The accounting cycle comprises of the cycle of accounting process. It begins with analysis of the transactions and ends with carrying forward the balances in balance sheet to the next accounting period. It produces numerous records, entries, documents, reports and statements. The most important output of accounting cycle is an enterprise’s financial statements.
The following are the steps that summarises an accounting cycle. The accountant performs the steps in one accounting cycle one after the other and repeats them in each accounting cycle.
Step 1: To understand and analyse business transactions: Business organizations offer products and services in order to satisfy customer needs and thereby seek profit and increase shareholder’s equity. Any transaction processed is either a cash or credit transaction. It is very important to understand the effect of any transaction on the company’s financial status.
Step 2: To record the transactions in a journal: A journal is a chronological record of transactions, journal entry for a transaction has the date of the transaction, the individual accounts and the related debit and credit amounts, and a brief explanation of the transaction.
Step 3: To post the journal entries to the ledger: This process starts with Posting, which is the process of transferring information from journal to ledger. We enter each data amount on the Debit column in the journal on the debit side of the appropriate amount and each amount on the Credit column on the credit side of the appropriate account. Posting includes, locating in the ledger the account(s) debited in the journal entry, entering the date of the transaction in the account entering the relevant journal page number in the Post. Ref. column of the account, entering the debit amount appearing in the journal in the Debit column of the account and entering the account code or the ledger page number in the Post. Ref. column of the journal....