Q. Illustrate about accounting cycle?
The accounting cycle is a series of points performed during the accounting period some throughout the period and some at the end to record, analyze, summarize, classify and report useful financial information for the purpose of preparing financial statements. Earlier than you can visualize the eight steps in the accounting cycle you should be able to recognize a business transaction. Business transactions are quantifiable events that affect the financial condition of a business. For instance presume that the owner of a business spilled a pot of coffee in her office or broke her leg while skiing.
These two events may perhaps briefly interrupt the operation of the business. But they aren't measurable in terms that affect the profitability and solvency of the business.
Business transactions are able to be the exchange of goods for cash between the business and an external party such like the sale of a book or they can involve paying salaries to employees. These actions have one fundamental criterion that they must have caused a measurable change in the amounts in the accounting equation
Assets = Liabilities + Stockholders' Equity.
The proof that a business event has occurred is a source document such like a sales ticket, check and etc source documents are vital because they are the ultimate proof of business transactions. Subsequently you have determined that an event is a measurable business transaction and have adequate proof of this transaction mentally analyze the transaction's effects on the accounting equation. You for several companies send and receive source documents electronically rather than on paper. In like as an electronic computer environment source documents might exist only in the computer databases of the two parties involved in the transaction accounting cycle. The eight key elements in the accounting cycle and the chapter that discuss them are
- Analyze transactions by investigative source documents
- Journalize transactions in the journal
- Put journal entries to the accounts in the ledger
- Prepare a trial balance of the accounts and complete the work sheet this step includes adjusting entries
- Prepare financial statements
- Journalize and post adjusting entries.
- Journalize and post closing entries.
- Prepare a post-closing trial balance.
Notice that firms carry out the last five steps at the end of the accounting period. Step 5 precedes steps 6 and 7 for the reason that management needs the financial statements at the earliest possible date. Subsequent to the statements have been delivered to management the adjusting and closing entries can be journalized and posted.
You are able to perform many of these steps on a computer with an accounting software package. But you must understand a manual accounting system and all of the steps in the accounting cycle to understand what the computer is doing. This understanding take away the mystery of what the computer is doing when it takes in raw data and produces financial statements.