The Accounting Cycle

Accounting Cycle

It refers to a complete sequence of accounting

procedures, which are required to be repeated in the

same order during each accounting period.

It is complete sequence beginning with the recording

of the transaction and ending with the preparation of

the final accounts.

The Accounting Cycle

1. Analyze the transaction

2. Journalize the transaction

3. Post the transaction to accounts in ledger

4. Prepare the trial balance

5. Prepare financial statements

The Accounting Cycle: Steps

Accounting Cycle

• The sequence of steps in recording

transactions:

Transactions Documentation Journal

Financial

Statements

Trial

Balance Ledger

The Accounting Cycle: Steps

Accounting Cycle

• Analysis of transactions from source documents

• Journalising the transactions

• Posting of journal entries into the ledger accounts

• Balancing of each ledger account

• Preparation of a trial balance to establish equality of

debits and credits in the ledger accounts.

• Recording of adjusting entries in the journal

• Recording of adjusting entries in the Ledger account.

• Recording of closing entries in the journal

• Preparation of financial statements/final accounts

The Accounting Cycle: Steps

Accounting Cycle

• The process starts with source

documents, which are the supporting

original records of any transaction.

– Examples are sales slips or invoices,

check stubs, purchase orders, bank

deposit slips, and cash receipt slips.

1. Analyze the transaction

The Accounting Cycle: Steps

2. Journalize the transaction

• In the second step, an analysis of the

transaction is placed in the book of

original entry, journal, which is a

chronological record of how the

transactions affect the balances of

applicable accounts.

– The most common example is the

general journal - a diary of all events

(transactions) in an entity’s life.

The Accounting Cycle: Steps

• In the third step, transactions are entered into

the ledger.

– Remember that a transaction is not

entered in just one place; it must be

entered in each account that it affects.

– Depending on the nature of the

organization, analysis of the transactions

could occur continuously or periodically.

3. Post the transaction to accounts in ledger

The Accounting Cycle: Steps

Accounting Cycle

• The fourth step includes the preparation

of the trial balance, which is a simple

listing of all accounts from the ledger

with their balances.

– Aids in verifying accuracy and

in preparing the financial statements

– Prepared periodically as necessary

4. Prepare the trial balance

The Accounting Cycle: Steps

Accounting Cycle

• In the final step, the financial statements

are prepared.

– Financial statements may be prepared

after each quarter of the year.

– the companies may prepare

financial statements at

various other intervals to

meet the needs of their users.

December 2007

5. Prepare financial statements

The Accounting Cycle: Steps

JOURNAL

Journal

• It is a list in chronological order of all the

transactions for a business.

What is a journal?

•It is the book of original (first) entry

Date Particulars V.NO. L.F Debit Credit

Format of Journal

Recording transactions

in the journal.

Journalizing

• It is the process of entering transactions

into the journal

Journal entry

An analysis of the effects of a transaction on the

accounts, usually accompanied by an

explanation of the transaction.

–This analysis identifies the accounts to be

debited and credited.

Types of journal entries

Simple entry

- an entry for a transaction that affects only two

accounts

Compound entry

- an entry for a transaction that affects more

than two accounts

• Remember: debits and credits must always be equal.

Journal entry

What does a journal entry include?

– Date of the transaction

– Title of the account debited

– Title of the account credited

– Amount of the debit and credit

– Description of the transaction (narration)

Steps Involved in Journalizing

• Identify transaction from source documents.

• Specify accounts affected.

• Apply debit/credit rules to determine which

accounts are to be debited and those to be

credited .

• Record transaction with description.

How to Record Transactions in a Journal

• Enter date in first column(date column)

• In particulars column enter the name of the account

debited at extreme left of column and abbreviation Dr. at

right end of particulars column.

• Write amount in Debit column

• In particulars column enter the title of the account to be

credited indented to right preceded by the word “To”

and write amount in Credit column.

• Insert a narration which is a brief description of

transaction

• Draw a line across particulars column

Journalizing

• On April 1, Garge invested Rs 30,000 in GillenTravel.

Journal entry

Date Particulars Debit Credit

April Rs Rs

1 Cash Account Dr 30,000

To Garge Capital 30,000

(Received initial investment

from owner)