Question

DB Post: What is accounting cycle? Illustrate the components of the cycle and explain the logic links between the steps

Answer 1

Accounting cycle refers to the whole process of identifying, analyzing and recording of financial transactions of a company for a accounting period. In other words we can say that accounting cycle refers to the all steps of preparation of financial statements which starts with the identification of business transaction and ends with closing of accounts.

Followings are the components of accounting cycle;

1. Transactions

2. Journal entries

3. Posting to the general ledger

4. Unadjusted Trial balance

5. Adjusting entries

6. Adjusted trial balance

7. Financial statements

8. Closing entries

9. Post closing trial balance

10. Reversing entries

As we know that in accounting cycle for a firm first of all we need to identify business transaction which need to be recorded then those transactions are recorded as journal entries. Apart from this we will record those transactions into relevant T accounts and then unadjusted trial balance will be prepared. At the end of period required adjusting entries will be made and then after making required adjustments, adjusted trial balance will be prepared.

As we prepared adjusted trial balance then we will prepare financial statements. After preparing financial statement we need to close all nominal accounts with the help of closing entries and then we need to prepare post closing trial balance so that all adjusted balances can be shown properly.

After this if required then reversing entries are made in the books of accounts.

This whole process continue year by year for a firm to record all financial business transactions in correct order.