Accounting Cycle or Accounting Trail
Accounting cycle is a chronological order in which an accounting process flows. It is a step by step process followed to achieve the ultimate goals of accounting.
Firstly, the information is recorded in a book or in a modern scenario accounting software called Journal. Then it is adjusted and moved to a ledger. Ledger balances are then summarized to make a trial balance. Finally, from trial balance financial statements such as an income statement, a trading account and a balance sheet are prepared.
Example of Accounting Cycle
Unreal Corp bought a building for 10 Million, which was shown in the balance sheet as an asset. We will study a possible accounting trail behind this.
|Step 1||Transaction for buying the building is identified.|
|Step 2||Evidence such as legal ownership documents is prepared.|
|Step 3||A journal entry for buying the building is recorded in books.|
|Step 4||A ledger account such as a “building account” is created.|
|Step 5||The ledger account for building is then balanced.|
|Step 6||All adjustments, if any, are incorporated.|
|Step 7||The amount is treated as an asset and moved to trial balance.|
|Step 8||The amount is then shown on the asset side of the balance sheet.|