Accounting Cycle The Accounting Cycle is a series of steps which are repeated every reporting period. The process starts with identify of financial transaction and ends with financial reports. Definition Accounting cycle includes all steps in the accounting process including analyzing and recording transactions, posting entries, adjusting and closing the accounts and preparing financial statements. Some popular definitions of Accounting cycle are: 1. “The various steps in the total processing of Accounting Data”. ----------The Institute of Cost and Works Accountants of India (ICWAI). 2. “Accounting Cycle is series of steps related to accumulating, processing and reporting useful financial information that are performed during an accounting period.” ------Hermanson. 3. “Certain procedures must be established by every business unit to provide the data to be reported on the financial statements. These procedures are collectively referred ta as the accounting process or accounting cycle”. ------ J.M Smith and K. Fred Skousen Steps of Accounting Cycle 15. Prepare Reversing Entries 1. Identify the transactions 2. Prepare the transaction’s source document 3. Analyze and classify the transaction 14. Prepare after closing entries trial 4. Record the transaction journal 13. Post the closing entries to ledger 12. Prepare closing entries 5. Post entries to ledger 11. Prepare financial statement 6. Prepare trial balance 10. Prepare adjusted trial balance 7. Correct any Discrepancies 9. Post adjusting entries to the ledger 8. Prepare adjusting entries Description of Steps of Accounting Cycle The accounting process is a series of activity that begins with a transaction and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these major steps: 1. Identify the transaction or other recognizable event. 2. Prepare the transaction’s source document such as a purchase order or invoice. 3. Analyze and classify the transaction. This step involves quantifying the transaction in monetary terms (e.g. dollars and cents) , identify the accounts that are affected and whether those accounts are to be debited or credited. 4. Record the transaction by making entries in the appropriate journal, such as the sales journal, purchase journal, cash receipt or disbursement journal, or the general journal. Such entries are made in chronological order. 5. Post general journal entries to the ledger accounts. The above steps are performed throughout the accounting period as transactions occur or in periodic batch processes. The following steps are performed at the end of the accounting period. 6. Prepare the Trial Balance to make sure that debits equal credits. The trial balance is a listing of all the ledger accounts, with debits in the left column and credits in the right column. At this point no adjusting entries have been made. The actual sum of each column is not meaningful; what is important is that the sums br equal. Note that while out-of-balance columns indicate a recording error, balanced columns do not guarantee that there are no errors. For example, not recordinf a transaction or recording it in the wrong account would not cause an imbalance. 7. Correct any discrepancies in the trial balance. If the columns are not balance, look for math errors, posting errors, and recording errors. Posting errors include: o Posting of the wrong account, o Omitting a posting, o Posting in the wrong column, or o Posting more than once. 8. Prepare adjusting entries to record accrued, deferred, and estimated amounts. 9. Post adjusting entries to the ledger accounts. 10. Prepare the adjusted trial balance. This step is similar to the preparation of the unadjusted trial balance, but this time the adjusting entries are included. Correct any errors that may be found. Relationship between events and transactions There is a relation transaction with event. All transactions are events but all events are not transactions. That is why a transaction’s prerequisite is it must be event first. Transaction is dependent on event. The relationship between event and transaction is shown on table (i) Both require specific time and place of occurrence (ii) Both may be visible or invisible (iii) Both may be internal or external Difference between event and transaction In spite having a relationship, there are some remarkable difference between event and transaction. Points of Difference 1.Change financial position 2. Relationship 3. Measurable in terms of money 4. purpose 5. Parties Events Event can or can’t change financial position of the firm. All transactions are event. Only monetary events are measurable in terms of money. Purpose of even is predetermined or not. It requires at least one party. Transaction Transaction changes the financial position of the firm. All events are not transactions. All transactions are measurable in terms of money. But purpose of transaction is predetermined. It requires at least two. Journalizing 1. INTRODUCTION: The word ‘Journal’ has been derived from there France word ‘jour’ which means ‘Day’. Hence, journal means a daily Register of trade. According the principles of Double Entry System, every day transactions are recorded two stages at their first stage in journal and at their stage in the ledger. Journal is the entrance of transaction into account; this is the First step of Accounting Cycle of Journal. Journal plays an important role in preparing the accounts and getting the results from them. It is prepared as per the rule of double entry system. The journal’s page number appears near the upper right corner. Many general journals have five columns: Date, Account Title and Discretion, Posting Reference, Debit, and Credit. 2. DEFINITION OF JOURNAL Transactions are initially recorded in chorological order in journal before being transaction to the accounts. Thus, the journal is referred to as the book of original entry. Tracking business activity with T accounts would be cumbersome because most businesses have a large number of transactions each day. These transactions are initially recorded on source document, such as invoices or checks. The first step in the accounting process is to analyze each transaction and identify what effect it has on the account. After making this determination, an accountant enters the transaction in chronological order into a journal, a process called journalizing the transaction. Although many company use specialized journals for certain transaction, al business use a general journal. In this book, the terms general journal and journal are used interchangeable. Definitions given by scholars are as follows: 1. “Journal is a book containing a record of each day’s transaction” ------------------------Prof. R. J. chamber 2. “Journal is a chronological record of transaction showing for each transaction the debits and credit to be entered in specific ledger accounts” ------------------------Professor Meigs & Meigs LEDGER 3. DEFINITION OF LEDGER: Ledger is an accounting book of final entry where transactions are listed in separate accounts. It is the complete collection of all account of a company, including all assets, liabilities, owner’s equality, revenues and expenses. The ledger should be arranged in the order in which accounts are presented in the financialstatements, beginning with the balance sheet accounts, first in order are the asset accounts, followed by liability accounts, owner’s capital, owners’ drawing revenues and expenses. Each account is numbered for easier identification. Some definitions about ledger given by some scholars as follows: 1. According to William Pickles, “Ledger is the destination of all entries made in the subsidiary book of Journal”. 