8 Important Steps of Accounting Cycle | Explain Accounting Cycle

 Accounting Cycle 

 

When a business transaction occurs, it is recorded in various books/statements in proper sequence (one after another). The order of recording these transactions is called as "Accounting Cycle". Every step of the record is called a Phase of the Accounting Cycle. The various phases of the accounting cycle are shown in the following diagram:  

 

 

Transaction 

 

  

  

These phases are explained as under  

   

1) Journal:

When any transaction takes place, it is recorded in a book called a journal at the time of its accordance. It is also called as Day Book.  

   

2) Ledger:

From the journal, the transaction is posted in another book called a ledger. In this book, the entries are classified under various heads of account. The ledger is balanced at frequent intervals  

   

3) Trial Balance:

The balances taken from the ledgers are written in a two columns statement, which is called Trial Balance. The trial balance is prepared to prove the accuracy of the record.   

  

4) Adjustments:

At the end of every accounting period, there are always some expenses that are to be paid and some revenue is to be received. These income and expenses are adjusted after making journal entries   

  

5) Work Sheet:

After making the adjusting entries a statement is prepared to incorporate and assemble the balance from trial balance and adjustments. The statement is called a worksheet.   

 

6) Financial Statements:

This means the preparation of an income statement to know the net earnings and Balance Sheet at the end of every accounting period and the financial position of the business. The financial statements are usually prepared from the worksheet.  

   

7) Closing Entries:

These journal entries, are passed to close the revenue accounts at the end of the accounting period. These entries are usually made when the financial statement is being prepared.  

   

8) Post Closing Trial Balance:

The final phase of the accounting cycle is the preparation of Post Closing Trail Balance This is prepared to prove the accuracy of the records after the end of the financial year.  

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