Question

Describe the steps and parts of the accounting cycle that take us from individual transactions all the way to formal published financial statement.

Answer 1

Accounting cycle refers to the process of identifying, analyzing and recording of financial transactions for a business enterprise. Accounting cycle refers to the steps which starts from identification of transactions and continue till the preparation of financial statements.

Followings are the steps of accounting cycle;

1. Transactions;

First of all we need to identify whether a transaction need to be recorded or not. Or we can say that we need to know whether a transaction is a financial transaction or not.

2. Journal entries;

After identifying financial transaction we have to make journal entries of all financial transactions.

3. Posting to the general ledger;

After making journal entries we will post these transactions into separate ledger account.

4. Unadjusted Trial balance;

After all ledger we will make unadjusted trail balance with the help of balances of ledger accounts.

5. Adjusting entries;

At the end of accounting year we will make adjusting entries for the relevant transactions.

6. Adjusted trial balance;

After adjusting entries we will make adjusted trial balance.

7. Financial statements;

After adjusted trial balance we will income statement and balance sheet.

8. Closing entries;

Relevant closing entries are made to close nominal accounts such as; income, expenses, losses and gains etc.

9. Post closing trial balance;

After closing entries we need to make post closing trial balance.

10. Reversing entries;

Reversing entries are made for some necessary relevant transactions.