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| Corporate Practice bd |
What is Accounting Cycle The-steps of Accounting Cycle.
The accounting cycle refers to the sequence of activities that occur in recording financial transactions and preparing financial statements for a specific accounting period. It typically includes the following steps:
Identifying and Analyzing Transactions:
Identify and analyze business transactions that impact the financial position of the company. This involves examining source documents such as invoices, receipts, and bank statements.
Recording Transactions:
Record each transaction in the appropriate journals (like sales journal, purchases journal, cash receipts journal, etc.) using double-entry accounting principles. Debits and credits are entered into the respective accounts.
Posting to Ledger Accounts:
Transfer the journal entries to the general ledger accounts. Each account (e.g., Cash, Accounts Receivable, Inventory) has a separate ledger where all transactions related to that account are recorded.
Preparing Un adjusted Trial Balance:
Create an un adjusted trial balance to ensure that total debits equal total credits after posting transactions to the general ledger. This step helps detect any mathematical errors or discrepancies before adjustments.
Making Adjusting Entries:
Make adjusting entries to update accounts for accruals, deferrals, depreciation, and other adjustments needed to align the financial statements with the accrual basis of accounting. These adjustments ensure that revenues and expenses are recognized in the appropriate accounting period.
Preparing Adjusted Trial Balance:
After making adjusting entries, prepare an adjusted trial balance to verify the equality of debits and credits and ensure that all adjustments have been properly reflected.
Preparing Financial Statements:
Use the adjusted trial balance to prepare financial statements, including the income statement, balance sheet, statement of cash flows, and statement of retained earnings. These statements provide a snapshot of the company's financial performance and position.
Closing Entries:
Close temporary accounts (revenue, expense, and dividend accounts) by transferring their balances to the retained earnings account or owner's equity. This process resets these accounts to zero for the next accounting period.
Preparing Post-Closing Trial Balance:
Prepare a post-closing trial balance to ensure that all temporary accounts have been closed properly and that only permanent accounts (assets, liabilities, equity) carry forward balances.
Reversing Entries (Optional):
In some cases, reversing entries are made at the beginning of the new accounting period to simplify the recording of certain transactions, such as accruals or deferrals.
Conclusion:
The accounting cycle ensures that financial information is accurately recorded, summarized, and reported according to generally accepted accounting principles (GAAP). It provides a systematic approach to maintaining financial records and preparing reliable financial statements that stakeholders, including investors, creditors, and management, rely upon for decision-making and performance evaluation.