Accounting Cycle in Accounting System
Accounting Cycle in accounting system can be shown as follows –
a) Identification of Transaction
This is the first requirement in accounting cycle or processes. Financial transactions are required to be identified for further process. As we know, only financial transactions are recorded in the book of accounts.
b) Identification of Source Documents
Once transaction is identified, We need to identifying and verify Source document which supports that particular transaction. Before recording in book of accounts, Every transaction must be verified with valid source documents. It may include Invoices,Voucher etc.
c) Recorded in Book of original entry
After identification of valid source document, transactions can be recorded in Book of original entry. The book in which we record transaction at very beginning. e.g. Purchase book, sales book etc. Nature of transaction is very important while recording in the book of accounts.
d) Posted to Ledger Accounts
Under Double entry accounting system, all transactions are recorded and posted to relevant ledger accounts so that trial balance can be prepared and financial position of firm can be ascertained accurately. The principles of double entry system of accounting are totally based upon duality concept.
e) Preparation of Trial Balance
After recording of transactions and posting it to Ledger Accounts, Preparation of trial balance is initiated. Trial Balance is prepared from total balance of various ledger accounts. It is one of the most important step in accounting system. Basically, It helps to identify arithmetical and other errors to certain extent.
f) Locating Errors and Passing of Adjustment Entries
During preparation of Trial balance, some of the errors in the book of accounts cab be detected. And, it can be rectified before the preparation of the Final Accounts. Before preparation of final accounts, balance of all ledger accounts need to be updated to include the effects of unrecorded transactions. For example, outstanding expenses, depreciation etc. It can be done by using adjustment entries.
g) Preparations of Final Accounts
After rectification of errors and adjustment entries, the next process in accounting system is called “Final Accounts”. Preparation of final accounts is the most important step in accounting system. Updated balance of ledger accounts are used to prepare Final Accounts. Generally, Final Accounts include Trading account, profit and loss account and Balance sheet.
Preparation of final accounts is done at the end of the accounting year and closing entries are required to get the final product of final accounts. And at the beginning of new accounting year, opening entries are required to pass in the book of accounts.
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