Accounting cycle

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The sequence of accounting procedure is frequently referred to as accounting cycle or phases of accounting. It is repeated in the same order in each accounting period. It begins with the journalizing of transactions and ends with the post-closing trial balance. The most significant output of the accounting cycle is the income statement and balance sheet.

Phases of accounting cycle

An understanding of all phases of accounting cycle is essential. These phases are therefore briefly described below:

1. Analyzing:

The accounting cycle starts with the analysis of business transaction. In this step, transactions are analyzed to find the nature of accounts involved in the transaction.

2. Journalizing:

The second step in the accounting cycle is journalizing which means recording all transactions in the general journal.

3. Posting:

Transferring entries from journal to the ledger is called posting. In this step, all transactions previously recorded in journal are transferred to the relevant ledger accounts at some appropriate time.

4. Summarizing:

Summarizing refers to the preparation of a trial balance from the debit and credit balances of the ledger accounts.

5. Adjusting entries:

At the end of every accounting period, some transactions are missed from records. The recording of such transactions in the books of accounts is known as adjusting entries. Mostly adjusting entries are made to adjust the income and expenses accounts.

6. Financial statements:

Financial statements are prepared at the end of each accounting period to know the earnings and financial position of the business concern.

7. Closing entries:

Closing entries are passed to close the income and expense accounts at the end of accounting period.

8. Post-closing trial balance:

The last and final phase of book-keeping is the preparation of post-closing trial balance to prove the accuracy of accounting records at the end of trading period.

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