Back to: Accounting 101
Welcome back! You’ve done great so far. Now, let’s learn about the steps that make up the Accounting Cycle.
The Accounting Cycle
The accounting cycle is the series of steps accountants use to record, classify, and summarise transactions. It’s like following a recipe to ensure your business finances are in order.
Body:
- Steps in the Accounting Cycle:
- Identifying Transactions:
This is the first step where you recognise an event, like a sale or purchase. - Recording Transactions in Journals:
You write down the transaction in a journal, the first place for recording financial activities. - Posting to Ledger:
From the journal, transactions are transferred to a ledger. - Trial Balance:
At the end of the period, we check if everything balances. - Preparing Financial Statements:
At the end of the cycle, businesses prepare financial statements like the Income Statement, Balance Sheet, and Cash Flow Statement.
- Identifying Transactions:
The accounting cycle is a series of steps used by businesses to track and manage their financial transactions. It begins with the identification and analysis of financial transactions, where each transaction is recorded as either a debit or credit in the appropriate accounts. These transactions are then entered into journals, known as journal entries, that categorize and document the business’s financial activities. This process ensures that every action taken by the business is accurately tracked and categorized for further analysis.
After journal entries are made, the next step in the accounting cycle is posting them to the general ledger. The general ledger organizes the journal entries into specific accounts such as assets, liabilities, equity, revenue, and expenses. This allows businesses to track balances over time and have an accurate representation of their financial position. Once posted, trial balances are prepared to ensure the accounting records are in balance, confirming that the total debits equal the total credits.
The final stages of the accounting cycle include the preparation of financial statements and closing entries. Financial statements, such as the income statement, balance sheet, and cash flow statement, are created to provide a summary of the business’s financial performance over a specific period. Closing entries are then made to reset temporary accounts (like revenue and expenses) to zero, preparing the books for the next accounting period. This cycle is repeated continuously to ensure accurate financial reporting and compliance with accounting principles.
Conclusion:
This ensures that all financial transactions are recorded properly and helps businesses understand their financial health.
Evaluation:
- What is the purpose of a trial balance in the accounting cycle?
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