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What is Accounting cycle: step by step procedure of accounting cycle

What is Accounting, Types of Accounting, Detailed overview of Accounting cycle


    What is Accounting?

    Accounting is the process of recording, summarizing & analyzing financial transaction of a business in such a way that it is presentable to others users. other users include investors, shareholders, partners of business, tax collection authorities.

    Types of Accounting

    • Financial Accounting
    • Managerial Accounting
    • Cost Accounting

    Financial Accounting

    Financial Accounting refers to process of preparing Financial Statements. Financial statement includes 4 reports.
    • Profit & loss account / income statement / Statement of comprehensive income.
    • Balance sheet / Statement of financial position.
    • Statement of cash flow.
    • Statement of changes in Equity.

    Managerial Accounting

    Managerial accounting use much of data that relates to financial accounting.  Managerial accounting is the process of preparing monthly accounts that is used by the management of company to make decisions. Following are the reports used by management to make financial decisions.
    • Monthly financial statements.
    • Budgeting reports.
    • Projected financial statements.

    Cost Accounting

    Cost accounting helps management to make product costing. In cost accounting process, we process different reports relates to material, labor & overhead to reduce the cost per unit.

    Accounting cycle

    Accounting cycle is the systematic step by step process of recording, processing & analyzing the financial transaction.
    Theses are the steps uses in Accounting cycle.
    • Journalizing
    • Ledger Accounts
    • Un-adjusted trial balance
    • Performing adjusting entries
    • Adjusted trial balance
    • Financial statements
    • Closing books of accounts
    • Post-closing trial balance

    Accounting cycle

    Journalizing

    Journalizing is the process of analyzing transaction and post as journal entries in books of accounts.
    It is the first step of accounting cycle. Its start from the beginning of the financial year and ends with the ending of financial year.
    We analyze each transaction according to their type like it’s a expense, income, assets, liabilities, drawings, capital, sales or purchase and post them to their debit credit rule. We prepare
    • Sales journal: here we record sales transactions
    • Purchase journal:  here we record purchase transactions
    • General journal: here we record other transactions

    Ledger Accounts

    In this step we transfer entries from journals to ledger accounts. It’s a second step of accounting cycle.
    In this process amounts are transferred in ledger in such a way that, debit side amounts of journals are transferred to debit side of ledgers and credit side of amounts of journals are transferred to credit side of ledger.
    We can say that expenses come debit side of general journal and when we transfer these expenses into ledger, we will also debit the expense ledger with the same amount.
    After posting all entries into ledger we make total and calculate balance of each ledger.

                                           Cash Account
    Dr
    Cr
    10000 Opening balance
    50000
    4000
    1000
    50000


    15000 (Debit balance closing)
    65000
    65000

    In cash, expenses we deduct credit balance from debit balance.
                                       Accounts payable
    Dr
    Cr
    50000


    15000 (Closing balance Credit)
    10000 opening balance
    50000
    4000
    1000
    65000
    65000

    In liabilities we deduct debit balance from credit balance.

    Un-adjusted trial balance

    It’s a 3rd step of accounting cycle. Trial balance is a list of all ledgers account balances. Trial balance of company is preparing on a specific point usually at the end of month or year.
    Both sides of trial balance must be equal. Any difference shows mistake in posting or in calculations.

    Adjusting entries

    Adjusting entries are recorded at the end of the year. It’s an adjustment of income and expenses. We make accounting transaction on accrual basis. The main purpose of adjusting entries is to adjust the income and expenses according to final year. Like
    We have financial year from July to June and we paid rent of the building for one year in January its mean we paid rent for 6 months of this financial year and remaining for next financial year. That’s why we will adjust the rent of next financial year and make adjusting entry to adjust it.

    Adjusted Trial balance

    After posting adjusting entries we prepared trial balance again its called adjusted trial balance. Its include list of adjusted income and expenses balance with assets, liabilities, capital, drawings balances.

    Financial statements

    Financial statements are set of documents which provide company financial position, indicate its performance. Following are the components of financial statements.
    • Income statement
    • Balance sheet
    • Statement of Cash flow
    • Statement of changes in equity
    • Notes & other disclosures

    Interim Financial statement

    Quarterly or Year yearly financial statements are called interim financial statement. These are prepared in condense format. Its mean disclosure is shown less as compared to annual reports disclosure. Quarterly reports are un-audited but half yearly reports are reviewed by the auditors for checking authenticity of financial data.

    Annual financial statement

    Financial statements which are prepared on annually is called annual financial statement. These financial statements are audited by chartered accountant or Certified public Accountant and published along with director reports, overview of company and its past results.

    Closing entries

    In this step closing balances of income, expenses, dividends, drawings, withdrawals are transfer to capital accounts.
    In case of company all these balances are transferred to retained earnings. In case of Partnership or sole proprietorship all balances transfer to its capital account.

    Post-closing trial balance

    After posting the closing entries a list of all accounts balances is prepared is called post-closing trial balances.
    In closing entries, we transfer balances to permanent account like, capital or retained earnings. Now post-closing trial balance must have equal balance on both side and now ready to transfer the balances to next year.


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