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

 Let us see, what is the basic purpose ( objective) of the Accounting Cycle? This also enables us to know the meaning, scope, different steps, aspects and objectives covered in it. 

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".

The top 10 steps of the Accounting Cycle are:

1. Identifying the business Transactions

2. Recording the Transactions in Journal

3. Posting the recorded transactions to Ledger accounts

4. Preparing Unadjusted Trial Balance

5. Preparing Worksheet to identify the errors

6. Passing Adjusting Journal Entries

7. Preparing an adjusted trial balance

8. Preparing and presenting the Financial Statements

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

10. Closing the Books of accounts at year-end

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

The basic objective or purpose of the Accounting Cycle 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 accounting standards, accounting 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 statement, Balance Sheet and Cash Flow Statement.

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.

Conclusion:

Thus, we can conclude, as to, what is the basic objective ( purpose) of the accounting cycle? This could be summarised as recording all the business transactions in the books of accounts without missing any transaction as per the applicable accounting standards and policies. Thus, enabling the preparation of financial statements to know the financial performance and financial position of any organisation. Communication such financial information to the users of financial statements to make decisions.