What is the accounting cycle? Understanding the accounting cycle is essential for a business man to make his business successful. In today’s post, I will tell you what is the accounting cycle , what are the phases of the accounting cycle , at what time the accounting cycle happens, how it works and how it is necessary for business.
What are accounting cycles
Accounting cycle refers to the steps in accounting to be followed by an entity for writing off financial transactions. The accounting cycle is a complete sequence that begins with the recording of transactions and ends with the creation of the final accounts. This process is repeated every year. The accounting cycle is also known as the ” accounting cycle”.
Stages of the Accounting Cycle
There are mainly five stages or stages in the accounting cycle. Which are given below as follows –
1. Financial Transactions
2. Journal Preparation
3. Ledger Preparation
4. Trial Balance
5. Preparation of Final Accounts or Financial Statements
1. Financial Transactions – The rule of accounting is applicable at the place where the transaction is done in monetary (₹). When a businessman or a person starts a new business, he has to do many types of activities. For example, purchase of goods, sale, return of goods, return of sale, etc.
2. Preparation of Journal – The first financial transactions are accounted for date wise in the initial books. The books in which the initial accounting is done is called the book of preliminary accounts or the original book. This book itself is called ‘Roznamcha’. Is.
In big business establishments, the journal is divided into 8 parts-
a. Cash Book Cash Book
b. Purchase Book Purchase Book
c. Sales Book Sales Book
d. Sales Return Book Sales Return Book
e. Purchase Return Book Purchase Return Book
f. Bills Receivable Book Receivable Bill Book
g. Bills Payable Book Payable Bill Book
h. Main Journal Journal
3. Ledger making –
The entries made in the journal have to be written in the appropriate side of the account related to it which is called ‘Classification’. The book in which the transactions are classified is called ledger. The act of making an account in the ledger is called posting. The balance in the account is drawn on a specified date, usually at the end of the month, after the transactions are recorded in different accounts.
4. Preparation of Trial Balance –
Trial Balance is prepared in the fourth stage of accounting. The trial balance is prepared on the basis of the balance of each account. The sum of the debit side (Dr. Side) of the trial balance is equal to the sum of the credit side (Cr. side). If in any circumstance the sum of these parties is not equal, then, in that case, Suspense Account is opened.
5. Preparation of Final Accounts or Financial Statements –
The Financial Statements (Final A/C) are prepared at the end of the year. Under which business account, profit and loss account and balance sheet are prepared. Trading account and PL account are prepared in sole trading and partnership business while profit and loss account is prepared in the company.
Balance sheet is prepared at the end of the year which shows the economic condition of the business. In this, assets are shown in the right part, liabilities are shown in the left part. The balance sheet prepared at the end of the year is called “Final Balance Sheet”. This is called the Preliminary Balance Sheet at the beginning of the next financial year. This process of accounting is repeated again in the next year.Hence it is called “Accounting Cycle ” .
Accounting Cycle Time
There is no fixed timing of the accounting cycle. It starts only when there is a transaction in any business and it continues till then. This cycle continues until the final account is made.
How the accounting cycle works
The accounting cycle is already set. First of all, monetary transactions in business are written first in what is called the ‘Original Book’ of the initial transaction. It is also known as Journal. The ledger is prepared from the recorded articles in the journal, after creating the ledger, a trial balance is prepared for verification and then the financial statement is prepared at the end of the year. This cycle goes on in business. Similarly, the accounting cycle works in business.
Is Accounting Cycle Necessary for Business
Yes, there is no doubt about it. The author wheel is the key to business success. By its analysis, it is known that how much profit or loss has been made in the business and what is the financial position showing. Overall, it is very important to have an accounting cycle in a business.