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Understanding Accounting Cycle
The accounting cycle usually begins at the commencement of a financial year and is completed within the accounting year which can be a fiscal quarter or a fiscal year. It is a progression of steps which involves recording, classifying, and summarizing the transactions in a business. Accounting cycle provides very important financial information which is collectively known as financial statements. Financial statements include income statement, balance sheet, cash flow statement and statement of changes in equity.
The accounting cycle is kept in pace with the budgeting and planning cycle and is the main focus of a company. Generally, the two cycles vary in the activities as well as the modus operandi involved.
- The budgeting cycle’s primary concern is to keep an eye on plans for future spending and cash inflows.
- The accounting cycle gives the record of previous transactions, and is concerned with accurate reporting the state of revenue, assets, liability, expense, and equities accounts (as they are at the end of the period).
All public companies have to publish a compilation of their financial statements for the currently ended annual accounting period. They have to send this compiled record to shareholders, before annual general meeting where the directors would be appointed. These statements show the financial standing of the company and its annual growth rate.
Steps of Accounting Cycles
With the evolution of computerized accounting systems, flawless accounting process has become easy with least possibility of mathematical errors. These softwares have well automated accounting cycles. We want to discuss the steps involved in accounting cycles which the students should learn. Our team of accounting cycle assignment help has compiled the steps of accounting cycle which is very easy to understand.
- Identification: In this step, documents relating to the company’s financial transactions are collected and compiled from ‘source documents’ like receipts, cheques, bank statements, and purchase orders. Their effect on the company’s accounts and profits are analyzed.
- Recording: The analyzed transactions are entered chronologically into the journal (journal entries), the book or electronic record which contains all the financial transactions of the company. For recording a journal “double entry” system is followed which shows the two effects of each transaction on at least two different accounts, viz., the debit and a corresponding credit for each transaction; total of debits and credits should be equal to the amount of the transaction, and debits are entered before credits.
- Classification: in this step, financial transactions are mainly categorized as the related or relevant transactions that include enterprises, persons, assets and income-expenses. Thereafter they are recorded in their respective ledger accounts, which are debtors’ and creditors’ accounts, land and building accounts, commission received accounts, etc.
- Summarizing: As the name suggests, at this step deals compiled with every journal and ledger entry are summarized and made into comprehensive statement. Financial transactions are summarized in this step. A trial balance in this step helps to cross-check if debits are equal to credits throughout the system, and to prepare final accounts which disclose the profit and loss of the company.
- Analysis and Communication: If any changes or corrections are needed in the accounts due to some mismatch in trial balance, then it is done in this step. After the corrections are made, a balance sheet and income statement is generated using the data. Thereafter, the revenue and expense accounts are closed for the current year. The cycle is supposed to begin again in the next year.
The income and expenditure statement and balance sheet determines the result of all the business operations conducted its financial position; the information is conveyed to the concerned authorities through the financial statements or the annual report. The information is then utilized by them for making further decisions.
Accounting Cycle is indeed a vast as well as the most important topic to be covered by a student. It holds the essence of the accountancy and forms the foundation of corporate or service sector roles. You should have a clear concept of it for any further use in practice. Learn more about accounting cycles through us. Read about them on our website or get in touch with our experts. At Livewebtutors, we intend to help you.
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