Process of Accounting/Accounting Cycle

Process of Accounting/ Accounting Cycle

The accounting process or accounting cycle is a process that begins with the recording of financial transactions and based on that, financial statements are prepared.


1. Identification of financial transactions: The accounting process begins with the identification of financial transactions. Only financial transactions are recorded in accounting records. All business transactions that can be converted into cash are called financial transactions.
2. Recording of financial transactions in journals and subsidiary books: After identifying financial transactions, the transactions are recorded in a journal or subsidiary book in order.
3. Classification of transactions recorded in ledger accounts: In the third stage of the accounting cycle, all the transactions recorded in the journals and subsidiary books are separated into their similar nature and recorded in the ledger. This is called the classification of financial transactions.
4. Summary of records (Balance test and preparation of final account): A trial balance is prepared from the net total balance shown in the ledger. Trial balance helps in detecting arithmetical errors in accounting records.
5. Analysis and Interpretation: In the fifth stage of the accounting cycle, the profit and loss account and balance sheet prepared by the business entity are analyzed and interpreted to identify the strengths and weaknesses of the entity.
6. Financial Information Flow: In the final stage of the accounting cycle, the financial information found by analyzing and interpreting the final accounts prepared by the business entity is distributed to the relevant parties.

 

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