Accounting Cycle | Definition | 9 Steps of Accounting Cycle

Accounting Cycle | Definition | 9 Steps of Accounting Cycle
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    hello everyone hi welcome to the channel of WallStreetmojo. Watch the video till the end also if you are new to this channel then you can subscribe us by clicking the bell icon. Friends today a a different topic that we are going to pick up that is the accounting cycle accounting cycle I mean that flows in an around in around every company now what exactly is the accounting cycle that's what we need to understand see accounting cycle is like a traditional concept but if you understand the accounting cycle completely you'll be able to make some prudent decisions as you can see in the picture you know all the things which are surrounded by the business things you know but what exactly is the accounting cycle okay no issues we need to understand that the accounting cycle is basically a combination of collecting the data it is the combination of collecting the data and for basically creating post-closing trial balance so that's why you collect data and accounting cycle starts with like you know a transaction and it ends with the books of accounts which the books of accounts gets closed right so there are 9 steps of accounting standards we'll be discussing each one of them a step by step process now this is the diagram for the accounting cycle which the step by step process you'll first collect the data then you will do a journal entries you'll be writing journal entries from those journal entries the ledger accounts will be prepared and once you have all the ledgers you'll pick up the ledger and its balance and form an the unadjusted trial balance you'll do some adjusting entries to evaluate trial balance if there are any problems there then you'll prepare an adjusted trial balance from that trial balance you will be posting the every single line item to various parts like the profit and loss account to the balance sheet trading accounts and once you're prepared like with the financial statements that is a CFS that it includes the cash flow statements, balance sheets, P&L, notes, once you prepared that you'll be closing your books of accounts and then you will be preparing a post-closing trial balance so let's understand this every single part of this step in a much detail form. the first is the collection of data and analysis of transaction right so at this juncture you know the accounting cycle begins it's it has just started and in the first step of the accounting cycle the accountants of the company they basically, collect the data and analyze the transaction now for smooth-running business you can say that there would be many transactions so the accountant needs to look at each transactions and find out why they have actually occurred and put it under the right accounts and basically analyze the same so the step is the most critical of all because this is like you know a kick start process for accounting the next step is the journalizing or you can say journal entry basically journalizing after collecting and analyzing the transaction it's time to record the entries into the first books of accounts so in this type of accounting cycle each transaction ok it is compared to the general you can say journal entries and and under each entry and narration is written to mention the reason behind debiting or crediting the item now recording the entries in the journal is important since there is an error that is at this stage of recording and it will be it will linger on the next books of accounts as well so needs to be taken care of the third portion in this is the recording of the journal entries into the ledger accounts right so in this portion accounting is basically a series of steps that are taken one when one one by one so after journalizing all the transaction it's time for the accountant to record the entries into the secondary books of accounts so that means if there there are cash and capital if there are basically cash and capital will be like two tables in the general ledger and the balance of the respective accounts will be transferred so the general ledger basically they allow the accountants to get a closing balance for preparing the trial balance and in the next step of the accounting cycle of the accounting cycle it's creating the unadjusted trial balance right now as you know that you know the trial balance is the source of all differential statement and that's why special attention should be given to the trial balance now from the closing balance of the general ledger account and an adjusted trial balance is prepared now in this trial balance the debit the balance will be recorded on the debit side and then credit balance will be recorded in the credit side so then the debit side is totaled and the credit side is basically totaled and then the accountants will see whether both of the side has a similar balance or not which is called as tallying the balance sheet right the 5 step in our accounting process is performing adjusting entries now at this juncture the unadjusted trial balance is already prepared so in this step of accounting cycle the adjusting entries are been recorded so the adjusting entries are typically related to you know any accrual adjustments or periodical depreciation adjustments or amortization adjustments and so on and so forth so without performing this adjustment entries just a trial balance will be the prepared the 6 step is creating the adjusted the six step is basically creating the adjusted trial balance right so after passing the adjusting entries it's time to create the fresh trial balance and the trial balance is called the adjusted trial balance since it is prepared after the adjustments that has been done entries after the after the adjustment entries have been has been passed as it isn't so the trial balance can be used to prepare the most important for the financial the statement now the 7-step is basically creating the financial statement from the trial balance so this step of accounting cycle is the most critical part of the accounting cycle see as an investor you must know how all the financial statements are coming from so from the adjusted trial balance all the financial statement are born so there are four most important financial statements that are prepared using the adjusted trial balance the first financial statement that every investor should look into the income statement so in the income statement the first item are sales, cost of sales, and other operating expenses that are deducted from the sales the next is the balance sheet and that includes all the data on the list of the balance sheet like the balance sheet we record the assets and the liabilities then you have the shareholders equity this is the next financial item that would be prepared here along with the share capital that retained earnings would be taken to account. retained earnings are like the person is the profit that has been reinvested in the company then you have the cash flow statement that is a CFS finally they CFS would be prepared in cash flow you know accountant needs to find the cash flow from the kind of various activities like operating, financial, investment and can be prepared with two things like you know two ways indirect and direct method then each step is basically closing the books now now it's time to close the books the step is the last step I mean that this is the third last step in the accounting cycle closing the books basically means that all the financial statement are prepared and are recorded after closing the books a new accounting period would start and would need to start repeating the above steps of the accounting cycle once again the step 9 that will go is finally creating the post-closing trial balance so the post-closing trial balance is you know to ensure that the accounting transactions are properly recorded and analyzed and summarized so post trial balance is prepared and here all the accounts are taken into account and then the closing balance are recorded as for the respective positions so then the credit side of the and the debit side are being matched to see whether everything is right or not so conclusion out of all the steps if an an investor can understand the nine steps of the accounting cycle, it would be clear that how he or she should approach the company and progress or decline so the knowledge of the accounting side in cycle will help you to decide whether he or she should invest in the company or not and at the same time he will get a concrete idea about the financial accounting of the company so that's it for this particular topic if you have learned and enjoyed watching this video please like and comment on this video and subscribe to our channel for the latest updates thank you everyone Cheers
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