Accounting cycle

ACCOUNTING CYCLE:
                                          ''Accounting cycle is a sequence of accounting procedures which are used to record, classify and summarize accounting information''...

STEPS INCLUDED IN ACCOUNTING CYCLE:
                Following steps are included in accounting cycle:

• Journal
• Ledger
• Trial balance
• Adjusting entries
• Adjusted trial balance
• Financial statements
• Closing entries
• After closing trial balance

JOURNAL: 

                             ''Day to day recording of business transactions is done in journal''

                            The first step of accounting cycle is recording of transactions in the journal. As any type of business transaction occured; they are entered in the journal. This procedure completes the recording step in the accounting cycle. Two accounts are involved in it. One a/c is debited and the other is credited.

LEDGER:

                          ''It is a book in which the entries from journal is transferred''

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

TRIAL BALANCE:

                                              ''A statement of all debit and credit items in double entry ledger, made to test their equality''

                             A trial balance proves and authenticates the equality of debit and credit entries in the ledger. The purpose of this procedure is to verify the accuracy of posting process and the computation of the ledger account balances. In the nutt shell debit and credit sides are balanced at the end in the trial balance. It is made under the instructions provided by the IAS.

ADJUSTING ENTRIES:

                                      '' An accounting entry made at the end of accounting period to allocate items between accounting periods''

                                 Adjusting entries are recorded at the end of accounting period to adjust ledger accounts for any changes that relate to the current accounting period but have not yet been recorded. The main purpose of adjusting entries is to match revenues and expenses to the current accounting period which is a requirement of the matching principle of accounting.

ADJUSTED TRIAL BALANCE:

                                        An adjusted trial balance is a list of the balances of ledgers which is made after the adjusting entries are done. Adjusted trial balance contains balances of revenues and expenses along with of assets, liabilities and equities after the changes occur due to adjusting entries.

FINANCIAL STATEMENTS:

                                             It is the step of accounting cycle in which exact figures from trial balance are summarized up to prepare the financial statements. These financial statements demonstrate the position of the business at the specific date.

It includes:

• Income statement
• Balance sheet 
• Statement of cash flow
• Statement of changes in equity
• Notes & other disclosures

CLOSING ENTRIES:

                                             It is necessary to close the temporary accounts in order to make their balances zero at the end of accounting period. Closing entries are based on the balances of accounts in the adjusted trial balance.

Temporary accounts include:

• Revenues
• Expenses
• Dividends
• Income summary

AFTER CLOSING TRIAL BALANCE:

                                             Post closing trial balance is a list of balances of ledgers prepared after passing adjusting entries and their postings to the ledgers. Post closing trial balance is prepared in the last step of the accounting cycle and its purpose is to assure that sum of debits equal the sum of credits before the new accounting period starts.