Accounting Cycle:
The sequence of accounting procedures used to record, classify and summarise accounting information is known as accounting cycle.It begins with the identification and recording of business transactions and aims with preparation of financial account.It is otherwise known as accounting process.
The main objective of accounting cycle is to maintain a systematic record in order to find out actual profit or loss of an organisation with a minimum effort.Accounting cycle includes the following steps:-
1.Identification of transaction.
2.Recording of transactions in a journal.
3.Posting from journal to ledger.
4.Balancing ledger account.
5.Preparing trial balance.
6.preparation of final accounts.
7.Interpretation and communication of performance.
1.Identification of transaction.
The first step in the accounting cycle is to identify transactions to be recorded and bring into journalising mode.It is the first and fresh mode accounting cycle for making an accounting process.
2.Recording of transaction in journal.
Recording of transactions in a journal is the process of recording transactions in the books of a journal. It records transactions date wise or in a chronological order for accounting entries.
3.Posting from journal to ledger.
Posting refers to the process of recording transactions from journal to ledger. Each ledger account should be balanced at the end of the accounting period.
4.Balancing ledger account.
After the preparation of a ledger account,each account is closed in order to find out the debit balance or credit balance of an account.
5.Preparing trial balance.
In order to check the arithmetical accuracy of books of account, trial balance is prepared.It is prepared by taking the balance of each account debit balance recorded in debit column and credit balance recorded in credit side or credit column.
6.preparation of final accounts.
After the preparation of trial balance, the final account is prepared.It is the final stage of the accounting cycle.It includes two accounts and one statement as follows.
a.Trading Account– To know gross profit and gross loss.
b.Profit & Loss Account– To know net profit and net loss.
c.Balance sheet- To know Financial position.
7.Interpretation and communication of performance.
After the completion of the accounting cycle.It is the duty of an accountant to interpret and communicate the performance and result of organisation.
Is Accounting Cycle Necessary for Business?
Yes, there is no doubt about it. The author wheel is the key to business success. By its analysis,it is known how much profit or loss has been made in the business and what is the financial position showing. Overall, it is very important to have an accounting cycle in a business.
How Accounting Cycle Works?
The accounting cycle is already set. First of all, monetary transactions in business are written first in what is called the ‘Original Book’ of the initial transaction. It is also known as Journal. The ledger is prepared from the recorded articles in the journal, after creating the ledger, a trial balance is prepared for verification and then the financial statement is prepared at the end of the year.This cycle continues in business. That’s how the accounting cycle works in business.
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