Financial Accounting:

Accounting Cycle, its meaning and objectives

Meaning of Financial Accounting
• Financial Accounting involves a process of recording, summarizing,
and reporting the uncountable of transactions resulting from
business operations over a period of time.
• Financial accounting deals with the maintenance of books of accounts
with a view to ascertain the financial status of the business.
Meaning of Accounting Cycle
• It is about recording and processing all the financial transactions of a company.
• It is a holistic approach begins with the occurrence of transaction, recording it in
relevant documents in a proper and systematic manner and closing the accounts
with the end of the accounting year.
• It ensures that no mistakes are made since recording of transactions and till the
closing the transactions in the books of accounts.
Accounting Cycle

Transaction
Journal
entries
Closing
the
books
Accounting Posting
cycle
Financial
statements

Trial
Adjusting balance
the worksheets
entries
Objectives of accounting cycle
• To systematically record all the transactions without missing any entry.
• To avoid common mistakes during the process of accounting.
-Omitting the recording of transaction.
- Posting in the wrong account.
-Posting on wrong side of the account.
-Posting wrong amount.
-Posting of transaction multiple times.
Steps in accounting cycle:

1. ACCOUNTING TRANSACTION: A business event having monetary impact on the financial

statements of business.

• For ex: Cash sales to customer.( account receivables or assets)

Purchase of fixed assets from suppliers.

2. Journal Entries: It includes book of original entry. Entries made into a journal employ double-

entry accounting system, where balancing debits and credits are used. The entries also state the date,

accounts impacted, and amounts, as well as an identifier for the source document.
 Steps in accounting cycle
3. Posting in General Ledger: After doing the journal entries of the transaction, the
accountant posts entries to individual general ledger where one can summaries all the
transactions related to that account.

4. Trial Balance: At the end of the accounting period, the accountant prepares the trial
balance from the journal ledger which helps in calculating the total balance of an
individual account.

5. Worksheets: All the debit balances should tally with the credit balances. If it does not
tally than it is crucial to identify the errors and rectify them to tally the balances. So,
worksheets are prepared.
Cont.. Steps in accounting cycle

6. Adjusting Entries: After completing the worksheets, the accountant

posts adjusting entries for accruals and deferrals in the accounts.

7. Financial Statements: The accounting person prepares the  financial

statements like the income statement, cash flow statements
and balance sheet after the final correct balances.