Accounting Cycle Definition & 11 Steps of The Accounting Cycle

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• Define an accounting cycle
• phases of the accounting cycle
• Explanation of the accounting cycle

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Before we understand accounting properly, we must first understand its process and procedures, right?

Understanding the accounting cycle is the essential part of understanding accounting. Because it says what needs to be understood or known. On the other hand, it also talks about accounting jobs .

From this article we will learn what the accounting cycle is and the phases of the accounting cycle.

Accounting cycle definition:
The concept of accounting continuity states that every organization will operate for an indefinite period of time . But in order to inform users of relevant accounting information, we need to prepare a cash flow statement.

To prepare a financial statement we have to follow some steps such as identification of transactions, registration, classification etc. and all these tasks must be done step by step.

The accounting cycle therefore includes all the phases which begin with the identification of the movements and, after the creation of the balance sheet, conclude with the closing entries (closure of the accounting entry).

All these tasks are performed one by one. This is why it is called an accounting cycle.

However, the phases of the accounting cycle are given below…

1. Determine the transaction:
We know that every transaction is an event. But not every opportunity is a bargain. Transaction definition is the first step in the accounting cycle. In this stage, the accountant identifies transactions for all events that occurred during a given period.

If an event affects the accounting equation, it is identified as a transaction. Then it is selected for accounting posting.

2. Log entry:
Once the transactions have been identified, they must be posted to the general ledger. The diary is called a daily ledger.

Record keeping is an essential stage in the accounting cycle. In other words, it is the cornerstone of the accounting cycle.

3. Classification:
From the general ledger we cannot know the amount of specific costs or revenues for the entire reporting period. Therefore, in order to find out the balance of each account, all account movements are summarized in a special table and the total balance for the period is determined. This is called the ledger.

According to the ledger, we can find out the total amount of all shares in the account. Creating a general ledger is an important step in the accounting cycle.

4. Trial Balance:
To justify the mathematical cleaning of the accounts, the accountant prepares a trial balance. If the debit and credit balances match, it is assumed that there are no errors in the accounts. But if they don't match, it is assumed that there is an error in the calculations.

The accounting equation is highlighted in the trial balance. Although it is a phase in the accounting cycle, creating an interim balance sheet is not mandatory. But if it's ready, that's fine. Because it ensures the arithmetic accuracy of the calculations.

5. Correction of recordings:
Corrective postings are entries made in the general ledger showing the balance of expected and accrued expenses and income after the reporting period to finally determine the true financial position of the company. This is an important step in the accounting cycle.

6. Adjusted Trial Balance:
After preparing the adjustment entries, the next step in the accounting cycle is to prepare the adjusted trial balance. The adjusted general balance is generated after the accounts have been created by adjusting the entries. Shows the mathematical correctness of correction entries.

7. Prepare your spreadsheet:
The financial statements are prepared on the basis of the adjusted trial balance. But if the report shows Trial Balance, Adjusted Trial Balance, Income Statement, and Balance Sheet, then it's a spreadsheet.

Preparation of the worksheet is optional. In other words, it is not a mandatory step in the accounting cycle.

8- Financial report:
Financial reports are the most important step in organizing a business . In other words, it is the most important phase of the accounting cycle.

The balance sheet is divided into two parts: one is the income statement and the other is the balance sheet.

With a profit and loss account, account users can see the company's income and expenses for the entire year or reporting period, as well as whether the company made a profit or loss.

Through the balance, the account users can know the whole business scenario. It also displays the company's current and fixed assets .

9. Closing Entries:
At this point in the accounting cycle, all income is recorded as a debit and the profit and loss account as a credit. Instead, all costs are shown as a credit, while the income statement is shown as a debit.

10. Post-Closing Trial Balance:
Once the closing postings are made and the account is closed, these closing postings follow a post-closing interim balance sheet.

11 - Corresponding entries:
The last stage of the accounting cycle is the entry of the contra entries in the accounting journal. At this point in the accounting cycle, the previous year's expenses and income are adjusted to the new year's expenses and income.

The most important phases of the accounting cycle

Above we have discussed the phases of the accounting cycle. According to the above process, the accounting cycle takes place continuously from year to year. Thus the concept of business continuity and the concept of reporting period become realistic.