Question

State the phases of ‘Accounting Cycle’.

Hint:

The accounting cycle begins with identifying a transaction and ends with post-closing entries. Accuracy at each step ensures proper financial reporting.

Answer 1

The Accounting Cycle is the step-by-step process followed in every accounting period to record, summarize, and report financial transactions.
The phases of the Accounting Cycle are:
1. Identifying Transactions: Recognizing and analyzing financial transactions relevant to the business.
2. Recording Transactions: Entering transactions in the Journal (Journalizing) using double-entry bookkeeping.
3. Posting to Ledger: Transferring journal entries into individual ledger accounts (also called “posting”).
4. Preparing Trial Balance: Creating a Trial Balance to ensure debits = credits and to detect arithmetical errors.
5. Making Adjusting Entries: At the end of the accounting period, adjustments are made for accrued and deferred items (e.g., depreciation, outstanding expenses).
6. Preparing Adjusted Trial Balance: An updated trial balance after adjustments is prepared.
7. Preparing Financial Statements: Using the adjusted trial balance to prepare: - Trading and Profit \& Loss Account - Balance Sheet - Cash Flow Statement (if applicable)
8. Closing Entries: Temporary accounts (revenue and expenses) are closed and transferred to capital or retained earnings.
9. Post-Closing Trial Balance: Prepared to ensure that all temporary accounts have been closed correctly.
10. Reversing Entries (Optional): Certain adjusting entries are reversed at the beginning of the next period for ease.