📝 8 Steps of the Accounting Cycle

 

📊 The Accounting Cycle – Step-by-Step Explanation

The Accounting Cycle is the process businesses follow to record financial transactions and prepare financial statements. It typically follows 8 steps in a repeating cycle.

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📝 8 Steps of the Accounting Cycle

1️⃣ Identify Transactions

• Every financial activity (sales, purchases, expenses) must be recorded.

• Example: A company sells products for ₹50,000 in cash.

2️⃣ Record Transactions in Journal (Journal Entries)

• Transactions are recorded in the journal using double-entry accounting (Debit & Credit).

• Example:

  
  Cash A/c          Dr ₹50,000  
  To Sales A/c         ₹50,000  
  (Being goods sold for cash)  
  

3️⃣ Post to Ledger (T-Accounts)

• Journal entries are transferred to the General Ledger, which categorizes transactions.

• Example:

  • The "Cash" account increases.

  • The "Sales" account increases.

4️⃣ Prepare a Trial Balance

• A list of all ledger balances is prepared to ensure debits = credits.

• If there’s a difference, there may be an error that needs correction.

5️⃣ Adjusting Entries (If Needed)

• Adjustments are made for items like depreciation, interest, or prepaid expenses.

• Example: Depreciation on equipment:

  
  Depreciation A/c  Dr ₹5,000  
  To Equipment A/c     ₹5,000  
  

6️⃣ Adjusted Trial Balance

• After adjustments, another trial balance is created to confirm accuracy.

7️⃣ Prepare Financial Statements

• Using the adjusted trial balance, the 3 main financial statements are prepared:

  1. Profit & Loss Statement (Income Statement) – Shows revenue & expenses.

  2. Balance Sheet – Shows assets, liabilities & equity.

  3. Cash Flow Statement – Tracks cash inflows & outflows.

8️⃣ Closing Entries

• Temporary accounts (like revenue & expenses) are closed, and net profit is transferred to capital or retained earnings.

• Example: Closing revenue account:

  
  Sales A/c         Dr ₹50,000  
  To Profit & Loss A/c ₹50,000  
  

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🔄 Why is the Accounting Cycle Important?

✅ Ensures accurate financial records.
✅ Helps businesses track profits & losses.
✅ Prepares data for tax filing & decision-making.

Would you like an example with numbers in a table format? 📊😊

📊 Accounting Cycle Example with a Table (Step-by-Step)

Below is a realistic example of the Accounting Cycle, using a business transaction.

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🛒 Business Example:

Company: ABC Traders
Transaction: On April 1st, ABC Traders sells goods worth ₹50,000 in cash.

Step	Details	Example Entry
1️⃣ Identify Transaction	ABC Traders sells goods for ₹50,000 in cash.	Sale of goods.
2️⃣ Journal Entry	Record the transaction using double-entry bookkeeping.	Journal Entry: 🔹 Cash A/c (Dr) ₹50,000 🔹 To Sales A/c (Cr) ₹50,000
3️⃣ Post to Ledger	Transfer the journal entries to the General Ledger.	🔹 Cash Account (Increases by ₹50,000) 🔹 Sales Account (Increases by ₹50,000)
4️⃣ Trial Balance	Check if Debits = Credits.	Trial Balance: ✅ Cash A/c: ₹50,000 (Dr) ✅ Sales A/c: ₹50,000 (Cr)
5️⃣ Adjusting Entries	Suppose ₹5,000 is depreciation on equipment.	Adjusting Entry: 🔹 Depreciation A/c (Dr) ₹5,000 🔹 To Equipment A/c (Cr) ₹5,000
6️⃣ Adjusted Trial Balance	Prepare a revised trial balance after adjustments.	✅ Cash: ₹50,000 (Dr) ✅ Sales: ₹50,000 (Cr) ✅ Depreciation: ₹5,000 (Dr) ✅ Equipment: ₹5,000 (Cr)
7️⃣ Financial Statements	Prepare 3 Financial Statements.	✅ Profit & Loss Statement (Net Profit Calculation) ✅ Balance Sheet (Assets & Liabilities) ✅ Cash Flow Statement (Cash movements)
8️⃣ Closing Entries	Transfer profits/losses to Retained Earnings.	Closing Entry: 🔹 Sales A/c (Dr) ₹50,000 🔹 To Profit & Loss A/c (Cr) ₹50,000

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📌 Summary of Accounts Affected

Account	Type	Debit (Dr)	Credit (Cr)
Cash A/c	Asset	₹50,000	-
Sales A/c	Revenue	-	₹50,000
Depreciation A/c	Expense	₹5,000	-
Equipment A/c	Asset	-	₹5,000

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🎯 Key Takeaways

✅ The Accounting Cycle ensures accurate financial records.
✅ Double-entry accounting follows Debit = Credit.
✅ Adjusting entries help in matching expenses with revenues.
✅ The cycle repeats every accounting period (monthly/yearly).

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