ACCOUNTING CYCLE AND ONLINE ACCOUNTING
Accounting Cycle and Online Accounting: Accounting is not just working with numbers, its about following guidelines and fundamentals of accounting.
There are specific steps that complete accounting process, the accounting cycle starts from a point and revolves through a circle. Each accounting cycle has a length which is variable on the basis of financial reporting of the company.
Steps in Accounting Cycle
These are basic steps to the accounting cycle: –
- Source documents
- Transactions analysis
- Journal transactions
- Transaction posting
- Unadjusted trial balance
- Adjusting entries
- Final trial balance
- Preparation of Financial statements
Source Documents/ occurrence
The source documents are the receipts, bills, cheques, bank statements, sales invoice, purchase orders which are basically the evidence of transactions at the time of occurrence.
Source documents are the main source to determine the nature of transactions.
Like an expense receipt is the source document for recording expenses.
Transaction analysis
In the next step you will analyze the transaction to make sure of the effect of such transaction on the company’s financial affairs.
Journal transactions
After the transactions are analyzed its time to post them into respective journals through journal entry. When a journal entry is used to record a transaction the double entry rule is in place which means with every transaction two accounts are affected at the same time.
Journal entries are recorded in chronological order for future tracking purposes.
- Transaction posting
- Un-adjusted trial balance
- Adjusting entries
- Final trial balance
- Preparation of Financial statements
Transaction posting
The next step is to post the transactions into the general ledger. A ledger keeps the records of all accounts in a company.
Ledgers are classified and numbered. When the information/ data is transferred to ledger account it is transferred to each account affected by the transaction using the double entry system.
- Un-adjusted trial balance
- Adjusting entries
- Final trial balance
- Preparation of Financial statements
Un-adjusted trial balance
The un-adjusted trial balance is the contains list of the accounts and their balances affected by double entries for the specific accounting period.
The debits and credits of un-adjusted trial balance are tallied as a result of double entry and the reason its called un-adjusted trial balance is that its drafted before entering adjusting entries.
- Adjusting entries
- Final trial balance
- Preparation of Financial statements
Adjusting entries
Adjusting entries are entries which are discovered after preparation of unadjusted trial balances and later on are posted into the ledger.
It is not necessary that every organization has adjusting entries.
Adjusting entries are recorded at the end of accounting period. Adjusted entries are not recorded at the end of accounting cycle.
- Final Trial Balance
- Preparation of Financial statements
Final Trial Balance
A final trial balance is the trial balances containing account balances of all the ledgers after posting the adjusting entries in ledgers.
At the level the accountant makes sure that the debits and credits are equal after adjusting entries.
Financial statements are from the final trial balance.
Preparation of Financial statements
Financial statements are prepared with the help of final trial balance as it is believed to be the complete and error-free trial balance.
Each company’s financial statements vary on the basis of nature of business activities of such company. Financial statements mainly consist upon the following:
- Balance Sheet
- Profit and loss account/income statement
- Cash flow statement
- Notes to the accounts
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