Question

What are the steps of the accounting cycle? Describe each in your own words using specific examples.

Answer 1

The accounting cycle also known as the accounting process, which starts with the identification of the business transactions and include recording, classifying, analysing and interperating anc communicating the financial result to its end users. Following are the steps of accounting cycle:

1. Identification of business transaction: The first step in the process of accounting is identifying the business transations which is divided into to parts: Quantitative and qualitative transactions. Quantitative transactions are those transactions that which are monetary in nature. Example: Salary paid to employess $1000, wheras qualitative transactions are important to business which reveals the quality of business and its staff.

2. Recording of transactions: For accounting purpose , business only keep record of quantitative transactions in its books. Recording of business transactions is done in journal and various subsidiary books.

3. Classifying the recorded transaction: Next step in accounting cycle is classifying the recorded transaction under different heads in ledger books.

4. Summarizing the transaction: After preparing ledger accounts, next step is preparing the summary of all ledger accounts showing debit and credit balance in one statement of trial balance. After preparing trial balance , balancing of trial balance is done after correcting the errors related to trial balance.

5. Analysing and interprating the financial results: Financial statements are prepared from corrected trial balance. Finamcial statements include profit and loss account whoch show firms net profit or loss and balance sheet which shows position of assets and liabilities of business.

6. Communicating the financial results: Last step in the process of accounting is communicating the financial result to various accounting users such as bankers, government, researcher, and various users.