Accounting process to some extend is also referred as accounting cycle. Traditional accounting methods are been changed in today’s accounting software. But still process of accounting and accounting cycle remains the same irrespective of traditional or modern accounting methods. In this topic we will initially understand what is accounting cycle followed by the three steps in the accounting process, process of accounting with examples and then seven steps of accounting cycle in depth.
The ability to comprehend financial figures is critical for business owners. They are essential for tasks like as budgeting money, selling your firm and acquiring funding which would be impossible without them. Because these procedures must be carried out on a continuous basis, the business will be able to produce new and up-to-date financial statements at regular intervals, as the term implies.
What is Accounting Cycle?
Accounting Cycle is a sequence of accounting activities to create financial statements that are performed in order to categorize, record, and summarize accounting information. When you conduct a whole sequence of accounting activities in the appropriate order throughout a single accounting period is called as completing the accounting cycle. Accounting cycle is also known as the bookkeeping cycle and sometimes it is also referred as accounting process.
Whenever a transaction takes place, the accounting process starts with the entry of the transaction into the books and continues until the transaction is reflected in the financial statements at the end of the accounting period.
In the accounting cycle, which is a seven multi-step process that takes place throughout the year, all of your company’s raw financial information is transformed into financial statements. These 7 steps of accounting cycle will be addressed in more depth later on in this article.
Key 3 Steps in the Accounting Process
The process of accounting is comprised of three distinct types of transactions that are used to record company activities in the accounting records: accrual accounting, accrual accounting, and accrual accounting. Accrual accounting is the type of transaction that is used to record company activities in the accounting records.
These many kinds of information are then integrated to produce financial statements for the organization. The following are the three steps in the accounting process to sorts the transactions.
- The first transaction type must be completed and documented in order to ensure that reversing entries from the previous period have, in fact, been reversed.
- Secondly, there are procedures that must be followed in order to record specific corporate transactions in accounting records, which are referred to as second-tier processes.
- The third category comprises the period-end processing that is required in order to close the books and prepare financial statements for the period under consideration.
Important 7 Steps of Accounting Cycle
Here we will provide the detail explanation on key important 7 steps of accounting cycle which is an elaborate following the 3 steps in the accounting process so that you can understand accounting in much more better ways.
Analyze and categorize Transactions
Steps in the 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. Let us understand process of accounting with examples for reference here. 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.
Posting transactions into Journals
All business related transactions are recorded based on double entry 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.
Preparing Ledger Accounts
Ledger accounts are known as last book of entry in accounting process. 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.
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 in this accounting process steps to rectify those errors.
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 in accounting process. At the end after all the adjustments, debit and credit of trial balances should be equal.
Preparing Financial Statement
After updating trial balance, it’s time to get close to the end stage in steps of accounting cycle. In this process financial statements of an individual or a business or an organization 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.
- Cash Flow statement.
- Annotations to financial statements.
This is the final stage in steps of accounting cycle. In this process nominal or temporary accounts are been closed and balances are carried forwarded to next accounting cycle. 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.
Accounting cycle is a step-by-step technique for documenting company acts and events in order to keep financial records up-to-date. The length of a period in the conduct of a business is defined as one operational cycle, which might be one month, one quarter, or even one year in length. Hope you have very well understood the 7 steps of accounting cycle and three steps in the accounting process. Each accounting period will be covered by this technique, which will then be repeated the next period after that, and so on.
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Basics of Accounting for Beginners
- Chapter 1: What is Accounting with Examples
- Chapter 2: Objectives of Accounting
- Chapter 3: Types of Accounts
- Chapter 4: Branches of Accounting
- Currently Reading: Accounting Process
- Chapter 6: What is Assets and Current Assets?
- Chapter 7: What is Liability and Current Liabilities?
- Chapter 8: What is Revenue and Expenses?
- Chapter 9: What is a Single Entry System?
- Chapter 10: What is Double Entry System?
- Chapter 11: What are Journal Entries? Format and Examples
- Chapter 12: What Is a General Ledger? Format with Example
- Chapter 13: What is a Trial Balance? Examples and Limitations
- Chapter 14: What is a Profit and Loss Statement or Income Statement?
- Chapter 15: What is a Balance Sheet? Definition, Format and Examples
- Chapter 16: What is Managerial Accounting? Role, Job and Objectives
- Chapter 17: Accounting Quiz – Basics of Accounting for Beginners Module
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