An accounting cycle involves everything, from identifying the transaction, to entering it into the books of accounts and preparing financial statements from this data. Accounting should be done correctly to help business firms understand where they stand, as compared to their peers.
Accounting, which is done by senior, as well as junior accountants helps businessmen know about the profit and losses earned by them, besides outlining the current assets and liabilities of the business. The books of accounts are referred by businessmen regularly, to be aware of the financial transactions done throughout the year, and also in the past.
This itself shows how important the duty of an accountant is in any organization. Completing the accounting cycle or bookkeeping correctly is essential for business houses, and this also helps them in being aware of their tax liabilities.
Steps Involved in the Accounting Cycle
Identifying the transaction is the most primary step. It is the duty of an accountant to identify and analyze a transaction carefully, before it is entered into the journal. The accountant needs to analyze which types of accounts are involved in the transactions and decide which account should be debited and which one should be credited.
Make Journal Entries
A journal is known as the primary book of accounts and the analyzed transactions are to be entered into this journal in a systematic way. The use of double entry system, in which there will be a credit for every corresponding debit, is used in this case. The journal entries will help an entrepreneur study the transaction and make business decisions. The journal has columns such as date, particulars and serial number.
Post Journal Entries into the Ledger
A ledger is known as a secondary book of accounts and journal entries are posted into it. While doing so, you will have to be very clear about how the transactions are written. The amounts of the transactions should be noted down correctly. You also need to mention the journal folio number which denotes the number in the journal from where the transaction has been taken.
Prepare Trial Balance and Make Adjustments
The next thing to do is to prepare the trial balance. It is nothing but a sum of all debits and credits. A trial balance has a debit column on the left and a credit column on the right. Generally, we denote debit by 'Dr' and credit by 'Cr'. The date, ledger number and particulars are the columns which should be made on the debit, as well as the credit side. It is mandatory that the sum of all debits equals the sum of all credits. The period end adjustments make sure that the debits and credits match each other.
Preparation of Important Financial Statements
The details in the trial balance can be used to prepare final accounts, such as trading accounts, profit and loss accounts, and the balance sheet statement. The income and cash flow statements can also be prepared with useful data from the trial balance.
It is necessary that complete transparency be maintained while presenting accounting information, as these statements will not be generated correctly if wrong numbers are given to the accountant.