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Topic 1 - Accounting Cycle and Accounting Information Users

ACCOUNTING CYCLE AND ACCOUNTING INFORMATION USERS

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Ramesh
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26 views4 pages

Topic 1 - Accounting Cycle and Accounting Information Users

ACCOUNTING CYCLE AND ACCOUNTING INFORMATION USERS

Uploaded by

Ramesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ACCOUNTING CYCLE AND ACCOUNTING PROCESS

Accounting Cycle is a sequence of accounting activities to create financial statements that are
performed in order to categorize, record, and summarize accounting information. When you conduct
a whole sequence of accounting activities in the appropriate order throughout a single accounting
period is called as completing the accounting cycle. Accounting cycle is also known as the bookkeeping
cycle and sometimes it is also referred as accounting process.

Whenever a transaction takes place, the accounting process starts with the entry of the transaction
into the books and continues until the transaction is reflected in the financial statements at the end
of the accounting period.

In the accounting cycle, which is a seven multi-step process that takes place throughout the year, all
of your company’s raw financial information is transformed into financial statements.

7 STEPS OF ACCOUNTING CYCLE

Step 1: Analyze and categorize Transactions

Steps in the accounting process is to analyze and categorize transactions which will be posted into
books of account. Initially transactions have to be categorized as a business transaction or personal
transaction. This is because only business transactions will be posted into accounting system.
Step 2: Posting transactions into Journals

All business related transactions are recorded based on double entry system irrespective of whether
journal entries are maintained manually or computerized. At-least two accounts are affected for a
single transaction when posting into journal entry where one account is credited and another account
is debited. Special journal books are maintained for recording frequently used transactions like sales
journal, cash receipts journal, purchases journal, etc. General journal book is maintained to record
transactions with are less commonly used.

Step 3: Preparing Ledger Accounts

Ledger accounts are known as last book of entry in accounting process. Ledger balances can be
determined after recording all the transactions into ledger account. For example: When posting all the
bank related debit and credit journal entries into Bank’s ledger account, Once can figure out increase
or decrease in bank A/c. This can assist business to take precautionary steps in case of deficit for next
year.

Step 4: Preparing Trial Balance

Main purpose of maintaining trail balance is to match debit and credit balances extracted from ledger
accounts. Total of all the debit amount of trial balance should match with credit amount of trial
balance. A necessary step has to be taken in-case if trial balance fails to match. Re-engineering has to
be performed to find errors and omissions. Also preventive step has to be taken in this accounting
process steps to rectify those errors.

Step 5: Adjustments in Trial Balance

There are times when expenses are incurred for business but are mistakenly unrecorded into journals.
There are circumstances when some incomes are left out during posting to journals. Under those
circumstances, Adjusting entries are been prepared before preparing financial statement when credit
and debit trial balance does not match. Such adjustments are known as adjusted trial balance in
accounting process. At the end after all the adjustments, debit and credit of trial balances should be
equal.

Step 6: Preparing Financial Statement

After updating trial balance, it’s time to get close to the end stage in steps of accounting cycle. In this
process financial statements of an individual or a business or an organization are been prepared for
the accounting year. Under this process, following reports are been prepared:

1) Statement of Comprehensive Income / Profit & Loss


2) Statement of Financial Position / Balance Sheet
3) Change of Equity statement
4) Cash Flow statement.
5) Notes to financial statements.

Step 7: Closing Entries

This is the final stage in steps of accounting cycle. In this process nominal or temporary accounts are
been closed and balances are carried forwarded to next accounting cycle. Accounts like: expenses a/c,
cash a/c, income a/c, bank a/c are been closed. Whereas permanent accounts like balance sheet, etc.
are not closed.

USERS OF ACCOUNTING INFORMATION

Accounting provides valuable information about the financial condition of a firm.


Stakeholders take an important decision based on this information.
So we can divide the users of accounting information into two groups-
1) Internal users of Accounting information
2) External users of Accounting information
1) Internal users of Accounting information

Internal users of accounting information are those who plan, organize and run the business. Internal
users include:

Owners Manager Internal Auditors Production Supervisor

Finance Directors Company officers Line manager Board of Directors

Top-Level Officers Treasurer Company Officers Marketing Manager

2) External users of Accounting information

External users are individuals and organizations or institutions outside a company that wants
financial information about the company. External users Include:

Suppliers Banks Customers Investors Potential investors General Public

External Auditors Tax Authorities Regulatory Agencies Labor union Researchers

Economic Planner Financial Institutions Securities Exchange Commission

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