A glimpse on background of accounting and accounting cycle by mounika ramachandruni

1. ACCOUNTING CYCLE
By Mounika Ramachandruni

2. Introduction
Accounting is the systematic and comprehensive recording of
financial transactions pertaining to a business, and it also refers to
the process of summarizing, analyzing and reporting these
transactions to oversight agencies and tax collection entities.
Accounting is one of the key functions for almost any business; it
may be handled by a bookkeeper and accountant at small firms or
by sizable finance departments with dozens of employees at large
companies.

3. Background
At one stage Luca Pacioli – the father of Accountancy brought a
revolutionary change in the field of accountancy by writing a
book on Mathematics- “Summa de Arithmetica Geometria
Proportioniet Proportionlita” – containing a chapter – “De
Computes it Scriptures”- in which Double Entry System of book
keeping was explained.
The Double Entry System is a recognized and generally accepted
system all over the world and till date this system is being used
widely with its basic principles unchanged.

4. Definition
According to the American Institute of Certified Public
Accountants [AICPA];
“Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms of money,
transactions and events, which are, in part at least, of a
financial character and interpreting the result thereof.”

5. Types of accounts

7. Accounting cycle
The accounting cycle is the name given to the collective
process of recording and processing the accounting events of
a company. The series of steps begin when a transaction
occurs and end with its inclusion in the financial statements.
Additional accounting records used during the accounting
cycle include the general ledger and trial balance.

8. Accounting cycle
Upon the posting of adjusting entries, a company prepares
an adjusted trail balance followed by the financial
statements. An entity closes temporary accounts -- revenues
and expenses -- at the end of the period using closing
entries.
 These closing entries transfer net income into retained
earnings. Finally, a company prepares the post-closing trial
balance to ensure debits and credits match.

9. Accounting cycle

10. Journal
An accounting journal entry is the method used to enter an
accounting transaction into the accounting records of a
business.
 The accounting records are aggregated into the general
ledger, or the journal entries may be recorded in a variety of
sub-ledgers, which are later rolled up into the general
ledger.

11. Ledger
In bookkeeping and accounting, a ledger is a book (or
record) for collecting chronological transaction data from a
journal, and organizing entries by account.
The ledger provides the transaction history and current
balance in each accounting system account, throughout the
accounting period.
 At the end of the period, ledgers therefore serve as the
authoritative source of data for building a firm's financial
accounting reports.

12. Trail Balance
Trial balance may be defined as an informal accounting
schedule or statement that lists the ledger account balances
at a point in time compares the total of debit balance with
the total of credit balance.
The trial balance is not an absolute or solid proof of the
accuracy of books of accounts. Thus if trial balance agrees,
there may be errors or may not be errors. But if it does not
agree, certainly there are errors

13. Adjustment Entries
Adjusting entries are journal entries recorded at the end of
an accounting period to alter the ending balances in various
general ledger accounts.
This generally involves the matching of revenues to
expenses under the matching principle, and so impacts
reported revenue and expense levels.

14. Trading Account
Trading account is prepared mainly to know the profitability of
the goods bought (or manufactured) sold by the businessman.
The difference between selling price and cost of goods sold is
the,5earning of the businessman. Thus in order to calculate the
gross earning,it is necessary to know:
(a) cost of goods sold.
(b) sales.

15. Profit or loss account
The profit and loss account is opened by recording the gross
profit (on credit side) or gross loss (debit side).
For earning net profit a businessman has to incur many more
expenses in addition to the direct expenses. Those expenses are
deducted from profit (or added to gross loss), the resultant figure
will be net profit or net loss.
The expenses which are recorded in profit and loss account are
ailed 'indirect expenses'.

16. Final accounts
• Final accounts give an idea about the profitability and
financial position of a business to its management, owners,
and other interested parties. All business transactions are
first recorded in a journal.
• They are then transferred to a ledger and balanced. These
final tallies are prepared for a specific period.