Accounting Cycle or Accounting Trail
The 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 accounting software (in the modern scenario) called a 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 on the balance sheet as an asset. We will study the possible accounting trail related to this transaction.
|Step 1||Transaction for buying the building is identified.|
|Step 2||Evidence such as a legal ownership document is prepared.|
|Step 3||Journal entry for buying the building is recorded in books.|
|Step 4||A ledger account such as a “building account” is created.|
|Step 5||Ledger account for the 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.|
Short Quiz for Self-Evaluation
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