2. According to Arthur Field House, “Ledger is the permanent store house of transaction” 3. According to L.C. Cropper, “The book in which traders transactions are recorded in classified permanent from is called ledger”. 4. According to Edwards, “The ledger is a master record of all the accounts of a business”. A ledger is the book where in all types of transaction of business organizations are recorded in a classified permanent from under different titles of accounts transaction them from primary book journal. 4. CHARECTARISTICS OF LEDGER: A ledger plays an important role in the preparation of final accounts and a permanent record of transaction it is very important of its following characteristics: i. Title: Every account must have an individual Head/Title. Title/Head contains separate ledger of transactions. ii. Specific From: Accounts are recorded in a specific from. As traditional approach a Ledger from (T from) contains 8 columns. There are 4 columns in each side, (In Debit side) names Date, Explanation/ Particulars, Reference and Amount. But in modern approach there are 6 columns in the form manes Date, Explanation, Ref. Debit Tk. Credit Tk. And Balance. Modern form of Ledger is also called three column form.( As counting only amount columns) iii. Side: Recording Date: All transactions are recorded as per their incurring dates. iv. Recording Amount: All transactions are recorded with their respective amounts. v. Journal Folio Post Reference: the accounts are transferred from journal are posted with proper reference in the column ‘Reference’. vi. Balancing: After a specific data all accounts are balance of the account. In modern Ledger from Balance is found just after posting an account. vii. Closing Line: ‘T’ From Ledger is given closing line after balancing to close the account. 5. FORMAT OF LEDGER There are two types of Ledger Format: a) Traditional or T Form b) Modern Form “T” From Dr. Date 2010 Jan-1 Cr. Particulars Balance B/D Balance B/D Ref Feb-1 Date 2010 Jan-1 Tk. Date 2010 Jan-25 Particulars Balance B/D Balance B/D Ref Tk. jan-31 Explanation Ref Debit Tk. Credit Tk. Balance Data: Year, Month and day of the transaction are written in the column. Particulars: The name of the opposite account of the transaction is written in this column. That means, the name of the account to be credited is written on the Debit side and name of the account to be debited is written on the credit side. Journal Folio: The page number of the journal from where the account is transaction here is written in this column. 6. ADVANTAGES/ NECESSITY/OBJECTIVES Of LEDGER Ledger is the most important part of modern accounting system. Because, there is no alternative account of ledger from where we can get the accurate balance or result of the account, the following are the objective of ledger. i. Permanent Record: It is a permanent record of all types of transaction. ii. Full information of transactions: In ledger transactions are recorded with a reference in L.F column which indicate full information of the transaction recorded in journal. iii. Accurate Result: Ledger of different accounts provides accurate result. iv. Determining the Accounts Receivable and Payable: Ledger helps in determining the balance of account payable and account receivable. v. Identity error and fraud: To identify error and fraud Trail Balance is prepared with the balances of Accounts of ledgers. vi. Determining Financial Position: Preparing assets account and liability accounts, financial position can be presented. vii. Preparing Financial Account: Financial statements can be prepared from Ledgers directly. viii. Comparative Analysis: Comparative analysis on financial position of a business firm is prepared on the basis accounts balance from ledger. ix. Helps in cost control: It helps in controlling cost different cost centers by giving proper information of past cost records. x. Permanent Data Bank: It is fully permanent data bank whenever the organization or other parties require they can use the past data. xi. Helps in Decision Making: Ledger is very helpful in decision making about future plans. Because, it provides the past and present data of strength of an organization. xii. Implementing the Double entry system: Double entry system is implemented her fully. 7. DIFFERENCE BETWEEN LEDGER & JOURNAL Points of Difference Type of Account Nature of record Objectives Accounting methods Essentiality Base Journal It is primary and helping book. Transactions are recorded with explanation. Its main objective is to help in preparing Ledgers. Ledger It is permanent and final book. Transactions are recorded in brief. Its main objective is to provide the net balance or result of the accounts. Every transaction discloses dual Same transactions are recorded aspect and recorded in the debit and under a head or title. credit. It is not mandatory. It is mandatory in a proper accounting system. Transactions are recorded in the Transactions are recorded based journal based on documents. on journal. Format There are 5 columns in the formats names date, Accounts Title & Explanation, L.F., Debit Tk. and Credit Tk. Preparation It is prepared in chronological order of transactions. Balancing No scope of balancing of Journal. Mathematical Accuracy Trial balance cannot be prepared on the basis of Journal to justify the accuracy. No result from Journal and Financial Statements can not be prepared. Result Comparative Analysis Comparative analysis on Financial Position cannot be prepared on the basis of journal. ================ A traditional (T form) contents 8 columns, 4 columns in each side (in Debit and Credit side) names date, explanation / Particulars, reference and amount. But in the modern approach there are 6 columns in the forms names date, explanations, Ref. Debit Tk., Credit Tk. and Balance. It is prepared as the nature of accounts after preparation of Journal. Balancing is must of all accounts after a specific period. Trial balance is prepared on the basis of balances from ledger to justify the accuracy. Ledgers provide the proper balances of account and Financial Statements are prepared. Comparative analysis on Financial Position prepared on the basis of ledger.
