Accounting Cycle

Accounting Cycle

Accounting Cycle is the process to keep all financial records of any organization. The process starts with recording each and every business transactions and drops up at the making of final financial statement. The process of Accounting Cycle shows the purpose of financial accounting clearly. The terminal purpose of financial accounting is to build financial information, acknowledge a financial statement, to provide financial information of the company in a brief manner. In others terms, we can say, the purpose of keeping records of financial transactions, tracking expenses and incomes is to use these data in the making of making of financial information. The financial information represents – balance sheet, income statements, cash flow statement and other useful financial information.

The Accounting Cycle is made up of several steps, which are repeated in every financial year. Some firms prefer to prepare financial statements every quarter; it makes their job of compiling the annual financial statement easier whereas some do it annually.

The steps of Accounting Cycle are discussed below –

Journal Entries – Journal Entry is the first step one of Accounting Cycle. In this step, all transactions are recorded in the accounting system of the company. A Journal Entry usually takes three steps – Identifying Transactions, Analyzing Transactions and Journalizing Transactions.

At the first step, financial transaction is to be identified. If you do not know what kind of transaction it was, you cannot record it. So you have to identify whether it was an outgoing transaction or an incoming one. When a transaction is sanctioned and has the result in the accounts, then it must pass through analyze process to check the impact of it on the accounting equation. When the transaction is identified and analyzed, now it’s time to record the transaction. Debits and Credits are registered in the record separately.

T-Accounts – We are now on the second step of Accounting Cycle. Once we have finalized journal entries, now it’s time to post the entries posted to the T-Accounts. T-Accounts are also distinguished as ledger accounts. Ledger Accounts are used to categorize the journal entries into credit or debit in different accounts. This categorization at Ledger Account helps to get useful information about budget and performance reports. Management uses these Ledger Accounts – so they are updated with journal entries regularly. Ledger Accounts display the balance of every account. The debits are added to the left side whereas the credits are added to the right side.

Unadjusted Trial Balance – Unadjusted Trial Balance is a list of the business accounts to be appeared on the financial statements prior to annual adjusting journal entries are computed. The reason behind calling it unadjusted is – it is prepared before adjusting the annual journal entries. Unadjusted Trial Balance is the third step in Accounting Cycle. Once all the journal entries are transferred to the ledger accounts. Unadjusted Trial Balance has three columns – account name, credit and debit.

Adjusting Entries – Adjusting Entries is the fourth step of Accounting Cycle. Adjusting Entries is performed at the end of each period to rectify the accounts. Once all accounts are adjusted – financial statements are made. This action is used to match the revenue and expenses of that particular period. Usually three types of Adjusting Journal Entries are performed – each of them adjusts the expense with income to match with a particular period. This is used to keep records of prepaid expenses, accrued expenses and revenues and non-cash expenses.

Adjusted Trial Balance – Now we have reached the fifth step. Adjusted Trial Balance is the list of all accounts of a company that will reflect in the financial statements after annual adjusting journal entries are done. This is the final step before the final financial statements can be made. It is formatted same as Unadjusted Trial Balance. The credit and the debit are calculated at the bottom.

Preparing the Financial Statements –

Financial Statement includes –

•    Balance sheet

•    Statement of retained earnings

•    Statement of cash flows

•    Income statement.

As the financial statement represents the sole purpose of accounting, it is the most important step in Accounting Cycle. This step lets users access to the useful financial information in the form of financial statement. Making a Financial Statement is neither simple nor complex, it all depends upon the company size and its turnover.

Accounting Worksheet – Accounting Worksheet is a valuable tool in Accounting Cycle. It helps accountants finishing the accounting cycle. It has a great impact on making annual reports like financial statements, adjusting journal entries, unadjusted trial balance, and adjusted trial balances.

