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Accounting Cycle Steps | Double Entry Bookkeeping (double-entry-bookkeeping.com)

Accounting Cycle Steps

Financial Accounting Cycle
The accounting cycle is a series of steps setting out the procedures required for a
typical small business to collect, record, and process its financial information.
The accounting cycle will vary from business to business and the procedures involved
may change, for example, the accounting cycle for a service business might differ
from the accounting cycle of a manufacturing business, the but the general steps to
explain the accounting cycle remain the same.

Steps in Accounting Cycle

Step 1: Identify and Analyze Transactions
The accounting cycle starts by identifying the transactions which relate to the
business. The business is a separate entity to the owner, so only business
transactions should be included.
Having identified the transactions, each one now needs to be analyzed to
determine which accounts in the bookkeeping records are affected. Each
transaction must be supported by a relevant accounting source document
such as sales and purchases invoices, debit and credit notes, petty cash
vouchers, payroll reports etc.

Step 2: Journal Entries for Transactions

The journal entries are recorded in a journal sometimes referred to as a
daybook.
The journals are also known as the books of original entry as they are the first
time the transactions are recorded and entered into the accounting system.

Step 3: Post journals to ledgers

The journals are used to post to the subsidiary and general ledgers. The general
ledger has an account for each type of transaction e.g. rent expense, fixed
assets etc. All postings to the ledgers are double entry postings and therefore
must balance which every debit having an equal and opposite credit entry.
Step 4: Prepare an unadjusted trial balance
At the end of each accounting period, the balances on the accounts of the
general ledger are listed to produce a trial balance. At this stage the total debits
on the trial balance should equal the total credits.

Step 5: Prepare worksheet

A 10 column worksheet is prepared and the unadjusted trial balance is
transferred to the first two columns.
Step 6: Record adjusting journal entries
Adjusting entries such as accruals, prepayments, and depreciation entries are
prepared to ensure that income and expenditure is allocated to the correct
accounting period, this means that the accounting records are completed on
an accruals basis and are in compliance with the matching principle.The
adjusting entries are entered in the next two columns of the worksheet and at
this stage, are not entered into the accounting records.
Step 7: Adjusted trial balance
When all adjusting entries have been completed an adjusted trial balance is
prepared in the next two columns of the worksheet.

Step 8: Prepare financial statements

The financial statements can now be prepared from the adjusted trial balance.
Items relating to the income statement are transferred to the next two columns
and items relating to the balance sheet are transferred to the final two
columns.

Step 9: Closing entries

Closing entries are carried out in the accounting ledgers. Closing entries are
posted and temporary income and expenditure accounts are closed and their
balances transferred to an income and expenditure summary account.
The summary account is in turn closed to transfer the profit or loss for the
period to the balance sheet retained profits account. Balance sheet or
permanent accounts are not closed, but the balance is carried forward to the
next accounting period.
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8.DEBIT VOUCHER
A debit voucher or payment voucher is the supporting document that
shows that the monetary transaction has occurred. It shows that the
company has made payment to its supplier and other parties. This payment
voucher will be used for both cash and bank transactions.

9.CREDIT VOUCHER
Credit or Receipt Voucher is the supporting document that shows the company
has received cash from their customer, bank, or other parties. This voucher can be
used for cash receipt from the sale, share capital injection, Interest earns from
bank, cash receipt from the debtor, and cash from other sources.

10. Non-Cash Voucher

Non-Cash voucher is the voucher for other transactions which is not involving
with cash flow, it is also known as the journal vouchers. Some transactions such
as, deprecation, credit sale, credit purchase, adjustment, and reversing entries.

Rules of Debit and Credit When Accounts are

Classified According to  Traditional Classification of
Accounts:
Debit and credit are simply additions to or subtraction from
an account. In accounting, debit refers to the left hand side
of any account and credit refers to the right hand side.
Asset, expenses and losses accounts normally have debit
balances; liability, income and capital accounts normally
have credit balances.
Personal Accounts:

Debit the account of the person who receives something

and credit the account of the person who gives something.
Real Accounts:

Debit the account of the asset/property which comes into

the business or addition to an asset, and credit the
account which goes out of the business. When furniture is
purchased for cash, furniture account is debited (which
comes into the business) and cash account is credited
(which goes out of the business).
Nominal Accounts:

Debit the accounts of expenses and losses, and credit the

accounts of incomes and gains. When wages are paid,
wages account is debited (expense) and cash account is
credited (asset goes out).

Rules of Debit and Credit at a Glance

Types of Account to be Account to be

Account Debited credited
Personal
Receiver Giver
account
Real account What comes in What goes out
Nominal account Expense and loss Income and gain

Rules of Debit and Credit When Accounts are

Classified According to  Modern Classification of
Accounts:
Harshit’s note
SN Types of Account to be Account to be
. Account Debited Credited
       
1. Assets account Increase Decrease
Liabilities
2. Decrease Increase
account
3. Capital account Decrease Increase
Revenue
4. Decrease Increase
account
Expenditure
5. Increase Decrease
account
Withdrawal
6. Increase Decrease
account
Table with transactions from Harshit