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A sequence of activities involving the recording of how cash is received and paid out in a company or organization. The accounting process in business is based on four accounting methods, which are: the accrual method, the consistency method, the prudence method and the going concern method.
Accounting consists of a number of sequential steps of activities. Those include identifying, recording, classifying, summarizing and communicating financial transactions. The sequence of the steps to be followed in accounting activities is known as accounting process. The accounting process takes the form of a cycle. The sequential steps of accounting activities are taken in cyclical order. The cyclical order starts from the beginning of the transaction till financial results are derived by preparing final accounts at the end of the accounting year. This cycle follows the same order every year.
The accounting process or cycle has the following five steps.
1. Identifying the financial transaction
A business may perform several transactions. Of which, only financial transactions are recorded in accounts. In the first step of the accounting process, therefore, financial transactions are identified. Financial transactions are those which are expressed in monetary terms.
2. Recording Of Financial Transactions
In the second step of accounting process, all financial transactions performed by the business are systematically recorded in the journal, and subsidiary books.
3. Classifying Financial Transactions
In the third step of accounting process, financial transactions are classified mainly into the transaction related with persons that include enterprises, persons, assets and income-expenses. Then, they are recorded in their respective ledger accounts, such as debtors' and creditors' accounts, land and building accounts, commission received accounts, and rent account.
4. Summarizing Financial Transactions
All financial transactions are summarized in this step of accounting process. They are summarized by preparing a trial balance. Preparation of trial balance helps to prepare final accounts which disclose the profit and loss and financial position.
5. Communicating the Results Of Business
In the last step of accounting process, the results of business operations such as profit or loss and the company's financial position are communicated to the users. Those users include owners, creditors and managers who need financial information for decision making purposes.
The accounting cycle is the accounting process used to record business transactions in accounting books and supply the end-of-accounting-period financial statements. The operating cycle is the business transaction process in which business inventories are purchased, processed and eventually sold to customers. A company's accounting cycle and operating cycle are independent of each other with respect to the length of the cycles, but they are also closely related in terms of information flow between the two areas
Accounting Cycle
The accounting cycle, or the accounting process, involves a series of accounting tasks such as identifying business transactions, recording them in journal entries, posting original journal entries to the general ledger and finally using the information in the general ledger to prepare financial statements. However, the length of an accounting cycle is not dependent on how and when business transactions take place, because a company can select the start and finish of its accounting cycle to carry out the required accounting tasks. An accounting cycle can be a calendar year or a fiscal year, and it can be also on a quarterly or monthly basis.
Operating Cycle
Companies don't arbitrarily decide an operating cycle because it reflects how in reality business transactions progress from start to finish. The operating cycle is also referred to as the cash-conversion cycle, which is the length of time that a company takes to convert its inventory purchase to sales revenue. A typical operating cycle includes the days of inventory outstanding before sales, the days of accounts receivable outstanding before cash collection, and the days of accounts payable outstanding before cash payments. The more days of inventory and accounts receivable outstanding, the longer an operating cycle is, but any days of accounts payable outstanding shorten the total length of an operating cycle because of the delayed cash payment effect.
Accounting prosesses are a detailed representation of the accounting cycle.
he nine steps of the accounting cycle are:
The accounting cycle, also commonly referred to as accounting process, is a series of procedures in the collection, processing, and communication of financial information.
Identifying and Analyzing Business Transactions
Recording in the Journals
Posting to the Ledger
Unadjusted Trial Balance
Adjusting Entries
Adjusted Trial Balance
Financial Statements
Closing Entries
Post-Closing Trial Balance
yes cycle is structure and process is how to work or planing to completed accounting work
The term, accounting cycle, refers to the steps involved in accounting for all of the business activities during an accounting period. Accounting cycle is the set of procedures that record business event into the accounting records and conclude in the production of financial statement. 1. Journal Entries (journalizing)
Companies initially record transactions in chronological order (the order in which they occur). Thus, the journal is referred to as the book of original entry. For each transaction the journal shows the debit and credit effects on specific accounts.
Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns.
The journal makes several significant contributions to the recording process:
2. Journal ledger /T. Accounts /Post to Ledgers
The entire group of accounts maintained by a company is the ledger. The ledger keeps in one place all the information about changes in specific account balances.
3. Trial Balance
A trial balance is a list of accounts and their balances at a given time. Customarily, companies prepare a trial balance at the end of an accounting period. They list accounts in the order in which they appear in the ledger. Debit balances appear in the left column and credit balances in the right column.
4. Adjusting Entries
Adjusting entries involve bringing an asset or liability account balance to its proper amount and updating the corresponding revenue or expense account. Adjusting entries are recorded in the general journal and then posted to the ledger. All adjusting entries are made at the end of the accounting time period.
5. Adjusted Trial Balance
A new trial balance is prepared after making adjusting entries.
6. Financial Statements: Like income statement, Balance sheet, Statement of retained earnings, and cash flow statements.
Income Statement
The income statement reports the revenues and expenses for a specific period of time.
Balance sheet
A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time
7. Closing Entries
Transfer the balances of temporary accounts to owner’s equity accounts. 8. After Closing Trial Balance/ post-closing trial balance.
A final trial balance is prepared after the closing entries are made. A post-closing trial balance should only contain the debit and credit balance for permanent accounts, because these are the only accounts that are remaining after the closing process. Once again the purpose of this trial balance is to ensure that the debits equal the credits and that all stemporary accounts have a zero balance.
9. Reversing Entries
Reverse the necessary adjusting entries (optional), are journal entries made at the beginning of an accounting period to reverse or cancel out adjusting journal entries made at the end of the previous accounting period. This is the last step in the accounting cycle.
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