The Basic Accounting Cycle

The Basic Accounting Cycle

There are following six steps involved in the basic accounting cycle.

1. Identification of source documents

2. Making of original entry
3. Making of double entry
4. Check arithmetic accuracy of the transactions
5. Calculate profit or loss
6. Closing financial position

1. Identification of source documents-where original information is to be found.

The source documents are as under:
a. Sales & purchase invoices
b. Debit & credit notes for returns
c. Bank pay-in slips & cheque counterfoils
d. Receipts of cash paid out and received
e. Corresponding containing other financial information

2. Making original entries-after identification of source documents, we classified

business transactions and then entered in the books of original entry. The books
of the original entry contain the following:
a. The cashbook
b. Sales daybook
c. Purchase daybook
d. Return inwards daybook
e. Return outwards daybook
f. The Journal

3. Making of double entry-in this step we have to record dual aspect of each
transaction. For this purpose, we will use the following ledgers:
a. General Ledger for real and nominal accounts
b. Sales ledger for debtors
c. Purchase ledger for creditors
d. Cashbook for cash and bank’s related transactions

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 The Basic Accounting Cycle

4. Check arithmetic accuracy of the transactions-for this purpose we will prepare

the trial balance.
5. Calculate profit or loss-profit or loss in an accounting period would show in the
financial statement, for this purpose we will prepare the Income Statement.
6. The closing financial position-financial position will be shown in the Balance
sheet.

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