Accounting Cycle
Hi everyone! In my previous blog, I discussed “The ABCs of accounting”, basic and important information that helps in understanding daily life matters. You can read my previous blog by using the following link:
Now let’s discuss the activities in the accounting cycle that are necessary for any business to maintain accurate financial records, produce meaningful financial statements, and make decisions.
1) Identifying and Recording Transactions:
Transaction means the exchange of something of value. So each transaction is identified and relevant transactions such as sales and purchases are recorded in the company’s first book.
2) Preparing Journal Entries:-
Journal is the first book in which initial entries are recorded. The initial entries are termed as Journal Entries. Journal Entries are prepared to document the specific accounts related to each transaction.
3) Preparing General Ledger:
General Ledger is a principal book of accounts where similar transactions relating to a particular person or thing are recorded.
Preparing General Ledger is the next step after preparing journal entries in which journal entries are transferred to appropriate accounts maintaining a record of all transactions for each account.
4) Adjusting Trial Balance:-
At the end of an accounting period, a trial balance is prepared which is a list of credit and debit entries to ensure that the list of credit and debit entries in a general ledger are equal and mathematically correct.
5) Preparing Worksheet:-
A worksheet is an informal working document that helps accountants organize and summarize the trail balance information as well as adjusting entries. It serves as a tool for preparing financial statements.
7) Preparation of Financial Statements:-
Once the adjusting entries are made, the financial statements are prepared. Financial Statements are reports that summarize a company’s financial position, performance and cash flow.
The key financial statements include:
1) The income statement — shows the company’s revenue, expenses and net income.
2) The Balance sheet — presents company assets, liabilities and equity.
3) The Cash Flow Statements — outlines the company’s cash inflows and outflows.
8) Closing the Financial Book:-
The final step in the accounting cycle is to close the temporary accounts and transfer their balances to the retained earning account. This includes closing revenue, expense and dividend accounts (accounts to record and track the distribution of profits and earnings of shareholders of a company).
The above information is detailed information about the accounting cycle and how accounts are managed in a business. I hope it is easy to understand and it will help you a lot. In the next blog, we will discuss how journal entries are prepared.
Stay tuned. Happy learning!