Traditional accounting methods are been changed in today’s accounting software. But still accounting process cycle remains the same irrespective of traditional or modern accounting methods. “Accounting process is also referred as accounting cycle”.
Steps involved in Accounting Process Cycle are listed below:
Here we will provide the detail explanation on accounting process steps / accounting cycle steps, so that you can understand accounting in much more better ways.
1. Analyze and categorize Transactions: First step in accounting process is to analyze and categorize transactions which will be posted into books of account. Initially transactions have to be categorized as a business transaction or personal transaction. This is because only business transactions will be posted into accounting system. For example: When journal entry says, Mr. Patel taken a personal loan of Rs.4,50,000/- from Citibank. During analyzing it should be categorize as personal entry and should not be considered when accounting for a business.
2. Posting transactions into Journals: All business related transactions are recorded based on double entry bookkeeping system irrespective of whether journal entries are maintained manually or computerized. At-least two accounts are affected for a single transaction when posting into journal entry where one account is credited and another account is debited. Special journal books are maintained for recording frequently used transactions like sales journal, cash receipts journal, purchases journal, etc. General journal book is maintained to record transactions with are less commonly used.
3. Preparing Ledger Accounts: Ledger accounts are known as last book of entry in accounting system. Ledger balances can be determined after recording all the transactions into ledger account. For example: When posting all the bank related debit and credit journal entries into Bank’s ledger account, Once can figure out increase or decrease in bank A/c. This can assist business to take precautionary steps in case of deficit for next year.
4. Preparing Trial Balance: Main purpose of maintaining trail balance is to match debit and credit balances extracted from ledger accounts. Total of all the debit amount of trial balance should match with credit amount of trial balance. A necessary step has to be taken in-case if trial balance fails to match. Re-engineering has to be performed to find errors and omissions. Also preventive step has to be taken to rectify those errors.
5. Adjustments in Trial Balance: There are times when expenses are incurred for business but are mistakenly unrecorded into journals. There are circumstances when some incomes are left out during posting to journals. Under those circumstances, Adjusting entries are been prepared before preparing financial statement when credit and debit trial balance does not match. Such adjustments are known as adjusted trial balance. At the end after all the adjustments, debit and credit of trial balances should be equal.
6. Preparing Financial Statement: After updating trial balance, it’s time to get the end product of accounting process. In this process financial statements of an individual or a business or an organisation are been prepared for the accounting year. Under this process, following reports are been prepared:
- Income statement or Profit / Loss statement.
- Change of Equity statement.
- Balance sheet or financial position statement.
- Annotations to financial statements.
7. Closing Entries: This is the final step of accounting process. In this process nominal or temporary accounts are been closed and balances are carried forwarded to next accounting period. Accounts like: expenses a/c, cash a/c, income a/c, bank a/c are been closed. Whereas permanent accounts like balance sheet, etc. are not closed.
- Tutorial Course - Basics of Accounting for Beginners -
» e-Learning Chapter 1: What is Accounting and objectives of Accounting?
» e-Learning Chapter 2: What is Assets and Current Assets?
» e-Learning Chapter 3: What is Liability and Current Liabilities?
» e-Learning Chapter 4: What is Revenue and Expenses?
» e-Learning Chapter 5: What are the Types of Accounts?
» e-Learning Chapter 6: What is a Single Entry System?
» e-Learning Chapter 7: What is Double Entry Accounting System?
» Currently Reading: What are the steps involved in Accounting Process Cycle.
» e-Learning Chapter 9: What are Journal Entries? Format and Examples.
» e-Learning Chapter 10: What Is a General Ledger? Format with Example.
» e-Learning Chapter 11: What is a Trial Balance? Examples and Limitations.
» e-Learning Chapter 12: What is a profit and loss statement or Income Statement?
» e-Learning Chapter 13: What is a Balance Sheet? Definition, Format and Examples.
» e-Learning Chapter 14: What are the Different Types of Accounting Methods in Bookkeeping.
» e-Learning Chapter 15: Accounting Quiz – Basics of Accounting for Beginners Module.