Closing Entries – Closing entries, also known as closing journal entries, are made at the closing period of a business year to turn the value of all temporary accounts into zero and transfer the balance to permanent accounts. In other words, passing accounts of the company are reset or closed at the end of each year. This step is also known as closing the books.

Income Summary Account – Income Summary Account is a temporary account. It is used to store income statement account balances, expense and revenue accounts at the first step of Accounting Cycle. In short, income summary account checks the data of all accounts at the end of the accounting period, when all accounts are renewed with closing entries.

Post Closing Trial Balance – Post Closing Trial Balance is the list where you can find the details of all accounts, account balances. This step is done after the closing entries are posted to the ledger. This account holds the statements, which are there in the balance sheet. It is made because at the time all of the income statement, accounts are closed.

Reversing Entries – The journal entries made at the beginning of the accounting period is called Reversing Entries. Reversing Entries is the final step of Accounting Cycle. This step is made because accruals and prepayments are to be paid off during the current financial year. And moreover pervious financial year’s accruals and prepayments don’t need to be considered as liabilities or assets. Reversing entries are made to keep the bookkeeping process simple. Reversing entry clears out previous year’s accruals.

Accounting: The Recording Process

Accounting: The Recording Process

 

Maintaining proper and fine accounts has become very essential today, as a result, of increasing complementation in the business-world. Every business organization is, therefore, supposed to maintain fine accounts  comprising of all the financial transactions, financial as well as nonfinancial information. We all know that any accounting involves a fine recording, summarizing, proper classification as well as the interpretation and communication of financial information.

 

The accounting cycle, therefore, provides a series of procedures regarding the collection, communication and the processing of the financial information. The accounting process as well as process of preparation of tax return Sydney is hence divided into various parts that eventually lead to the maintenance of a proper account of the organization. Financial information of an organization is presented properly in reports. These reports are known as financial statements. But before preparing a financial statement, an accountant needs to gather various details and information about the business transactions of that enterprise. He further needs to record the obtained information and then collate it to come up with a proper report.

 

The business transaction, therefore, forms a complete cycle and several steps are taken to complete a financial statement. This complete chain of forming a proper business transaction and financial statement in called as a recording process.

 

The recording process is the whole process that goes on in maintaining a financial statement. From the very starting to the final destination of the statement, the recording process involves various steps that are to be taken to maintain a good and proper account. These steps are nine in number and help to remove all the flaws from the transaction so made. This recording process starts from the very beginning, from the process of identifying and analyzing transactions and events to reaching the post closing trial balance. A brief study of the recording process in accounting is mentioned below

 

•    Identifying and analyzing business transactions:-

Every accounting process of a transaction starts with identifying and analyzing. Under this process, all the important transactions that pertain to a business entity are recorded. Every transaction is identified as to relate to a business entity. After the identification of the transaction, the process of analyzing it starts. The process of analyzing involves the determination of the accounts affected and also the accounts that are to be recorded. This step thus includes the preparation of business documents. The document so prepared serves as the basis of a business transaction.

 

•    Maintaining the records of transactions in a journal:-

A journal is simply a book, either a paper or electronic, in which all the transactions are recorded. After the identification and analyzing process, the transaction goes through the process o recording it in a journal. These transactions are recorded in a journal, using a double entry bookkeeping system. The transactions in a journal are always recorded in chronological order, the journals are, therefore, also known as ‘Books of original entry.’

 

•    Posting a transaction to a ledger:-

Posting the transaction into a ledger further follows the second step. A ledger is nothing but a collection of accounts that present the changes made in each account, as a result, of past transactions and their existing balances. The ledgers are also known as the “Books, of final entry.’ This is the most important step in the recording process of the transaction. After the posting is done, the balances of each account start to be determined.

 

•    Unadjusted trial balance:-

All the balances obtained, as a result, of ledger are further arranged in one report. All the debit balances are further added in it. Along with the debit balances, the credit balances too are added. The balance of the debits and the credits must be equal. However, if any error is discovered during this process, correcting entries are made in order to rectify them. Sometimes, errors could exist even when the balances of debits and credits are equal. This happens, as a result, of double posting or failure of recording a transaction.

