The term ‘Accounting Cycle’ refers to the sequence of accounting procedures followed in recording, classifying and summarising business transactions. In starts with identification of business transactions and ends with the adjustment entries for prepaid and outstanding expenses.
The sequence of accounting procedures is as follows.
- Identification of transactions.
- Preparation or receipt of business documents.
- Recording of transactions in books of original entry.
- Posting of transactions to ledgers.
- Preparation of trial balance.
- Preparation of final accounts.
- Passing of closing and adjustment entries.
A transaction is an event or happening that changes an organisation’s financial position and/ or its earnings. For example, when you deposit cash in the bank, your cash balance increases and your stock reduces.
Transactions can be classified as follows:
- Receipts – Cash or Bank
- Payments – Cash or Bank
The essential function of accounting is to record transaction to ascertain the financial status of a company as on a particular date.
- Purchase of goods, either as raw material for further processing or as finished goods for resale.
- Payment of expenses incurred towards business.
- Sale of goods or services.
- Receipts, in cash or by cheque.
- Other payments, in cash or by cheque.
Types of Accounts
The three types of accounts maintained for transactions with parties are:
- Real Accounts
- Personal Acounts
- Nominal Accounts
Real Accounts are maintained for assets owned or possessed by the business.
Personal Accounts are the accounts of persons with whom the business is required to deal with.
Nominal Accounts are accounts where income and expenses are recorded.
- Rent expenses
- Salary expenses
Accounts can e broadly classified under the following five groups:
Assets, liabilities and capital are taken to the balance sheet. Revenue and expenditure accounts are shown in the profit and loss statement.