Note on Accounting Cycle and Accounting Terminologies

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Accounting Cycle/ Process

Accounting is the sequential steps which includes identifying, classifying, summarizing and communicating financial transactions. The sequence of the step to be followed in accounting activities is known as accounting process or cycle. The accounting process is a continuous process in the life of business organization which began with a recording of financial transactions and end with preparing final account. The financial statements also can be prepared before making the adjusting entries by taking the help of a worksheet that calculat the adjusters before they actually are posted.

The different steps that are included in accounting process or cycle are:

fig. Accounting Cycle or Process
fig. Accounting Cycle or Process

1. Identifying and analyzing transactions and events

The first step in accounting process is the collection, summarizing, identifying and analyzing the transactions of the business organization. Any transactions that are related to the financial sources of the business firm occurs, the firm recorded those transactions for analyzing the financial condition of the firm. The transactions that are related to the business organization are only recorded. In this step, the transactions are recorded, identified and analyze the nature of transctions so that the proper recording can be done.

2. Recording in the Journal

After analyzing, recording and identifying the nature of account involved in the transactions, the next step is to post or record to the journal. These transactions are recorded in the journal entries containing the two account (one is debit and another is credit). These transactions are recorded in the journal at chronological order i.e. according to date the transactions occurs. So, the transactions are recorded in journal to simplify the recording process.

3. Posting to Ledger

Ledger which is also known as " Book of Final Entry ", is a collection of each account thatshows the changes made to each account as a result of past transactions, and their current balances. It helps to collect and summarize the transactions of same account. It helps to determine the amount of each account easily.

4. Unadjusted Trial Balance

Trial balance is prepared to show the equal balance of both the debit and credit sied of all the account balances that are extracted from ledger. If the debit and credit balances do not match, this points an error in one of the first three steps. So, unadjusted trial balance is prepared to check the account balances and discover the error before moving to next step.

5. Adjusting Entries

At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals. Some income may have been earned but not entered in the books. Adjusting entries are prepared to update the accounts before they are summarized in the financial statements. Adjusting entries are made for accrual of income, accrual of expenses, deferrals (income method or liability method), prepayments (asset method or expense method), depreciation, and allowances.

6. Adjusted Trial Balance

Adjusted trial balance is prepared after adjusting entries are made and it is prepared to check the equality of debit and credit side after adjusting entries are made.

7. Financial Statements

When the accounts are updated and tested the equality of both debit and credit balances, then the financial statements are prepared. The financial statements includes:

  • Balance sheet
  • Income statement
  • Cash flow statement

8. Closing Entries

The eighth step in the accounting cycle is to close accounts in preparation for the next accounting period. Temporary or nominal accounts are closed, while permanent or real accounts carry their balances into the next period. Closing entries are recorded and posted to the owner's capital account after they are transferred to the income summary account. Once completed, all revenue, expense, withdrawal and income summary balances should be zero.

9. Post-Closing Trial Balance

Post closing trial balance are prepared to list out the balances of accounts that are not closed and to also verify the equality of debit and credit balances after the closing entries are made.

Accounting terminologies

While maintaining the records of different accounting terms which are frequently used in practice. Those terms are known as accounting terminologies. Some of the terminologies are given below:

  1. Transaction

In an easy and simple statement, we can say, transaction means the exchange of money to money's worth from one account to another account. