The Accounting Cycle

Accounting cycle is a sequence of accounting procedures which are used to record, classify and summarize accounting information. The accounting cycle begins with the initial recording of business transactions and concludes with the preparation of formal financial statements summarizing the effect of these transactions upon the assets, liabilities and owner’s equity of the business.

The term “cycle” indicates that these procedures must be repeated continuously to enable the business to prepare new and up-to-date financial statements at reasonable intervals.

Accounting cycle relates to the preparation of balance sheet or income statement for a service type business with the manual accounting system. The accounting procedures discussed in above paragraph may be summarized as follows:

1.Identify the transaction

Identify the transaction which occurred or the set of events. This step is not mandatory but it will help you out in the next step of accounting cycle.

2.Prepare the Source Document

Prepare the source document such as P.O (Purchase order) or Invoice of the collection of transaction identified in the first step.

3.Recording transactions in the journal

The first step of accounting cycle is recording transactions in the ledger. As any type of business transaction occurred; they are entered in the journal, thus creating sequential record of events. This procedure completes the recording step in the accounting cycle.

4. Post to ledgers account

The debit and credit entries in account balances are posted from journal to the ledger. This procedure classifies the effects of the business transactions on terms of specific asset, liability, owner’s equity, revenue and expense accounts.