 

•    Adjusting entries:-

The fifth step involving in a recording process is the step of adjusting the entries of a transaction. It is prepared as an application of the real basis of the accounting. Many of the times, at the end of the accounting period various expenses, are incurred that have not been recorded in the journals. Likewise, various incomes that have been earned is also not recorded in the journals. Thus, adjusting entries are prepared in this regard that thereby adjusts the left incomes and the expenses before they are concluded in the financial statements. Adjusting entries of allowances, depreciation, deferrals, etc. is also made.

 

•    Adjusted trial balance:-

Many of the times the trial balances are also adjusted, as a result, of any discrepancy in the transactions. It is prepared once the adjusting entries are made and, prior to the preparation, of financial statement. The step of adjusting the trial balance is simply made to ensure whether the debits are equal to the credits or vice-versa.

 

•    Financial Statements:-

After all the adjustments of the trial balances and several entries comes the step of preparing a financial statement of the transaction. When the accounts are being checked of the flaws and the balance of the debits and the credits is ensured, the financial statement is prepared. The financial statement is the tail end of a business transaction.

 

 

•    Closing entries:-

The preparation of financial statement is further followed by the preparation of closing entries. Temporary or nominal accounts are closed to prepare a proper system of next accounting period. The temporary accounts include in them the income, expenses and withdrawal accounts that are closed to give rise to the next accounting system. These are closed to a summary account. Real or permanent accounts like balance-sheet accounts are never closed.

 

•    Post-closing trial balance:-

A post closing trial balance is lastly prepared again to check the equality of the debits and credits after the closing entries are made.

 

Thus, these were the steps involved in the recording process of the transaction. Once the transaction goes through all the above listed steps, it becomes free of all the flaws and the discrepancies. Hence, anybody could take a look into it and eventually a proper ad a perfect account is maintained.

 

 

 

Types of Accounting

Accounting: The Recording Process

 

Maintaining proper and fine accounts has become very essential today, as a result, of increasing complementation in the business-world. Every business organization is, therefore, supposed to maintain fine accounts  comprising of all the financial transactions, financial as well as nonfinancial information. We all know that any accounting involves a fine recording, summarizing, proper classification as well as the interpretation and communication of financial information.

 

The accounting cycle, therefore, provides a series of procedures regarding the collection, communication and the processing of the financial information. The accounting process is hence divided into various parts that eventually lead to the maintenance of a proper account of the organization. Financial information of an organization is presented properly in reports. These reports are known as financial statements. But before preparing a financial statement, an accountant needs to gather various details and information about the business transactions of that enterprise. He further needs to record the obtained information and then collate it to come up with a proper report.

 

The business transaction, therefore, forms a complete cycle and several steps are taken to complete a financial statement. This complete chain of forming a proper business transaction and financial statement in called as a recording process.

 

The recording process is the whole process that goes on in maintaining a financial statement. From the very starting to the final destination of the statement, the recording process involves various steps that are to be taken to maintain a good and proper account. These steps are nine in number and help to remove all the flaws from the transaction so made. This recording process starts from the very beginning, from the process of identifying and analyzing transactions and events to reaching the post closing trial balance. A brief study of the recording process in accounting is mentioned below

 

•    Identifying and analyzing business transactions:-

Every accounting process of a transaction starts with identifying and analyzing. Under this process, all the important transactions that pertain to a business entity are recorded. Every transaction is identified as to relate to a business entity. After the identification of the transaction, the process of analyzing it starts. The process of analyzing involves the determination of the accounts affected and also the accounts that are to be recorded. This step thus includes the preparation of business documents. The document so prepared serves as the basis of a business transaction.

