Accounting Cycle

ACCOUNTING CYCLE
• It refers to a complete sequence of accounting
procedures which are required to be repeated in same
order during each accounting period. Accounting cycle
includes
a. Recording
b. Classifying
c. Summarizing

RECORDING
First, all transactions should be recorded in the journal or
books of Original Entry known as subsidiary books as and
when they take place.

CLASSIFYING
• All entries in the journal or books of original entry should
be posted to the appropriate ledger accounts to find out
at a glance the total effect of all such transactions in a
particular account.

SUMMARIZING
• Last stage is to prepare the trial balance and a final
accounts with a view to ascertaining the profit or loss
made during a trading period and the financial position of
the business on a particular date.

EXHIBIT 4.5—STEPS IN THE
ACCOUNTING CYCLE

TRANSACTIONS
• Any dealing between two persons or things is a
transaction. It may relate to purchase and sale of goods,
receipt and payment of cash and rendering of service by
one party to another.
• Transaction is of two kinds
• Cash transaction
• Credit transaction

PROBLEMS
1. Prepare Accounting Equation on the basis of the
following
• Rahim started business with cash 20000 rupees
• Rahim purchased furniture for cash 2000.
• Rahim paid rent 200 rupees.
• Rahim purchased goods on credit 3000 Rs.
• Rahim sold goods (cost price Rs. 2000) for Rs. 5000 on
cash.

JOURNAL
• In accounting our object should be to record the
business transactions properly in a book. The first book
to be used for this purpose is called Journal.
• The word journal has been derived from the French word
“Jour”. Jour means day. So, journal means daily.
Transactions are recorded daily in journal and hence it
has been named so.

CONT.
• It is a book of original entry to record chronologically and
in detail the various transactions of a trader. It is also
known as “Day Book” because it contains the account of
every day’s transactions.

CHARACTERISTICS OF JOURNAL
• Journal is the first successful step of the double entry
system. A transaction is recorded first of all in the journal.
So journal is called the book of original entry.
• A transaction is recorded on the same day it takes place.
So, journal is called Day Book.
• Transactions are recorded chronologically. So, journal is
called chronological Book.

CONT.
• Narration is written below each entry.
• The amount is written in the last two columns
• Debit amount in debit column
• Credit amount in credit column

ADVANTAGES OF JOURNAL
• Each transaction is recorded as soon as it takes place.
So there is no possibility of any transaction being omitted
from the books of account.
• Since the transactions are kept recorded in journal
chronologically with narration. It can be easily
ascertained when and why a transaction has taken
place.

CONT.
• For each and every transaction which of the two
concerned accounts will be debited and which account
credited are clearly written in journal. So, there is no
possibility of committing any mistake in writing the
ledger.
• Since all the details of transactions are recorded in
journal. It is not necessary to repeat them in ledger.

CONT.
• Journal shows the complete story of a transaction in one
entry.
• Any mistake in ledger can be easily detected with the
help of journal.

ILLUSTRATION
• On 1st January 2018 A Salam started business with a
capital of Rs. 20,000 and his transactions of the month
were as follows
Rupees
• Jan 2 Purchased building for cash 8000
• 8 Purchased goods from C 1000
• 15 Sold goods for cash 500
• 20 Goods returned to C 100
• 22 Sold goods to Rehman 400
• 25 Rehman returned goods 25
• 31 Salaries paid for the month 200
• 31 Rent paid for the month 150
Record these transactions in Journal

LEDGER
• When all the transactions for a given period
have been journalized, the next thing is to
classify them according to the accounts affected.
All similar transactions must be brought together.
For instance all transactions relating to cash
must be put in one place. Similarly, all
transactions with a customer or a supplier must
also be assembled at one place. The book in
which this classification is done is called the
ledger.

FEATURES
• It has two identical sides….left hand side and right
hand side is called debit and the right hand side is
called credit.
• Debit aspect of all the concerned transactions is
recorded on debit side while credit aspect on credit
side according to date.
• The difference of the totals of the two sides
represents balance. The excess of debit side over
credit side indicates debit balance. If the total of the
two sides is equal there will be no balance.

CONT.
• Usually balance is drawn at the year end and recorded
on the deficit side to make the two sides equal. This
balance is known as closing balance.
• The closing balance of the current year will be the
opening balance of the next year.

