What is Accounting Cycle? What are the 10 steps in Accounting Cycle?

 Let us understand, as to, What is Accounting Cycle?. We will have a clear idea about Accounting Cycle in a few simple steps that will be disclosed below. 

Let us also discuss the Series of 10 Steps involved in the Accounting Cycle as mentioned below.

What is Accounting Cycle?

Accounting Cycle is a series of steps involved that starts from identifying or recording the transactions and ends up with the preparation or presentation of financial statements & closing of books of accounts.

This generally happens in every financial year. This process is continuous and cyclical in nature.

Thus it is a continuous process that has a series of 10 steps involved. The key 10 steps in this continuous process involved are identifying the business transactions, recording the transactions in Journal Book, Posting such recorded transactions to relevant Ledger accounts, preparing the trial balance, identifying the errors by preparing worksheet, passing the adjusting journal entries, preparing the financial statements, finally closing the books of accounts.

Since Accounting is a continuous process, after closing the books of accounts at the year-end, the accounting cycle starts over again for the new accounting period. Thus Accounting process is cyclical in nature with continuous steps involved and hence called the "Accounting Cycle".

What is the purpose (objective) of the Accounting Cycle?

The basic objective or purpose is to record all the relevant business transactions and convert those financial transactions into useful financial information by presenting & preparing Financial Statements. Finally, communicating such useful information contained in financial statements to the users of financial information to make useful decisions.

Thus, here, we can divide the objectives or purpose as follows:

1. To record all the business transactions in the books of accounts, without missing any single business transaction or event, in a systematic manner.

2. Recording of business transactions in accordance with the Generally Acceptable Accounting Principles, applicable standards,  policies consistently. This is to ensure the arithmetical accuracy of books of accounts.

3. All the recorded business transactions help in preparing and presenting Financial Statements. These Financial Statements help us in depicting the financial performance, financial position, cash position of the business entity. These Financial Statements include Profit&Loss statements, Balance Sheet and Cash Flow Statements.

4. Finally, Communicating the Financial information contained in financial statements to the users of financial statements to make useful decisions. The users of financial information would include debtors, creditors, suppliers, investors, government, management.

The Series of 10 Steps involved in the Accounting Cycle:

The following are the ten steps involved in it. They are discussed below.

1. Identifying the business Transactions

The first step to collect the source documents and identify the business transactions. Identifying the business transactions of monetary in nature. Only monetary transactions will be recorded in the accounting process.

2. Recording the Transactions in Journal

The second step is to record the financial transactions in the Journal. Journal is a book of primary entry where all the transactions are recorded in chronological order.

3. Posting the recorded transactions to Ledger accounts

Then posting the recorded transactions from journal to ledger to the relevant ledger accounts and balancing the ledger accounts to obtain their ledger account balances

4. Preparing Unadjusted Trial Balance

We will prepare the trial balance from the obtained ledger balances as well. This trial balance is called unadjusted trial balance as it is prepared before passing adjusting entries

5. Preparing Worksheet to identify the errors

The next step is to identify the errors by review of the journal entries and transactions. This is done by preparing a worksheet to identify the errors. This is to ensure that all debits are equal to the credit

6. Passing Adjusting Journal Entries

The next step is to pass the journal entries for errors identified. This is to rectify and adjust the transactions. We will prepare the adjusting journal entries

7. Preparing an adjusted trial balance

After passing the adjusting journal entries, we will prepare the trial balance before preparing financial statements. This trial balance would be called Adjusted Trial balance.

8. Preparing and presenting the Financial Statements

Finally, we will prepare the financial statements from the given adjusted trial balance. The financial statements would include profit and loss account, balance sheet, cash flow statement, notes to accounts.

9. Preparing the post-closing trial balance after post-closing entries

We will be preparing a trial balance after passing closing entries. This is prepared after preparing financial statements and passing closing entries. This is called a post-closing trial balance

10. Closing the Books of accounts at year-end

Finally, we will close the books of accounts at the end of the financial year. The new accounting cycle will be in process for the next financial year. This is a continuous and cyclical process.

Conclusion:

Thus now we can understand, as to, What is Accounting Cycle? what are the key 10 steps involved in it?

.Thus it is a continuous process that has a series of steps involved. The key steps in this continuous process involved are identifying the business transactions, recording the transactions in Journal Book, Posting such recorded transactions to relevant Ledger accounts, preparing the trial balance, identifying the errors by preparing worksheet, passing the adjusting journal entries, preparing the financial statements, finally closing the books of accounts.

Related blogs:

What is Journal? Its features, types, Objectives and uses

What are Ledgers? 

What is Trial Balance?

What are Financial Statements? Its features, types, uses

What is Income Statement (Profit and loss a/c)?

What is Balance Sheet (Position Statement)?

What is Cash Flow Statement?

What is Bookkeeping? Its features, objectives, uses?

What are Subsidiary Books? Its features, types, objectives, uses

What is Single Entry System? Its features, types, objectives, uses

What is Double Entry System? Its features, objectives, uses