In the beginning when we gained our first understanding of accounting and also when it was formally introduced, we understood that accounting is a name of process that involves different steps through which data passes and ultimately transforms into an information that is communicated to users of accounting who use it in their economic decisions.
To study the accounting process in detail we have to study the steps involved in the process. These steps are called accounting cycle. It is described as cycle as they are carried out on repetitive basis. It starts with occurrence of an even which is of importance and ends at preparing financial statements and closing accounts for one particular period. And as one cycle ends the other starts. So it keeps on repeating and thus cycle.
Duration of one accounting cycle depends on the user of accounting information and its requirements, however, generally it is one year, but it can be semi-annual (6 months), quarterly (3 months), monthly (1 month), weekly or any number of days.
Usually accounting cycle is 1 year long as entities are required to prepare financial statements once a year and these financial statements are prepared after equal intervals i.e. 1 year that is the reason organizations have specific date at which one period ends which is also called balance sheet date.
Balance sheet data is the date at which one financial year concludes and so financial position at this date and financial performance up to this date is reported to users of accounting information.
Complete accounting cycle involves following steps:
- Identification of transaction
- Raising source document
- Recording in journals – Journalizing
- Recording in ledgers – Posting
- Preparing trial balance
- Making adjustments via adjust entries
- Preparing Adjusted trial balance
- Preparing worksheet
- Preparing Financial Statements
- Statement of Financial Position
- Income Statement
- Statement of Changes in equity
- Statement of Cash flows
- Disclosures: Notes to the accounts
- Closing entries
- Income Summary account
- Preparing post-closing trial balance
- Reversal entries
Some of the steps mentioned above are optional and need not to be carried out however, the ones mentioned in bold letters are mandatory and are necessary to prepare financial statements as per majority of accounting frameworks and regulations around the world.
To learn about accounting cycle involving only mandatory steps please read: Accounting cycle simplified
Author: Hasaan Fazal
Studied Chartered Accountancy and now Pursuing Professional Career as Financial Consultant, Manager Accounts and Finance. A teacher by passion and likes to make things easier for students by publishing courses and lecturing in on-campus and online classes
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