Wednesday, November 27, 2013

What is Accounting Cycle & its step

 Accounting cycle: According to ongoing concept, it is expected that the business will go on forever. The continuous cycle of keeping accounts is known as Accounting cycle.
accounting cycle
Accounting Cycle

1.   Identifying Transactions: Analyzing each event, transactions are identified in the first stage of Accounting cycle.

2.     Analyzing Transactions: In this stage, each transaction is analyzed and accounts are identified. For example Machineries bought for Taka 5,000. Here two accounts are involved. One Machinery Account and the other cash Account.

3.      Journalizing: Analyzed accounts record into the primary Book of Accounts as Debit and credit chronologically and the journalizing is done. 

4.      Transfer to Ledger: In this stage, transactions recorded in journal are recorded into the separate heads of accounts. Different ledgers are prepared for each heads of accounts and the balance of which is determined on a certain date.

5.      Preparing Trial Balance: Trial balance is prepared to testify whether the transactions are recorded accurately to their concerned head of accounts and with the balances of debit and credit of ledger, a trial balance is prepared. 

6.      Adjusting Entries: To identify the actual financial condition of a business the receivable income, accrued expense, expenses paid in advance and unearned income these items of a particular accounting period are adjusted through adjusting entries.

7.      Prepare Worksheet: For the objective of preparing the financial statement easier, an optional multi column statement is prepared. It is known as worksheet. 

   8.   Preparation of Financial Statement: With the financial statement, the amount of profit-loss, assets, liability, and owner’s equity of a business is determined. 

   9.  Closing Entry: The balance of the revenue income, revenue expense, and drawings of a business need to be closed at the end of the year. The income and expense of a business remain closed with the remaining asset, liability, and owner’s equity the next year starts. Therefore, trial balance after accounting year or opening journal is prepared.
    10.  Post closing Trial balance or Opening Journal: Income, Expense & Drawing accounts are being closed by closing entry. Next accounting period starts with the remaining balance of Asset, Liability & Owner’s Equity accounts. Post closing trial balance or Opening journal is prepared for this.