Accounting cycle and Preparation of financial statements
The Accounting Cycle
The Accounting Cycle is a series of steps performed during the accounting period to record, classify, summarize and communicate the economic events to the interested users.
Accounting cycle consists of the following steps:
l (1) Journal-make entry for a new transaction.
l (2) Ledger-classify the accounts.
l (3) Trial Balance-summarize the accounts.
l (4) Corrections and adjustments.
l (5) Preparation of financial statements.
(1) Journal:
▪ A journal is a chronological record of business transaction.
▪ Chronological means recording in order of time.
▪ It is the first step of recording process.
▪ It is also known as the books of original entry.
l (2) Ledger:
lA ledger is a complete collection of all the accounts of a company. That is all the accounts are arranged according to accounting codes.
The procedure of transferring journal entries to the ledger accounts is called posting.
l (3) Trial Balance:
lA trial balance is a list of accounts and their balances at a given time.
lCustomary a trial balance is prepares at the end of accounting period. The primary purpose of trial balance is to check that the debits equal the credits after the posting.
l (4) Corrections and adjustments.
l (5) Preparation of financial statements.
Financial Statements means the following statements:
(1) Income Statement
(2) Owner's Equity Statement
(3) Balance Sheet
(Statement of Cash Flows
Another Types of Accounts:
lBalance Sheet Accounts/ Real Accounts/ Permanent Accounts:
►Assets
► Liabilities
► Owners’ Equity
lIncome Statements Accounts/ Temporary Accounts/ Nominal Accounts:
► Revenues
► Expenses/ Losses
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