Accounting Life Cycle Process: A Handy Learn Book For Accounting Freshers
Accounts are the major task in any organization for keeping track of financial records, assets, revenue, or any expense. These tracking accounts must be reported at any time to the organization if when asked.
After the mass revolution in Liberalization and Privatization, Business and Trade dealings are expanding huge with its complex trading. The human mind cannot track those thousands of dealings. Hence, Accounting was brought to practice to keep records of all monetary transactions and tracking business dealings.
Accountants are employed to carry out this accounting business with good Computer Application and Tally knowledge. Accountancy is the subject tracking all accounting information. Any Accountant must-have business and some commercial knowledge also.
Accounting is also termed as Book-Keeping and Lucas Pacioli is the Father of modern Book Keeping.
The accounting cycle definition given by Bierman and Drebin is, ” Accounting may be defined as identifying, measuring, recording and communicating financial information.”
The main aim of this blog is to communicate the Accounting Life Cycle process clearly in a step by step manner to all readers.
So, Here you go with the process of Accounting.
ACCOUNTING LIFE CYCLE
The Accounting life cycle consists of six well-defined steps to process systematically. The accounting cycle is listed below,
Research and record transactions
Update transactions to the ledger
Prepare an unaccustomed trial balance
Prepare adjusting entries by the accounting closure period
Prepare an adjusted or regulated trial balance
Prepare Company’s financial statements.
You will see the steps explained in detail below,
RESEARCH AND RECORD TRANSACTIONS
The very first step takes us on a journey of millions of miles. So remember that the first step should always remain concrete and strong. The foundation of the accounting cycle process is collecting all necessary business transaction records for the present accounting period. This record includes business receipts, invoices, ledgers, and bank financial statements.
Actually, the collections gathered in the accounting cycle will be the raw financial information that needs to be converted into accounting data.
UPDATE TRANSACTIONS TO THE LEDGER
First of all, let us clarify Ledger in simple terms.
A ledger is an account that contains a record of related business transactions. The ledger usually contains the data that is required to prepare financial statements. It includes accounts(records) for assets, liabilities, owners' equity, revenues, and expenses.
Now, coming to explain this second stage, it involves tracking all of the updated financial information we’ve collected in the previous first stage into the ledger.
The ledger is actually arranged in a chronological list of all the business’s transactions, which follows the rules of double-entry-accounting. On the occasion of a transaction, Double-Entry accounting insists the accountant make two journal entries, transforming at least two accounts: a Debit and Credit. Here we give you a realistic example for better understanding. If you buy an Apple iPhone 12 Pro, it's sure that your asset rate goes high, but your bank account rate will lower.
After converting your business transactions into debits and credits, you have to necessarily move them to your organization ledger. Updating the ledger frequently makes sure the company’s books are kept up-to-date.
Usage of accounting software automatically posts the ledger in the backend.
PREPARE AN UNACCUSTOMED TRIAL BALANCE
We’ll prepare the un-accustomed trial balance during the end of the accounting period.
Firstly, the trial balance is summed up including all the debits and credits in a company's accounts, and then evaluate a total balance for each account.
The unaccustomed trial balance brings all the totals together in one place.
Below depicted is the Trial balance for a particular month. Observe it and what you find in common?
It is found that Debit and Credit totals will be the same. It should be the same and tally according to Double Entry rules.
In Trial Balance, If the total of the debit entries doesn’t equal or match the sum in the credits, then it means there’s an error in recording or updating journal entries. There should be a mismatch in the entered information.
Methods to find a fix for this mismatch in debit & credit values is called Correcting Entries.
PREPARE ADJUSTING ENTRIES BY THE ACCOUNTING CLOSURE PERIOD
After the Correcting Entries task is performed (if any), then the right time has come to perform adjustment in entries.
Adjusting Entries guarantee that your financial and accounting statements contain only the accurate information that suits the particular financial period of time.
The Adjustments are categorized into 4 main types. They are Deferrals, Accruals, Tax adjustments, and Missing transaction adjustments. Let us see them in detail,
a) Deferrals: Deferrals are an advanced payment from the customer. This deals with the money you spent before revenue results. A fine example is you buy or order the office supplements (furniture) for future use, or owners receiving cash before delivering a service or good.
In simple terms, deferral refers to money offered(paid) or received before a product or service has been delivered(provided).
b) Accruals: Accruals record the revenue and expenses whenever a transaction occurs and make sure its related payment is credited. In Accruals, accountants always ensure that the financial statements prepared are currently being considered for future payments and expenses.
c) Tax Adjustments: Tax Adjustments are accounting for depreciation and other tax deductions. Tax adjustments occur once a year, and your CPA(Certified Public Accountant) will help you with adjusting it.
A freelancer can pay half of the self-employment taxes. This is a vivid example of Tax Adjustment.
c) Missing Transactional Adjustments: There are some chances where you manually miss or forget to account for the transaction in book-keeping. One Common example is you miss adding your business purchases on your personal credit. Those missed purchases can be added here later.
PREPARE AN ADJUSTED OR REGULATED TRIAL BALANCE:
You know already there exists one Trial balance. Now, you have to consider adding the above missed transactional adjustments too in the trial balance by creating another Trial balance record.
The new trial balance created is called an Adjustment Trial Balance. Its goal is to achieve balanced adjusted debits and credits.
Hence, the Adjusted Trial balance record acts as a database and holds updated information for preparing your company’s financial statements that we are going to discuss in the next stage.
PREPARE COMPANY’S FINANCIAL STATEMENTS:
The last most practical accounting step is to prepare your company's Financial Statement. This stage provides direction to the monetary storehouse of your company. If all the above-mentioned stages go successful, then there is no doubt you achieve a milestone in this final stage.
Coordinating financial statements also becomes an easy task after creating an Adjusted Trial Balance.
The below explained terms are necessary to understand if you are preparing financial statements.
a) Income statement: Preparing an income statement is a mandatory task and it can be prepared from the revenue information and expense account phases of the trial balance.
b) Balance Sheet: A balance sheet should be prepared that contains the organization's assets, liabilities, and owner’s equity.
And you know what, Certified Public Accountants (CPA) are the right people to prepare the Financial Statements. They have the scope of closing the company’s temporary accounts too by going through another try of adjustments.
Hence, the steps of the accounting cycle are simplified above with realistic examples to get a clear accounting picturization.
Accounting might seem a simpler task to go through in words. But actually, it's an art that requires a lot of human concentration and Tallying(Judging) knowledge. Calman Analytics takes care of your financial and accounting responsibilities and makes your financial process simpler. This blog is designed dedicatedly for freshers in accounting in such a way they understand the full cycle of accounting with much comfort. Also, you will now be in a stage to explain the accounting cycle clearly.
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Be Accounting a Science or an Art, get Ready to explore it with utmost zeal.