Accounting Cycle:
A cycle means the happening
of events in a systematic manner and recurring of the same at regular
intervals. The accounting activities are undertaken in such a sequence that
they form a cycle. That is why the term “accounting cycle” refers to the
activities relating to the different stages involved in accounting process .As
these steps are undertaken repeatedly is a sequential manner in each accounting
period, as a whole they are identified and termed as a cycle.
The steps or phases involved in an accounting cycle are: (i) recording of financial transactions, (ii) classification and summarization of the recorded transactions and (iii) preparation of Trial Balance and Final Accounts. So each accounting cycle starts from recording of transactions in Journal and ends in preparation of financial statements.
The above stages of an accounting cycle are discussed hereunder:
(i) Recording: As soon as the financial transactions take place they are recorded in journal or primary books of accounts. Accounting process starts with the task of recording.
(ii) Classifying and summarizing: After recording the recorded transactions are classified into personal, real and nominal accounts and accordingly they are posted in different ledger accounts. The balancing of ledger accounts helps providing summarized information of classified transactions.
(iii) Preparation of Trial Balance and Final Accounts: At the end of a particular time span Trial Balance is prepared with the ledger balances to check the arithmetical accuracy of the first two accounting steps. Similarly at the end of a particular accounting period, to find out the end result of the transactions recorded in that period, a Profit and Loss Account is prepared. Along with the Profit and Loss Account a Balance sheet is prepared on the closing day of the accounting period to exhibit the claims owned and debts owed by the concern.
The above steps are followed in the same order in each accounting period. The concept of accounting cycle is further explained in the following diagram.
The steps or phases involved in an accounting cycle are: (i) recording of financial transactions, (ii) classification and summarization of the recorded transactions and (iii) preparation of Trial Balance and Final Accounts. So each accounting cycle starts from recording of transactions in Journal and ends in preparation of financial statements.
The above stages of an accounting cycle are discussed hereunder:
(i) Recording: As soon as the financial transactions take place they are recorded in journal or primary books of accounts. Accounting process starts with the task of recording.
(ii) Classifying and summarizing: After recording the recorded transactions are classified into personal, real and nominal accounts and accordingly they are posted in different ledger accounts. The balancing of ledger accounts helps providing summarized information of classified transactions.
(iii) Preparation of Trial Balance and Final Accounts: At the end of a particular time span Trial Balance is prepared with the ledger balances to check the arithmetical accuracy of the first two accounting steps. Similarly at the end of a particular accounting period, to find out the end result of the transactions recorded in that period, a Profit and Loss Account is prepared. Along with the Profit and Loss Account a Balance sheet is prepared on the closing day of the accounting period to exhibit the claims owned and debts owed by the concern.
The above steps are followed in the same order in each accounting period. The concept of accounting cycle is further explained in the following diagram.
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