What is the Accounting Cycle?

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.

 

Image with Accounting Cycle

 

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 are 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.