The sequence of accounting procedures is frequently referred to as the accounting cycle or the phases of accounting. It is repeated in the same order in each accounting period.
The accounting cycle begins with the journalizing of transactions and ends with the post-closing trial balance. The most significant output of the accounting cycle is the income statement and balance sheet.
Phases of Accounting Cycle
An understanding of all phases of the accounting cycle is essential. These phases are briefly described below.
The accounting cycle starts with the analysis of the transactions of the business in question. In this step, transactions are analyzed to identify the nature of accounts involved in the transaction.
The second step in the accounting cycle is journalizing, which involves recording all transactions in the general journal.
The process of transferring entries from the journal to the ledger is called posting. In this step, all transactions previously recorded in the journal are transferred to the relevant ledger accounts at some appropriate time.
Summarizing refers to the preparation of a trial balance from the debit and credit balances of the ledger accounts.
5. Adjusting Entries
At the end of every accounting period, some transactions are missed from the records. The recording of such transactions in the books of accounts is known as adjusting entries. Such entries are usually made to adjust the income and expense accounts.
6. Financial Statements
Financial statements are prepared at the end of each accounting period to understand the earnings and financial position of the business concern.
7. Closing Entries
Closing entries are passed to close the income and expense accounts at the end of the accounting period.
8. Post-Closing Trial Balance
The last and final phase of bookkeeping is the preparation of the post-closing trial balance. This proves the accuracy of the accounting records at the end of the trading period.