Accounting Process - Accounting Basics

What is an Accounting Cycle?

The specific task which facilitates in completing an accounting process is known as Accounting cycle. The accounting cycle length may vary, some may be monthly, quarterly, half-yearly or annually. The structure of the accounting cycle may vary from organization to organization, but the process remains the same.

Explain in detail the Accounting Process

The steps involved in the accounting process are as follows:

Accounting Process

1

Collecting and Analyzing Accounting Documents

An important step where the source documents such as cash, bank, sales and purchase related documents are examined and analyzed. This process is continuous throughout the accounting period.

2

Posting in Journal

The journal entries are passed on the basis of the above documents by using the double entry system where the debit and credit balance remains equal. This process is repeated throughout the accounting period.

3

Posting in Ledger Accounts

The journal entries are posted in the ledger accounts and ledger is considered as a collection of all accounts. This process is continuous throughout the accounting period.

4

Preparation of Trial Balance

The summary of all the balances either debit or credit of ledger accounts is known as a Trial balance. As double entry system of accounts is followed, The total of the debit and the credit balance that appears in the trial balance remains equal. Trial balance is prepared at the end of the accounting period.

5

Posting of Adjustment Entries

The adjustment entries are first passed in the journal and then posted in ledger accounts and finally in trial balance. To find the correct value of revenue, expenses, assets and liabilities accounts, accrual basis of accounting is used and adjustment entries are required. This process is performed at the end of the accounting period.

6

Adjusted Trial Balance

Adjusted trial balance is prepared considering the above adjustment entries. The platform to prepare the financial statements of the company is Adjusted Trial Balance.

7

Preparation of Financial Statements

Set of statements such as Income and Expenditure Account, Trading and Profit and Loss Account, Cash Flow Statements, Fund Flow Statement, Balance Sheet or Statement of Affairs Account are termed as Financial Statements. Trial balance is used for putting the information into the financial statements. The financial health of the firm is depicted by the financial statements.

8

Post-Closing Entries

The revenue and expenditure of the firm are transferred to Trading and Profit and Loss account. These entries turn the balance of all the accounts of income and expenditure to NIL. The profit or loss of the company is represented by the net balance of these entries which is finally transferred to the capital or owner’s equity.

9

Post-Closing Trial Balance

The balances of Asset, Liabilities and Capital account are represented by the Post-closing Trial Balance. These balances are transferred to the next financial year as an opening balance.

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