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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