What is Accounting Cycle?
An accounting cycle shows the accounting process which consists of recording, classifying, summarizing, analyzing and interpreting of the financial information.
The accounting process consist of the following six steps –
Step 1 – The first and most important step in the accounting process is the analysis of the transactions. It deals with deciding which account or accounts should be debited and which should be credited. This step also takes in consideration to what amount these accounts to be debit or credit. For doing so, proper knowledge of accounting concepts and judgement is necessary.
Step 2 – This step concerned with recording the transactions in the journal book. Meaning thereby recording the transactions in the chronological order that is when they occur.
Step 3 – The third step deals with posting of the transaction. In this classification of the transactions is done. That is transactions of similar nature are placed in one account. For example, all the transaction related to purchase of goods will be places in Purchase Account.
Step 4 – At the ending of the accounting period,judgement is involved in deciding on the adjusting entries. These are journalized or posted in the same manner as original entries.
Step 5 – In this closing entries are journalized and posted. This is completely a mechanical step.
Step 6 – This is concerned with the preparation of financial statements. This requires judgement as to the best arrangement and terminology, but the numbers that are used result from the judgement made in Step 1 and 4.
These six steps are taken sequentially during an accounting period and are repeated in each subsequent year. That’s why collectively these steps are known as Accounting Cycle.
Flow Chart for Accounting Cycle
|Journalize Original Entries|
|Post Journal Entries To Ledger|
|Identify Journalize and post adjusting entries|
|Journalize and Post Closing Entries|
|Prepare Financial Statements|