THE ACCOUNTING CYCLE

A remarkable week comes to an end . This week, we went in depth into corporate financial accounting where we were introduced to the accounting cycle. The accounting cycle could be understood as the systematic process that businesses follow to record, analyze, and report financial transactions. It involves several sequential steps, each playing a crucial role in the overall financial management of a company.

SOURCE DOCUMENT

The accounting cycle begins with source documents, which are the original records of transactions. These can include invoices, receipts, purchase orders, bank statements, and other documents that provide evidence of financial activities. They are the starting point of a meticulous journey, where numbers become narratives and transactions evolve into financial stories.

JOURNAL

Transactions recorded in source documents are then entered into the accounting journal. The journal is a chronological record that captures each transaction, specifying the accounts affected, the amounts involved, and the date of the transaction. The journal helps in creating a coherent storyline while telling the tales of business transactions.

LEDGER

The ledger is a collection of all the accounts used by a business. For each transaction recorded in the journal, corresponding entries are made in the appropriate ledger accounts. This step helps organize and categorize financial information for each account.  The transfer of information from the journal to the ledger in accounting is termed posting.

TRIAL BALANCE

A trial balance is prepared to ensure that the accounting system is in balance. It lists all the accounts with their debit and credit balances. If the total debits equal the total credits, the trial balance is considered balanced, indicating that the accounting equation is in equilibrium.

ADJUSTMENT

Adjusting entries are made to correct errors, update account balances, and allocate revenues and expenses to the correct accounting periods. This step is crucial for ensuring that the financial statements accurately reflect the company’s financial position and performance.

CLOSING ACCOUNT AND STOCK VALUATION

At the end of an accounting period, temporary accounts, such as revenue and expense accounts, are closed to prepare the books for the next period. The net income or loss is transferred to the retained earnings account. Stock valuation involves assessing the value of inventory, an important asset for many businesses.

PREPARATION OF FINAL ACCOUNT

The final step in the accounting cycle involves preparing the financial statements. These statements include the income statement, which details revenues and expenses, the statement of retained earnings, outlining changes in equity, and the balance sheet, providing an overview of the company’s financial position.

Throughout the accounting cycle, adherence to accounting principles and standards ensures accuracy and consistency in financial reporting. The cycle then repeats for each accounting period, providing a continuous and systematic approach to managing a company’s financial information.

In present day, different accounting software like ODOO, Peachtree and the likes are now available to aid in automation of the above listed process, but then it, still follows the cycle religiously. In our next episode, we will discuss the components and elements of a financial statement. Keep a date with us.