Accounting cycle is defined as the flow of the accounts maintaining and refers to the steps which are used in completing an accounting process with profiency. This accounting cycle is often regarded as a circle. The beginning is at one point and then the process revolves with many steps and pointers. This cycle or circle start again from the very same point and then have the same steps followed by same procedures. Every company’s accounting cycle varies with the type of execution, nature of work, decision making policies and resources usage. The accounting cycle maybe annually, monthly, quarterly or even semiannually. The financial statements also have an impact on this cycle of accounting. The process remains the same regardless of the time or execution.
Accounting period is a period to which the accounting books are made in reference with. The books are balanced, the statements of finance are prepared and the expenditures are sorted in this accounting period. Accounting period is usually made for 12 months. But, the start of the accounting period changes according to the major jurisdiction of a company. Accounting period is started with a different date and time of the year. Usually the year starts with 1st Jan and ends with 31st Dec but the accounting period usually start with 1st of April and ends with 31st of March. The International Financial Reporting Standards have made a singular code of 52 weeks which is an accounting period.
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There are some major steps in the process of accounting cycle which ensures a smooth work flow. These are,
This is the first and the most step of the accounting cycle. It is to gather all the documents which are coherently related to the official transactions as well as decisions of the organization. Collecting the source documents and a good research work ensures a sound work frame for the accounting cycle. These source documents are basically the checks, bank statements, purchase orders and receipts of the company or the business firm.
Accounting cycle’s second step is to check, verify and analyze the transactions and in particular the source documents. This step is particularly important as it helps in making appropriate decisions regarding the company’s finances. The transactions made are studied and analyzed and further more decisions are made as per the situation.
Journalizing the transactions is the third step in the accounting cycle. This step elaborates that the all the transactions made should be written down in a journal. The entries of transactions are posted in this journal. A journal is usually a book or a digital book that documents all that transactions or financial transactions made by the company. It also affects the other accounts which are attached with the journal. Also, when the journal is maintained the rule of posting the transactions is ‘double-entry’ rule. At least two other accounts are effected for one transaction. It is denoted by debit and credit for each such transaction which is made. The entry order of journal entries is chronologically followed.
The fourth step in the cycle of accounting is to posting the transactions to the ledger from the journal. The ledger transferring is a must and is incomplete without it. A ledger is basically a book or a digital book which have the records of all the accounts which a company holds at the time. The account number and class differentiates these accounts from each other. Each and every account is affected which is mentioned in the journal and is part of a transaction.
A trial balance is simply a total list of the company’s account as well as the balance of these accounts when the trial balance is being prepared. Before adjusting the relevant entries into the ledger and the accounts, an unadjusted trial balance is made. The ledger provides the information directly to the trial balance. For a perfect book keeping, the total of the credit and debit at the end of the balance sheet should be equal.
The entries which are to be adjusting and are commenced in the journal and simultaneously posted in the ledger book of the company. The main purpose for which these adjusting entries are made is to bring the light upon the account balances with the appropriate amounts. To be noted, not all accounts mention an adjusting entry with it. These adjusting entries are not made at the end of accounting cycle, but at the end of the accounting period.
The next step in the accounting cycle is to prepare the trial balance for the entries. Trial balance is basically the list of all account and their respective balances an after certain adjustments are made if necessary. It is made to make sure the debit and credit of the accounts equal after the relevant adjusting entries are made. Financial statement are made with the use of these trial balance.
In the end the financial statements are put up by the company which is made with the help of the trial balance. There is a way of preparing these statements and is made with a specific order and sometimes the information is taken from one financial statement to the another.
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