Accounting Cycle

Below given are the steps for accounting cycle.

1. Collection of data and analysis of transactions

   In this first step of the accounting cycle, the accountant of the company collects the data and analyzes the transactions.
   
   For a smoothly running business, there would be many, many transactions. The accountant needs to look at each transaction, find out why it occurred, put it under the right accounts, and then analyze it.
   
   This step is the most critical of all because this kick-starts the process of accounting.

2. Journalizing

   After collecting and analyzing the transactions, it’s time to record the entries into the first books of accounts.
   
   In this step, each transaction transfers to the general journalGeneral JournalThe General Journal is a book of entry that holds the initial record of every transaction before being posted to the concerned accounts like Sales Journal, Purchase Journal, & Cash Journal etc. read more. Under each entry, a narration written mentions the reason behind debiting or crediting one account.
   
   Recording the entries in the journal is essential since if there is any error at this stage of recording, it will linger on in the next books of accounts as well.

3. Recording the journals into the ledger accountsLedger AccountsLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. read more

   Accounting is a series of steps taken one by one.
   
   After journalizing all the transactions, it’s time for the accountant to record the entries into the secondary books of accounts.
   
   That means if there are cash and capital, there will be two ‘t-tables’ in the general ledger, and then the balances of respective accounts will be transferred.
   General ledgers allow the accountant to get the closing balance for preparing the trial balance in the next step of the accounting cycle.

4. Creating an unadjusted trial balance

   As you know that trial balance is the source of all the financial statements, that’s why trial balance gets special attention.
   
   Closing balances of the general ledger accounts prepare an unadjusted trial balance.
   
   In this trial balance the debit side records the debit balances, and the credit side records the credit balances.
   
   Then the debit side is totaled, and the credit side is also totaled.
   
   And then the accountant will see whether both the side have similar balances or not.

5. Performing adjusting entries

   At this juncture, the unadjusted trial balanceThe Unadjusted Trial BalanceAn unadjusted trial balance is the account balances reported directly from the general ledger without adjusting for the year-end journal entries. It acts as a starting point for analyzing account balances and adjusting entries.read more is ready.
   
   In this step, the adjusting entries are prepared.
   
   The adjusting entries are typically related to accrual adjustments, periodical depreciation adjustments, or amortization adjustments.
   
   These adjusting entries are required to prepare an adjusted trial balance.

6. Creating adjusted trial balance

   After passing the adjusting entries, it’s time to create a new trial balance.
   
   This trial balance is called adjusted trial balance since it is prepared after passing the adjustment entries. This trial balance prepares many critical financial statements.

7. Creating financial statements from the trial balance

   This step of the accounting cycle is the most critical part. As an investor, you must know how and from where all the financial statements are coming. From the adjusted trial balance, all the financial statements are born. Adjusted trial balance prepares four important financial statements:
   – Income statement: The first financial statement that every investor should look at is the income statementThe Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more. In the income statement, the first item is sales, and the cost of sales and other operating expenses are deducted from the sales to ascertain the operating profit. Other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more when deducted from the operating profit, it computes the Net profit of the year.
   – Balance Sheet: The next financial statement on the list is the balance sheet. In the balance sheetIn The Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more, we record the assets and liabilities. And we see whether the balance of assets is in harmony with the balance of liabilities.
   – Shareholder’s Equity Statement: This is the next financial statement that is prepared. In this share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more and the retained earnings are taken into account. Retained EarningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more are percentage of profit reinvested into the company.
   – Cash flow Statement: Finally, the cash flow statement is prepared. In the cash flow statement, the accountant needs to find out cash flow from three kinds of activities – operating activities, financial activities, and investing activities. Two ways of preparing cash flow operating activitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more are – the direct and indirect cash flow from operations.

8. Closing the books

   This step is the penultimate step in the accounting cycle.
   
   Closing the books means that all financial statements are prepared, and all transactions have been recorded, analyzed, summarised, and recorded.
   
   After closing the books, a new accounting periodNew Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more would start, and the accountant would need to start repeating the above steps once again.

9. Creating a post-closing trial balance

   To ensure that the accounting transactionsAccounting TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. read more are properly recorded, analyzed, and summarized, a post-closing trial balance is prepared.
   
   Here all the accounts are taken into account, and then the closing balances are recorded as per their respective position.
   
   Then the credit side and the debit side are being matched to see whether everything is in the right order or not.