ACCOUNTING CYCLE

Accounting  cycle

CHAPTER 5

The accounting cycle defines the sequence of the stages to be followed in financial accounting. It starts from identifying the financial transaction and ends with preparation of financial statements. Thereafter, the statements are analysed and interpreted by different user to meet their requirements.

The stagesof  the  accounting cycle are:

Identifying financial transaction the actual business transactions take place and the supporting source documents are created at this stage. Supporting documents primarily include vouchers. Vouchers provide information about the accounts affected by the transaction, the amount of transaction in money terms, and the date of transaction and voucher number.

Recording transactions in accounting books:

This stage pertains to the recording of transactions. Transaction are recorded in the books of accounts. In other words, the information on the vouchers is recorded in the accounting books by passing journal entries in the appropriate accounting books.

Classifying transactions under various accounts: at this stage, the journal entries are transferred/posted to different account. The process of transferring the journal entries to different accounts is known as posting. In simple terms, every transaction will affects at least two accounts and therefore, two accounts are created. The financial record in the form of journal entry is transferred to the appropriate accounts.

Summarizing and presenting financial statement many transaction take place in a business. Therefore, various accounts are created. The accounts do not give information in a summarized manner. Hence, there is a need for summarizing information. In financial accounting, initially the accounting information is summarizing in the form of trail balance. The trail balance is used to prepare and present the trading account, profit & loss account. And the balance sheet. With this the accounting cycle comes to an end.

Once the financial statements are ready, they are analysed using different analytical tools. The tools are the ratios and the fund and cash flow statement. Ratios are used to analyse financial statements while the fund and cash flow statements analyse the fund flow and cash flow position of the business.

ACCOUNT

An account is a summarized record of various transactions pertaining to a particular account head. It is commonly referred to as a ledger account. Let us understand with the help of an example. ABC & Co. has a closing cash balance of RS. 5,000 for month ending April 2005. During the month of May, furniture worth RS. 4000 is purchased while goods wroth rs. 6000 are sold. Now to know the closing balance at the end of the month, the account can deduct the outflow and add the inflow of cash. This process can be cumbersomre in case there are numerous transactions for a single month.

To solve the problem we create an account for cash in which all the transactions leading to an increase in cash are recorded in one column and transactions leading to a decrease in cash are recorded in another column. These two columns are put in the form of an account. Give here is a simple presentation of an account.

INCREASES	AMOUNT		DECREASES	AMOUNT
Opening balance Sale of goods	5,000 6,000		Furniture Closing balance	4,000 7,000
TOTAL	11,000		TOTAL	11,000

Given here is a commonly used layout for an account.

DATE	type	Voucher/bill number	Account	Debit	Credit	Balance

Under the type of transaction is entered such as sales or payment. The voucher or bill number is entered under the voucher/bill number column. The name of the ledger account that is affected by the transaction is entered under the account column. If the ledger account being created is debited then the amount is written under the debit column. On the other hand if the ledger account being created then the amount is written in the credit column. The balance column displays the balance in the account after a transaction is recorded.

Given here is another commonly used layout for an account.

Dr.                                                                                                                                            CR.

Date	Particular	L.F	Amount		Date	Particular	L.F	Amount
TOTAL					TOTAL

The left hand side of the amount is called the debit side while the right hand side is called the credit side. The folio column records the page or reference number of the accounting book where the entry was first recorded.

We will use the former account layout for the ledger accounts.

Debit and credit

The terms debit and credit refer to the additions to or subtractions from an account. Debit is an accounting term that means to owe. It is used to describe a payment, debit, or an entry in recording a transaction, the effect of which is to decrease a liability, income, or capital account or increase an assets or expense account. Another significance of the term debit is that all the asset account have a debit balance.

Credit is the opposite of debit. It is an accounting term used to describe an entry that increase an income, liability or capital account, and decrease an expense and asset account. Another significance of the term credit is that all the liability account have a credit balance.

These terms find place in the accounting equation. The assets side of the accounting equation will have those accounts that have a debit balance and the liability side will have those accounts that have credit balance.

The transactions that are recorded in the accounting books affect minimum two accounts. One account will be debited while the other will be credited. Such debited and crediting is based on the classification of accounts and golden rules of accounting.

E-ACCOUNTING

BASIC OF COMPUTER SYSTEM  
 
COMPUTER TRICKS 

HOW TO PROTECT BUSINESS RISK?

SHORTCUT KEY OF MS-OFFICE

ACCOUNTING TERMS

ACCOUNTING CONCEPTS

ACCOUNTING CYCLE

GOLDEN RULES OF ACCOUNTS

JOURNAL ENTRIES

LEDGER POSTING


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