Different steps of accounting cycle

Q. What are various steps of Accounting Cycle?

Various steps of Accounting Cycle:

(1) Identification of transaction: The first steps of accounting cycle are the identification of transaction. Many event occur every day in a business concern or in any other organization, But all events are not transactions. The events that are transactions are accounted for. So, the events which are measured in terms of money and for which the financial position of an organization is changed are identified as transactions and in the next stage accounts are maintained for these.

For example, a purchase order of Rs 20000 was placed to a person. This is not a transaction because it brings no financial change. On the other hand purchase of merchandise Rs 20,000 for cash is a transaction because it has brought financial changes to the business. Therefore, the events measurable m terms of money and for which financial changes take place are identified as transactions.

(2) Journalizing: The second stage of accounting cycle is journalizing. In this stage of journal, transactions are recorded in chronological order of dates debiting one account and crediting the other with brief explanation.

(3) Posting to ledger account: The third step or stage of accounting cycle is to classify business transactions. The statement which is prepared classifying the transactions in groups like income expense, assets and liabilities is called account. The book where transactions are recorded permanently in classified and summarized way is called ledger. The recording process of transaction in the ledger is called posting. As all transactions are finally recorded in this book  
penitently it is called permanent book of account. It is possible to know various information regarding business from the balances of ledger account. That is why ledger is called the king of all books of accounts.

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(4) Preparation of trial balance: It is the fourth step of accounting cycle. After preparing ledger accounts a trial balance is prepared with the help of ledger account balances. Trial balance is a statement prepared at a particular data of period end including debit and credit balances of ledger account. Trial balance is prepared to proof the arithmetical accuracy of ledger account and facilitate preparing financial statement.

(5) Adjusting entries: To ascertain operating result of a particular period and exact financial position at a particular data of a business concern various information regarding accruals and advances is essential to be accounted. These sorts of information which are not accounted or incorrectly accounted are adjusted through journal entries which are called adjusting journal entries.

(6) Adjusted trial balance: At the end of each accounting period financial statements of an organization are to be prepared. But before preparation of financial statements the information relating to particular period which influences the financial statements are to be Journalized and posted in the ledger accounts again for finding out relevant ledger balances at the end of the period. The trial balance which is prepared again with these ledger balances is called adjusted trial balance.

(7) Preparation of financial statements: The seventh stage of accounting cycle is preparation of financial stamens. The financial statement are prepared form an adjusted trial balance. Financial statements mainly include income statement and balance sheet. At the end of a particular accounting period to exhibit exact financial position of an organization.

(8) Closing entries: The eighth stage of accounting cycle is preparation of closing entries. Generally after preparation of financial statements the periodic expenses and incomes including balance of income statement are closed by passing closing journal entries. The necessity of closing expenses and incomes arises as their utilities ended during the particular accounting period and these are not carried forward to the next year like assets liabilities.

(9) Post closing trial balance: Post closing trial balance is the ninth stage of accounting cycle. In the trial balance only assets, liabilities and owner's equity are shown. In this post closing trial  
balance the total of assets becomes equal to the total of liabilities and owner's equity. So it is proved that, A=L+O.E. These assets and liabilities are carried forward to the next accounting period a opening balances.

(10) Reversal entries: Preparation of reversal entries is the last step of accounting cycle. Passing reversal entries in not compulsory. It is an optional step of accounting the beginning of an accounting year which is opposite to outstanding cycle. Reversal entries are adverse to adjusting entries which are passed at the beginning of next financial year. Infect reversal entries are passed for outstanding and advances of previous year in and advances.

(11) Work sheet: This is a statement containing multi columns which are prepared at the end of each accounting period. This is an optional step of accounting cycle, Big business organizations where number of accounts and adjustments are comparatively huge; work sheet is prepared to facilitate preparation of financial statements conveniently and accurately. Work sheet is prepared before preparation of financial statements. The steps of work sheet are trial balance, adjustments, adjusted trial balance, income statement and balance sheet. A worksheet is the complimentary statement to the financial statements. Financial statements are prepared from the work sheet.