Page 61 - DMGT104_FINANCIAL_ACCOUNTING

Unit 4: Accounting Equation and Accounting Cycle

4.2 Accounting Cycle Notes

Accounting is described as origin for the creation of information and the continuous utility of
information. Now the question is how is this information created? For this, there is a step by
step process, as shown below accounting cycle. It is a complete sequence beginning with recording
of transaction and ends with preparation of final accounts. The major steps involved in the
accounting cycle are:
1. Analyse Transactions: The first step of a accounting cycle is to know what type of transaction
we are dealing with; we also need to verify that the information is correct and that
transactions have taken place only with proper authorization. Most accounting transactions
originate with what are called source documents, which are the invoices, orders, time
cards, checks, and other “paperwork” (or now, commonly digital files) which provide the
first indication that a transaction has taken place (or will be taking place in the future.)
2. Preparing Journals: The journal is the “book of original entry,” the place where the
transactions first become part of the official financial records of the organization. We
make journal entries which specify the accounts which are affected by a transaction, and
the amount of money involved.
3. Post to Ledger A/c: The ledger is the entire group of accounts maintained by an organization.
Posting refers to the transfer of the journal entries to the ledger. In a manual system,
posting was a separate process. In computerized systems, posting is typically accomplished
contemporaneously with recording the transaction in the journal.
4. Preparation of Trial Balance: A trial balance is nothing more than a summation of the
account balances to be sure that the books do, in fact, balance.
5. Post Closing Entries: Closing entries are the entries that we make to close the temporary
accounts (the expense and revenue accounts). In manual systems, each closing entry had to
be made individually. In computerized systems, a single command closes the books.

6. Preparation of Financial Statement: Last step includes the preparation of Trading and
Profit & Loss A/c and opening and closing balance sheet.

Notes Classifying: It is one of the most important processes of the accounting. Under this,
grouping of transactions is carried out on the basis of certain segments or divisions. It can
be described as a method of rational segregation of the transactions. The segregation is
generally done into two categories, viz.
1. Cash transactions and

2. Non-cash transactions.
The preparation of the ledger A/cs and Subsidiary books are prepared on the basis of
rational segregation of accounting transactions. For example, the preparation of cash
book is involved in the unification of cash transactions.
Summarizing: The ledger books are appropriately balanced and listed one after another.
The list of the name of the various ledger book A/c and their accounting balances is
known as Trial Balance. The trial balance is summary of all unadjusted name of the accounts
and their balances.
Contd...

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