ACCOUNTING CYCLE

Following are the steps of accounting cycle

1.   Journal: First time entries are recorded in journal. Journal can be described as:

“It is a day to day record of business transactions which are recorded chronologically as they happened.”

Journal may include purchases journal, sales journal, and general journal etc.

2.   Ledger: After the journal, entries are posted in ledger. And for every accounting head there must be a ledger. Normally every ledger account has some balance

Ø  Debit Balance Of Ledger: If debit side of ledger is greater than credit side

Ø  Credit Balance Of Ledger: If credit side of ledger is greater than debit side

3.   Unadjusted Trial Balance: Balances of ledger are transferred in trial balance. Trial balance has two sides. One is debit side and other is credit side. Both sides of trial balance should be equal. And if both sides of trial balance are not equal it means there is some mistake either in journal or in posting.

4.   Adjustments: whenever we make advance payments or there are advance receipts then there is a need of adjustments.

Adjusting entries are made under matching concept according to which:

“Accounting period for which revenue recorded expenses should also recorded for that accounting period”

Note: Always remember that there is no word “cash” in adjusting entries.

5.   Adjusted Trial Balance: The trial balance which is prepared after adjustments is called adjusted trial balance and that amounts of accounting heads should be included in adjusted trial balance which will appear after adjustments.

6.   Financial Statements: After adjusted trial balance some financial statements are prepared. These are generally prepared financial statements:

Ø  Income Statement

Ø  Statement Of Retained Earnings

Ø  Balance Sheet

Ø  Cash Flow Statement

Ø  Statement Of Changes In Equity

7.   Closing Entries: Normally closing entries are performed at the end of accounting year.

8.   After Closing Trial Balance: Trial balance which is prepared after closing entries is called trial balance after closing entries.

It is just like “balance sheet” and includes only balance sheet items i.e. Assets, Liabilities, Owner’s Equity.