Accounting is an art as well as science which systematical process that identifies, records, classifies and communicates the economic facts and figures of an organization. Accounting cycle means the repetition of a complete sequence of accounting procedures in appropriate order during each accounting period.
This process is a combination of a series of activities begin when a transaction take place and end with its inclusion in the financial statements at the end of the accounting period. The sequence of accounting procedures used to record, classify and summarize accounting information is often termed the Accounting Cycle.
The term indicates that these procedures must be repeated continuously to enable the business to prepare new up-to-date financial statements at reasonable intervals.
10 Steps of Accounting Cycle are;
- Analyzing and Classify Data about an Economic Event.
- Journalizing the transaction.
- Posting from the Journals to the General Ledger.
- Preparing the Unadjusted Trial Balance.
- Recording Adjusting Entries.
- Preparing the Adjusted Trial Balance.
- Preparing Financial Statements.
- Recording Closing Entries.
- Preparing a Closing Trial Balance.
- Recording Reversing Entries.
Analyzing and Classify Data about an Economic Event
Identifying the transactions from the events is the first step of accounting process. Events are analyzed to find the impact on the financial position or to be more specific the impacts on the accounting equation.
Documents such as; a receipt, an invoice, a depreciation schedule, and a bank statement etc. provides evidence that an economic event has actually occurred.
Journalizing the transaction
Transactions having an impact on the financial position of a business are recorded in the general journal.
In the general journal, the transactions are recorded as a debit and a credit in monetary terms with the date and short description about the cause of the particular economic event.
Posting from the Journals to the General Ledger
Transactions recorded in the general journal are then posted to the general ledger accounts. The accounts classify accounting data into certain categories and they are recorded in general journal entries according to that classification.
Depending on the frequency of the transactions posting to ledger accounts may be less frequent.
Preparing the Unadjusted Trial Balance
To determine the equality of debits and credits as recorded in the general ledger, an unadjusted is prepared. It is a way to investigate and find fault or prove correctness of the previous steps before proceeding to the next step.
Unadjusted trial balance makes the next steps of accounting process easy and provides the balances of all the accounts that may require adjustment in the next step. Unadjusted balance sheet is for internal use only.
Recording Adjusting Entries
Adjusting entries ensure that the revenue recognition and matching principles are followed. To find the revenues and expenses of an accounting period adjustments are required.
Adjusting entries are required to be is because a transaction may have influence revenues or expenses beyond the current accounting period and to journalize to the events that not yet recorded.
Preparing the Adjusted Trial Balance
An adjusted trial balance contains all the account titles and balances of the general ledger which is created after the adjusting entries for an accounting period have been posted to the accounts.
It is an internal document and is not a financial statement. It helps to create the income statement and balance sheet and doesn’t provide enough information for preparing the cash flow statement.
Preparing Financial Statements
Financial statements are prepared from the balances from the adjusted trial balance. The financial statements are made at the very last of the accounting period.
Cash flow statement, income statement, balance sheet and statement of retained earnings; are the financial statements that are prepared at the end of the accounting period. This is the output of the accounting process.
Recording Closing Entries
At the end of an accounting period Closing entries are made to transfer data in the temporary accounts to the permanent balance sheet or income statement accounts.
Transferring the balances of the temporary accounts or nominal accounts (e.g. revenue, expense, and drawing accounts) to owner’s equity or retained earnings account is used because these types of accounts only affect one accounting period.
Preparing a Closing Trial Balance
To make sure that debits equal credits, final trial balance is prepared. As the temporary ones have been closed only the permanent accounts appear on the closing trial balance to make sure that debits equal credits.
Recording Reversing Entries
Posit closing entries is an optional step of accounting cycle. A reversing journal entry is recorded on the first day of the new period for avoiding double counting the amount when the transaction occurs in the next period.
Primary objective of the accounting cycle in an organization is to process financial information and to prepare financial statements at the end of the accounting period.
Accounting cycle is a continuous and fixed process which needs to be followed accordingly. Maintenance of continuity accounting cycle is important.