Question

What is accounting cycle? What is its relationship with operating cycle?

In the steps to compile financial statements, explain a few accounts that are more likely to be used to link these financial statements.

Answer 1

Accounting Cycle: Accounting Cycle is the period of recording the financial business transaction and provide end to end reporting in financial Statements. However, same is considered mostly of 12 Months or 15 months.

Where as Operating cycle: It is the period in which the raw material purchased or processed to meet the customers needs. The relationship between Accounting and operating cycle is Accounting cycle is more broader concept than operating cycle. Accounting is dealing with maintenance of financial statements whereas operating cycle deals with the procurement, processing and delivery of the same.

With this completion of any process either procurement, either process and finished goods same has been included in financial statements. At every stage of completion same is shown in financial for decision making purpose.

As in relation to financial statement and concerning the operating cycle, with the procurement once made either in cash or credit shall be recorded with Inventory and cash or creditors shall be credited as per the transactions, for processing WIP and for Sale of goods to end consumers Debtors or cash shall be debited against sale of goods.

As these process clearly mirror the capital outflow (Purchase / Procurement) and generation of cash inflows ( Sale) which will be further enacted in financial statement.