The accounting cycle involves locating, evaluating, and documenting a company’s accounting events. The process follows a standard sequence of eight steps that begin with the occurrence of a transaction and conclude when it is included in the financial statements and the books are closed. This blog will explore the key steps in the Accounting Cycle. The main processes in the eight-step accounting cycle are recording journal entries, posting to the general ledger, calculating trial balances, adjusting entries, and producing financial statements, which are covered comprehensively in a Tally Course in Chennai.
How the Accounting Cycle WorksÂ
The organized set of guidelines known as the accounting cycle may help ensure the precision and consistency of financial statements. Mathematical errors have partly decreased because of computerized accounting systems and the standardized accounting cycle process.
The accounting cycle is now automated mainly by software, which reduces human labour and processing errors that come with manual labour.
Accounting Cycle Steps
The following are the key steps in the accounting cycle.
Identify Transactions
The first step in an organization’s accounting cycle is finding the transactions that make up a bookkeeping event. It could be a purchase, a reimbursement, money to a supplier, etc.
Record Transactions in a Journal
The following step uses journal entries to record the transactions. Completing other economic events, the ticket of an invoice, or the sale disclosure serves as the basis for the entries.
Posting
A transaction should be credited to an account in the general ledger after it has been documented as a journal entry. The general ledger provides an account-by-account breakdown of all accounting operations.
Unadjusted Trial Balance
It is made once each general ledger account has journal entries posted by the business. In the financial records, the trial balance guarantees that total debits and credits equal one another.
Worksheet
The fifth step is to make a worksheet of debits and credits and analyze any discrepancies that require adjusting entries.
Adjusting Journal Entries
Adjusting entries are made after the period. These are the outcomes of both time passing and corrections made on the worksheet. An adjusting entry might, for instance, include interest income that has been accrued over time.
Financial Statements
An organization prepares an adjusted trial balance after posting adjusting entries and the official financial statements. The Online Tally Course will provide comprehensive insights and practical knowledge on effectively managing and navigating the intricacies of adjusting entries and trial balances.
Closing the Books
An entity closes out temporary accounts, revenues, and expenses at the end of the period. Transferring net income to retained earnings is one of these closing entries. A business finally prepares the post-closing trial balance to guarantee that the debits and credits match and the cycle can restart.
Timing of the Accounting Cycle
When financial statements are prepared, the accounting cycle begins and ends within the accounting period. Accounting periods are not fixed and rely on various factors. Nonetheless, the annual period is the most prevalent kind of accounting period. Numerous transactions take place and are documented throughout the accounting cycle. Financial statements are prepared at the end of the fiscal year (and are often required by government regulation).
An accounting period marks the start and finish of the accounting cycle, which is a thorough accounting procedure. It consists of eight steps that guarantee accurate financial transaction reporting and recording. The following accounting period and its associated financial transactions mark the start of a company’s accounting cycle, which concludes when its books are closed. The Coaching Institute in Chennai provides a structured learning environment to equip individuals with the necessary skills to navigate the accounting cycle seamlessly.