Accounting Cycle

Accounting Cycle is a very basic concept in relation to the accounting and it refers to the sequential order that is followed regarding the accounting methods and procedures used to record, followed by classifying and summarizing the business events and transactions. It begins with the identification of business transactions and ends with the reverse entries for prepaid and outstanding expenses.

Steps of the Accounting Cycle

Accounting cycle is the process of collecting, recording, processing, and the information of a business entity. Businesses are required to prepare its accounting statements periodically. Some make it weekly others monthly, some bimonthly, some quarterly, while a few annually.

The following steps take place in a standard accounting cycle.

• ·         Recording in relation to the entries in day books or alternatively journals.
• ·         Posting the aforementioned double entries or alternatively the journal entries to respective ledgers.
• ·         Finalizing of the unadjusted statement of list of balances that is the trial balance.
• ·         Journalizing the adjusting entries followed by the preparation of the adjusted trial balance.
• ·         That main and important stage in relation to the preparation of the financial statements.
• ·         Designing and passing of the necessary closing entries to close the temporary accounts.
• ·         Last but not least is the stage in relation to the preparation of the post-closing statement of the list of balances that is the post-closing trial balance.

In the first step analyze which should be on the debt and which should be on credit side of entry passed. After that pass a journal entry to record the transaction.

Example 1

Owner invests 10,000,000 in business to start.

Journal entry will be as follows.

Account Head	Debit (CU)	Credit (CU)
Cash	10,000,000
Owner’s Equity		10,000,000

Example 2

Company bought equipment of 10,000

Account Head	Debit (CU)	Credit (CU)
Equipment	10,000
Cash		10,000

Then data from the journal is then classified in categories in the respective ledgers. Ledgers are commonly posted as t-accounts.

Example                                                         

Ledger of the Cash Account

Folio No.	Amount (CU)	Folio No.	Amount (CU)
1	10,000	22	400
7	1,200	05	290
13	2,000	11	110
Total	13,200	Total	800

No. shows the reference number of the journal where complete entry is passed. After entry analysis one can consider the balance to be posted on debit or the credit side. Total debt side shows a balance of 13,200 while credit side shows 800 balance.

The ledger entries are then collected to make a un-adjusted trial balance to check positions of assets, liabilities, owners’ equity and then the trial balance is balanced asset side should be equal to liabilities side.

Example

A typical trial balance looks as follows

Faisal & Company

Un-adjusted trial balance

May 30, 2015

Account Heads	Debit Balance Accounts	Credit Balance Accounts
Cash	10,200
Accounts Receivables	5,800
Supplies	12,000
Prepaid Rent	10,000
Equipment	90,000
Accounts Payable		40,000
Notes Payable		60,000
Service Revenue		100,000
Salary Expense	32,000
Miscellaneous Expense	20,000
Dividends	20,000
Total	200,000	200,000

                                                                                               

As far as double entry dynamics of the accounting are concerned, each of the occurred transaction is put down with the two aspects, first debit and then subsequently the credit hence the net balances in relation to the statement of the trial balance used to be equal normally. Then from the data above financial statements such as balance sheet followed by the statement of owner equity and lastly statement of cash flow are finally prepared and presented. After making statements left over or changed data is incorporated through closing entries.

It is important to remember Four concrete steps in relation to the Preparation of the Closing Entries of the temporary accounts:

1. Close all income accounts to Income Summary.
2. Close all expense accounts to Income Summary.
3. Close Income Summary to the appropriate capital account.
4. Close accounts having withdrawals nature to the capital account/s (this step is mandatory only in relation to the sole proprietorship and partnership form of businesses).

Examples

Close all income accounts that is the temporary accounts to the Income Summary:

Date	Account Head Particulars	Debit Amount	Credit Amount
1 July	Revenue from the Services provided	12,000
	Income summary		12,000

Likewise, the next step that will follow is in relation to the Closing of all the related expense accounts to the very same Income Summary.

Date	Particulars	Debit (CU)	Credit (CU)
1 July	Income Summary	8,79
		Rent Expense	150
		Salaries Expense	350
		Taxes and Licenses	37
		Utilities Expense	180
		Service Supplies Expense	90
		Depreciation Expense	72

The Final step that will be quite important is about the routing of the income summary to the eventual capital accounts.

Following journal entry will take place in this step:

Income Summary	1,065
Mr. Faisal, Capital Account		1,065

Let’s not forget to close the withdrawals to the capital account as well.

Mr. Gray, Capital	7,500
Mr. Faisal, Drawing		7,500

Finally, post-closing trial balance is made to complete the process. The process above is cyclic in nature. After the completion, the process continues and again steps are repeated it is a dynamic process not a static or one-time activity.