This will help you understand Accounting Cycle in Accounting.

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Accountint Cycle
by Haider Ali

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Accounting Cycle
The Accounting cycle is a process of flow
of business transactions. It defines how
business transaction move toward the
next step unless the desired business
financial information are achieved. It is a
series of steps which are repeated every
reporting period. The process starts with
making accounting entries for each
transaction and goes through closing the
books. Now look below to understand how
Accounting cycle moves toward the next
stage.

3. Page 3Accounting Cycle
5
Financial
Statements
5
Financial
Statements
4
Trial Balance
4
Trial Balance
3
Posting in
Ledger
3
Posting in
Ledger
2
Recording in
Journal
2
Recording in
Journal
1
Source
Documents
1
Source
Documents
Accounting
Cycle
Accounting
Cycle

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• While preparing your accounts in manual
process, you have to follow the above
mentioned cycle step by step, although
the best accounting software such as
QuickBooks Premier, Peachtree Complete
Accounting, and MYOB handle much of
the accounting cycle automatically, such
as posting to the general ledger, preparing
a Trail Balance and producing Financial
Statements. Understanding of Accounting
Cycle is a must thing and students must
learn this cycle by heart because once you
have got the basic concepts you can
understand accounting the more easily.

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Now we define each step in detail
• Source Documents.
A Source Document refers and includes any document
that is received or issued against any business
transaction, which is needed to be recorded in a
Journal. It provides evidence that an economic event
has actually occurred. Examples of source documents
include a receipt, an invoice, a bill , a payment and a
bank statement etc. A source document is necessary
to make journal entry because if there is no source
document, there would be not journal entry.

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Record Transactions in Journal.
•
Once you have received the
source document, the next step is
to analyze and record this source
document in Journal. The Journal
is called book of original entry,
because as soon as business
transaction originates it is
recorded in journal . The journal
provides a chronological record of
transactions that affect the
financial statements. An entry into
the journal is called a journal
entry.

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Post Journal entries into Ledger
After journalizing the source document, you
need to go ahead by posting journal entries
into ledger. In other words, the debit and
credit in the journal will be posted into the
appropriate debit and credit column of each
Ledger account.
The Ledger is called the king of all books of
accounts because all entries from the books
of original entry must be posted to the
various accounts in the ledger. It should be
noted that journal contains a chronological
record while ledger contains
a classified record of all transactions.

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Trail Balance.
Personally I believe that once you have Journalized
business transaction accurately and posted them into
the appropriate Ledger accurately, you did a great job.
Now what to do next? Obliviously you need to check
the accuracy of your Journalizing and Posting process,
for this purpose, you need to prepare a Trail Balance.
A Trial Balance is simply a listing of the Ledger
accounts with their respective Debit or Credit
balances. It is not a formal Financial Statement, but a
great tool to check the Accounting Equation
(Debits=Credit).
Preparing Trial Balance

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You did it all what would be the next level?
Sure! Preparing Financial Statements.
Owners of the business entity require their
business’s financial status, so they need
to know how much they have earned or
lost, how much is receivable and how
much is payable, the valuation of closing
stock etc. Four types of Financial
Statements are prepared but commonly
most of small businesses require “Income
Statement / Profit & Loss A/C” and Balance
Sheet. Other two statements are “Cash
Flow statement and Retained Earning A/C.
Prepare Financial Statements

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• Income Statement / Profit & Loss
• Income financial statements present information concerning
the revenue earned or loss suffered by a company in a
specified time period, normally annually. The income statement
is created from the nominal or temporary accounts.
• Balance Sheet
• The balance sheet is created from the real or permanent
accounts. Real accounts are the assets, liabilities, and owner's
equity. Balance Sheet provides insight into a company’s assets
and Liabilities at a particular period of time. Information about
the company’s shareholder equity is included as well.