Welcome to the session on Fundamentals of Accounting. By the end of this article, you will have a good grasp of the basic accounting concepts and terminology, and an understanding of the different phases of the accounting cycle. The accounting cycle refers to the series of steps that businesses take to record, summarize, and interpret their financial transactions. In this article, we will discuss the six integral steps of the accounting cycle.
The first phase is to understand the transaction. In this phase, we identify the type of transaction, the date, and the debit and credit amounts.
The second phase involves recording the transaction by debiting and crediting the different accounts involved.
In the third phase, we transfer the journal entries to the ledger, a process known as ledger posting.
The fourth phase involves preparing the trial balance, which summarizes the financial data contained in the ledger. The purpose of preparing a trial balance is to ensure that the entries in the company’s bookkeeping system are mathematically correct.
The fifth phase is preparing the profit and loss account, where we determine the net profit or loss of a business during the accounting period.
Finally, in the sixth phase, we prepare the balance sheet, which summarizes the financial balances of a business or an organization.
It’s worth noting that accounting can be done in two ways: manually and using accounting software. In the case of manual accounting, all six activities are carried out manually by accountants. However, in the case of accounting software, only two steps are done manually, such as understanding the transactions and voucher entry. The remaining four activities – ledger posting, trial balance, profit and loss account, and balance sheet – are automatically performed by the software.
In conclusion, the accounting cycle is essential for all businesses, and it helps them to keep track of their financial transactions accurately. Understanding the different phases of the accounting cycle is crucial to create reliable financial reports that help businesses make informed decisions.