ADVANTAGES
• It is the ledger through which successful application of
double entry system is ensured. Each and every
transactions is divided into two parts…. Receiver and
giver…. And recorded in the two concerned accounts in
ledger.
• Transactions relating to different persons or concerns
are recorded in the account of each person or concern
separately. As e result, complete and reliable information
is available in respect of each and every account.

CONT.
• Different types of incomes and expenses are recorded in
different accounts separately. So it is possible to
ascertain the amount of income and expenditure under
each head and the overall result at the year end through
trading and profit & loss A/c.

FORM OF LEDGER
• One account usually occupies one page in the ledger.
But if the account is big one it may extend to two or more
pages. The pages of the ledger are vertically divided in
to two equal halves. The left hand half or side is known
as the debit side and the right hand half or side is the
credit side.

METHOD OF POSTING
• The act of separately transferring each entry from journal to
the respective account in the ledger is called posting.
• Posting consists of
• Recording the relevant amount on the left hand side of the
account which according to the journal is to be debited.
• Recording the relevant amount on the right hand side of the
account which according to the journal is to be credited.
• In the ledger account the first entry on the debit side is
preceded by the word “To” and the first entry on the credit side
is preceded by word “By”.

ILLUSTRATION
• Journalize the following transactions and post them to the
ledger accounts concerned:
• 2018 Rs.
• Dec 1 Purchased goods for cash 2000
• 3 Sold goods to Karim 500
• 10 Received from Karim 500
• 15 Purchased machinery for cash 1000
• 20 Cash sales 300
• 25 Sold goods to Rahim & sons 600
• 28 Received from Rahim & Sons 590
• Discount allowed 10
• 30 Paid rent 50
• 31 Paid salaries 100

TRIAL BALANCE
• A trial balance is a bookkeeping worksheet in
which the balances of all ledgers are compiled
into debit and credit account column totals that
are equal. A company prepares a trial
balance periodically, usually at the end of every
reporting period.

TRIAL BALANCE
• DEFINITION
• IT IS A STATEMENT SHOWING CREDIT AND DEBIT
BALANCES FROM THE LEDGER.
• HELPS ARITHMETICAL ACCURACY AND FACILITATES
FINAL ACCOUNTS.

ACCURACY OF LEDGER: TRIAL
BALANCE
• Having posted all the transactions into the ledger, it is
necessary to check the correctness of the work done
before proceeding further. In order to test the arithmetical
accuracy of our ledger we should prepare a statement
called the trial balance.
• A trial balance is a statement prepared by taking out the
debit and credit balances of all accounts appearing in the
ledger.

OBJECTIVES OF PREPARING TRIAL
BALANCE
• The following are the main objectives of preparing a trial
balance
• Trial balance helps in knowing the arithmetical accuracy of the
accounting entries. Trial balance represents a summary of all
ledger balances and therefore if the two sides of the trial
balance tally, it is an indication of this fact that the books of
accounts are arithmetically accurate.
• Trial balance forms the basis for preparing financial
statements such as income statement and profit & Loss A/c
and balance sheet. In case the trial balance is not prepared it
will be almost impossible to prepare the financial statements.

CONT.
• The entire ledger is summarized in the form of a trial
balance. Thus the position of a particular account can be
judged simply by looking at the trial balance.

TRIAL BALANCE
• BASIC PRINCIPLE :
• SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,
ASSETS AND EXPENSES ARE DEBIT BALANCES
LIABILITIES AND INCOMES ARE CREDIT BALANCES

PROOF OF ACCURACY
• If the debit and credit totals of the trial balance are equal
and also correspond with the total of journal. We may be
satisfied that the postings have been properly made and
are arithmetically accurate.

HOW TO PREPARE A TRIAL BALANCE
• The trial balance is usually prepared on a loose sheet of
paper.
We may prepare a trial balance in one of the following
forms
• Total trial balance
• Balance trial balance
• According to total trial balance method two sides of each
ledger account debit side and credit side are added up
and the debit and credit totals so obtained are placed in
the debit and credit columns of trial balance respectively.

RULES FOR BALANCING ACCOUNTS
• Add up both sides of the account.
• Find out the difference in a separate slip.
• Put the difference on the lighter side.
• Add up both sides again.
• Rule off.

TRIAL BALANCE
TYPICAL TRIAL BALANCE
N A M E DEBIT CREDIT
CAPITAL X
• DRAWINGS X
• PURCHASES X
• SALES X
• EXPENSES X
• DEBTORS(CUSTOMRES) X
• CREDITORS(SUPPLIERS) X
• CASH X
• SALES RETURN X