 

•    Maintaining the records of transactions in a journal:-

A journal is simply a book, either a paper or electronic, in which all the transactions are recorded. After the identification and analyzing process, the transaction goes through the process o recording it in a journal. These transactions are recorded in a journal, using a double entry bookkeeping system. The transactions in a journal are always recorded in chronological order, the journals are, therefore, also known as ‘Books of original entry.’

 

•    Posting a transaction to a ledger:-

Posting the transaction into a ledger further follows the second step. A ledger is nothing but a collection of accounts that present the changes made in each account, as a result, of past transactions and their existing balances. The ledgers are also known as the “Books, of final entry.’ This is the most important step in the recording process of the transaction. After the posting is done, the balances of each account start to be determined.

 

•    Unadjusted trial balance:-

All the balances obtained, as a result, of ledger are further arranged in one report. All the debit balances are further added in it. Along with the debit balances, the credit balances too are added. The balance of the debits and the credits must be equal. However, if any error is discovered during this process, correcting entries are made in order to rectify them. Sometimes, errors could exist even when the balances of debits and credits are equal. This happens, as a result, of double posting or failure of recording a transaction.

 

•    Adjusting entries:-

The fifth step involving in a recording process is the step of adjusting the entries of a transaction. It is prepared as an application of the real basis of the accounting. Many of the times, at the end of the accounting period various expenses, are incurred that have not been recorded in the journals. Likewise, various incomes that have been earned is also not recorded in the journals. Thus, adjusting entries are prepared in this regard that thereby adjusts the left incomes and the expenses before they are concluded in the financial statements. Adjusting entries of allowances, depreciation, deferrals, etc. is also made.

 

•    Adjusted trial balance:-

Many of the times the trial balances are also adjusted, as a result, of any discrepancy in the transactions. It is prepared once the adjusting entries are made and, prior to the preparation, of financial statement. The step of adjusting the trial balance is simply made to ensure whether the debits are equal to the credits or vice-versa.

 

•    Financial Statements:-

After all the adjustments of the trial balances and several entries comes the step of preparing a financial statement of the transaction. When the accounts are being checked of the flaws and the balance of the debits and the credits is ensured, the financial statement is prepared. The financial statement is the tail end of a business transaction.

 

 

•    Closing entries:-

The preparation of financial statement is further followed by the preparation of closing entries. Temporary or nominal accounts are closed to prepare a proper system of next accounting period. The temporary accounts include in them the income, expenses and withdrawal accounts that are closed to give rise to the next accounting system. These are closed to a summary account. Real or permanent accounts like balance-sheet accounts are never closed.

 

•    Post-closing trial balance:-

A post closing trial balance is lastly prepared again to check the equality of the debits and credits after the closing entries are made.

 

  • Tax Preparation:

Small businesses have to make sure they are tax compliant and lodge Tax Return Sydney lodgement due dates can be found here:

 

Thus, these were the steps involved in the recording process of the transaction. Once the transaction goes through all the above listed steps, it becomes free of all the flaws and the discrepancies. Hence, anybody could take a look into it and eventually a proper ad a perfect account is maintained.

 

 

 

What is accounting?

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Introduction of accounting and its importance

 

Accounting:

 

Accounting is an activity to maintain proper data or information related to the business operations in an orderly manner. It is the recording phase of accounting. It is also the main part of the business. Without the concept of accounting nobody can find the real profit and loss of the business. No one can find the actual expenses & losses, income & gains, sundry debtors and sundry creditors. To grow up the business one should need some financial support from someone. The person who supports to the business in the form on monetary aspects that person is known as sundry creditor. On the other hand, person who are liable to pay money or give a promise to pay the money to the business that is known as sundry debtor. With the help of accounting, business has also maintained a record of purchase and sale. It is the term that is used in business. Accounting means to maintain the record systematically, properly. It is summarized form of records. With the help of accounts, anyone can judge the financial position of the business. Large-scale industries, as well as small-scale industries, maintain their accounts on a daily basis. It is compulsory for every firm, industries and company as well. Accounting is an art as well as science. In simple words science is always based on causes and effects. Whereas art is the application of knowledge, which are based on theories and rule of accounting.  Apart from this, the main objective of any business is to earn maximum profit with the used of maximum sources that are limited. Every businessman is interested to know at the end of the accounting year, what is the actual profit of the business, he has earned during this period. For this purpose, it would become necessary to maintain the proper record in the proper place, with proper manner and record all the data according to date wise. Such as proper maintenance of books of accounts, it becomes so easy to find any record at the time of need. Moreover, accounting written records is also essential for the following types of information required:

