The cycle of Accounting & its Significance

A bookkeeper follows a set of eight steps involved in completing a task. In order to keep a record of all the transactions made in a year by a company, the accountant keeps working in a cycle. Starting with entering, prioritizing, and classification and finally ending on the summarizing of financial information, this cycle brings authenticity to the work of an accountant. All the steps are carried out one by one throughout the year. Hence, the chances of making a mistake are negligible.

Following are the eight steps which form the basis of accounting.

  1. Identify the transactions: All kinds of financial activities are included in this step. Record all the inflow and outflow of cash which might have happened in the form of sales, revenue, debt, payoff, taxes, investments etc. The receipts and invoices used in these activities help in identifying the transactions accurately. Make sure you count only those transactions which are directly linked to the company’s interest.
  2. Enter the transactions in Original Book of Entry: In this step, note down all the tractions which you have identified in a chronological pattern. The transactions are noted in the Original Book of Entry or simply called a journal. There are two ways to make this record: Single-entry bookkeeping and double-entry bookkeeping. In single-entry bookkeeping, there is either credit or debit. Whereas in double-entry bookkeeping, both credit and debit are noted.
  3. Record the transactions in Final Book of Entry: The final book of entry also called general ledger is sometimes a physical journal or a notebook. But mostly, businesses prefer using software which serves as a journal. In this journal, changes made into the account are recorded. In the case of single account entry, your journal or cashbook already serve as your general ledger.
  4. Calculate trial balance: When the accounting year is ended, the trial balance is calculated. While making a trial balance, add the credit and debit records. Both figures must be equal. If not, then there is surely an error in the recordings. It is the most efficient way to determine the balance between credit and debit balances.
  5. Record accruals and deferrals: This step is a rescuer. Many times an error is detected while calculating the trial balance. In this case, errors are corrected which are called adjustments and it is supposed to be done on a worksheet. Also, the accruals (which are not previously recorded) and deferrals (which are advanced payments) are recorded to add it into the balance sheet.
  6. Adjust the worksheet: This step is again about the rechecking and correction. If the balance between credits and debits is unequal go back to the trial sheet and make the adjustments. As long as you keep checking and rechecking the input the errors will keep highlighting and in the end, results would be balanced.
  7. Prepare financial statements: This step proceeds towards the finality of process. Financial statements are proof of a company’s progress. Only viewing at it gives a summarized history of all the profits and losses of a company. The financial statement holds comparison between profit and loss. All kinds of inflow and outflow of cash are recorded on it.
  8. Close the book: This is the last step. Logically, it is not the last step because it is a cycle that proceeds in a circular motion. Now the books are closed for the purpose of revenue and expense. All the balance goes back to zero for you to start over again. Any financial activity that takes place after this step is counted in the next academic year.

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