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What is the Accounting Cycle?

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.

Image with Accounting Cycle

 

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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>Read What is Journal Posting?