Define accounting and accounting cycle

Welcome to Now we will discuss about accounting and accounting cycle. As we know, accounting is a business language. We can use this business language to communicate financial transactions and their results. We use this comprehensive system to collect, analyze and communicate accounting financial information.

The core of accounting is as old as money. In the early days, the number of transactions was very low, so each concerned person could keep a record of the transactions during a specific period.

According to certain accounting principles and standards, a book-keeper may record financial transactions and may be determined by an accountant based on the size, nature, volume, and other constraints of a particular organization.

With the help of the accounting process, we can determine the profit or loss of a business on a specific date. It also helps us analyze past performance and plan future courses of action.

Define Accounting

The American Institute of Certified Public Accountants has defined financial accounting as: “Recording, classification and summarization in an important way in terms of money transactions and events that convey at least part of the financial character and results.”

Scope of accounting

Let us go through the main objectives of accounting:

  • For systematic record keeping: Accounting is done to keep a systematic record of financial transactions. The primary objective of accounting is to help in collecting financial data and to record it systematically to get correct and useful results of financial statements.
  • To find out the profitability: With the help of accounting, we can evaluate the profit and loss during a specific accounting period. With the help of a trading and profit and loss account, we can easily determine the profit or loss of a firm.
  • To find out the financial position of the business: A balance sheet or statement of affairs indicates the financial position of the company on a particular date. A properly prepared balance sheet also gives us an indication of the value of class and assets, the nature and value of the obligation, and the state of the firm’s capital. With its help, we can easily find out the strength of any business unit.
  • To aid decision making: To make decisions for the future, accurate financial statements are required. One of the main objectives of accounting is to take the right decision at the right time. Thus, accounting gives you a platform to plan the future with the help of past records.
  • To fulfill compliance of Law: Business entities such as companies, trusts and societies are being run and regulated according to various legislative acts – to meet compliance with the law. Similarly, different taxation laws (direct indirect taxes) also apply to each business house. All have to keep and maintain different types of accounts and records as per the respective laws of the land. Helps in running a business in compliance with accounting law.

Accounting cycle

The accounting cycle refers to the specific tasks involved in completing an accounting process. The length of an accounting cycle can be monthly, quarterly, half-yearly or yearly. It can vary from one organization to another but the process remains the same.

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Accounting cycle procedure

The following steps in the accounting process are listed below –

Collection and analysis of accounting documents:

This is a very important step in which you examine the source documents and analyze them. For example, cash, bank, sale and purchase of related documents. It is a continuous process throughout the accounting period.

Posting in the magazine:

Based on the above documents, you pass journal entries using a double entry system in which the debit and credit balance remain equal. This process is repeated throughout the accounting period.

Posting in Ledger Accounts:

Debit and credit balances of all the above accounts affected through journal entries are posted to ledger accounts. An ledger is simply a collection of all accounts. Generally, it is also a continuous process for the entire accounting period.

Preparation of trial balance:

As the name itself suggests, a trial balance is a summary of all the balances in the ledger holding the debit balance or credit balance, whatever.

Since we follow the double entry system of accounts, the total number of debit and credit balances shown in the trial balance remains equal. Generally, you are required to prepare a trial balance at the end of the said accounting period.

Posting of adjustment entries:

In this phase, adjustment entries are first passed through the journal, then posted to ledger accounts, and finally to the trial balance.

Since in most cases, we used a sequential basis of accounting to find out the true value of the accounts of revenue, expenditure, assets and liabilities, we need to make these adjustment entries. This process is done at the end of each accounting period.

adjusted trial balance:

Considering the above adjusting entries, we make the adjusted trial balance. Adjusted trial balance is a platform to prepare a company’s financial statements.

Preparation of financial statements:

Financial statements are a set of statements such as income and expense accounts or business and profit and loss accounts, cash flow statements, fund flow statements, balance sheets or statements of accounts.

With the help of trial balance we put all the information in the financial statements. Financial statements clearly reflect the financial health of a firm, its profit or loss.

Closing Entry:

All the various accounts of the firm’s revenue and expenditure are transferred to the trading and profit and loss account. As a result of these entries, the balance of all accounts in income and expenditure accounts goes to NIL.

The net balance of these entries represents the profit or loss of the company, which is eventually transferred to the owner’s equity or capital.

Time after trial end:

After the trial balance, the closing assets represent the liabilities and the balance of the capital account. These balances are transferred as initial balances in the next financial year.

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