Steps in the Accounting Cycle - Example

Here we discuss about steps in the Accounting Process. Accounting Cycle is the basic of the Accounting. The whole system of accounting processes are operated throughout the Accounting period is called Accounting Cycle. Every Step has its great importance. We can not ignore any one of these. There are following steps / stages in the Accounting Cycle and we can say that the Accounting Process begins with the following Accounting Cycle Steps:

Accounting Cycle Order

Below are the steps in the Accounting Cycle:

1.   Voucher (Source Document)

2.   Journal (Recording)

3.   Ledger

4.   Trial Balance

5.  Final Accounts (Income Statement and Balance Sheet)

6.   Cash Flow Statements

7.   Statement of Changes in Equity

8.   Notes to the accounts

1)   Voucher (source Document)

Voucher means any written evidence in support of transactions. For example, when we sold goods to Mr. A, then we give him / her a Sale receipt for selling goods. This receipt is called Voucher.

          2)   Journal (Recording)

For Journal, Please you can referred to Journal Format  for better understanding about this topic.

Recording of transactions in the books of account after verifying from the voucher or source document. For example, recording sales transactions in the Sales book after verifying from voucher receipt of the sales.

3)   Ledger

For Ledger, Please read this Ledger

After recording transactions in the journal, all theses are posted to their concerned accounts. Business Account Ledger is called the king of books of accounts.

For example, all the transactions of  Sales to any person either made in cash or credit are recorded in the ledger.

4)   Trial Balance

After posting the transaction to concerned accounts, Accounting Trial Balance is prepared to show the Arithmetical accuracy of the books of accounts.

Is the Total of Debit Balance equal to the Total of Credit Balance means that accounts are prepared accurately?

The answer is no, because, merely the total equality of both debit balance and credit balance does not give us guarantee that there are no errors or fraud in the books of accounts, so this is the limitation of Trial Balance. For this Rectification of errors and frauds are made.

5)   Final Accounts

Final Accounts are prepared after the end of accounting period. Final Accounts include the Income Statement (Statement of Comprehensive Income) and Balance Sheet (Statement of Financial Position).

                                i.   Income Statement

Income Statement shows us financial performance (Net Income) of the business.

                              ii.   Balance Sheet

Balance Sheet shows us financial position of the business.

6)   Cash Flows Statements

Cash Flows Statement shows us Cash inflow and Cash outflow of the business. It shows the Liquidity position of the company.

Note: You may also be interested in Statement of Cash Flows Example

There are three components of this statement:

                                      i.   Operating Activities

Operating activities include those Cash Transactions that are important for the operations of the business. Revenues and Expenses and Working Capital are example.

                                    ii.   Investing Activities

Cash involves in investing related transaction, Purchase of Fixed Assets, Disposal of Fixed Assets and Cash investments.

                                  iii.   Financial Activities

Cash Flows involve the financial related activities like Cash received from issuance of capital, Cash Dividend, Repayment of debts.

7) Statement of Changes in Equity

Changes in Equity are recorded in this account. Retained Earnings, Share Capital, General Reserves, are transferred to this statement.

8)  Notes to the accounts

These notes are provided for the necessary explanation of the accounting transaction For example, we provide the detail of contingent liability (that depends on the happening of certain event) in Notes to the accounts section.

So, hopefully now you can understand the above mentioned steps in the Accounting Cycle that are explained through example.