 

•    How much will be the total earnings during the period.

•    What will be the expenditure during the period like salary, wages, commission, bank charges, purchase, electricity bill, repair and maintenance, rent etc. All are the expenses related to all the business.

•    How much will be the profit or loss

•    How much will be the business capital and liabilities

•    Nature and values of fixed and intangible assets, fixed and current possessed in business

•    Nature and amount of liabilities

•    Customers who owe to the company and the amount in each case.

•    Suppliers to whom the firm has to pay and the amount in respective case.

•    Other facts for filing sales tax or income tax returns.

 

Accounting vs. Accountancy:

 

The knowledge of accounting concept, principles, assumptions, conventions, and rules of accounting are the governing factor of accounting.

On the other hand, the following the rules of accounting and record the transaction in books, according to that rule is termed as accountancy.

 

Accounting Terminology:

The important terminology, which is used very much in accounting language, is very important to discuss here. These terms are frequently used  in accounting.

 

•    Assets: Assets may be defined as anything, which used to run the business smoothly. Assets may be fixed and intangible, current assets, tangible assets, etc. Fixed assets are as the name suggests those assets that are fixed that cannot change time to time. Building, furniture & fixture, air conditioner are the example of fixed assets. These assets are always fixed for a long period. At business case is a very important part; a business cannot survive without the flow of cash. The nature of cash is current. It may increase or decrease the time to time. So current assets are those assets that are frequently changed. All the assets either fixed or current that can be touched or seen are called tangible assets. Building, furniture & fixtures, cash all are the tangible nature assets. On the other side that assets that cannot be touch or seen, that asset is known as an intangible asset. Goodwill or name of the company like ABC & Sons Pvt. Ltd. are an intangible asset. But what it means. Why is it an intangible asset? The reason is every company or business has some value in the market. At the time of disclosure businessman also charges extra payment for the company’s name. It is a kind of goodwill of the company.

 

•    Revenue: It is the financial value of any services or products sold to the customers during the period. The Commission receives; interest receives from the bank is revenue for the business.

 

•    Expenses: Expenses are divided into two category wise direct expenses and another is indirect expense. Wages, carriage inward and outward are direct expenses. These expenses are related directly to sales and purchase. On the other hand, all other expenses except direct are known as indirect expenses as salary, rent, commission paid, repair, etc. all are indirect expenses.

 

•    Drawing:  The term drawing is used for personal used of business assets by the businessman or the owner of the business.

 

•    Sundry Creditor: Amount owed by the enterprises on account of the purchase of goods and services with contract obligations known as sundry creditor.

 

•    Sundry Debtor: is the person from whom amounts are due to product sold in respect of contractual obligations is known as sundry debtor.

•    Gross profit: It is excess money, goods that are traded and services rendered during a period over their cost.

 

•    Net profit: At the end of the financial year when all expenses are deducted from all incomes, then the balance left is known as net profit. If balance came in a negative form, then it means a loss and in case it is positive then that is net profit.

 

So to sum up this discussion, accounting is based on some rules and principles, concepts and conventions, proper recording of transactions. It is a systematic way to keep a record with proper manner. It is a way to maintain the records of fixed and intangible assets, record of sundry debtor and creditor, expenses or incomes, profit or loss.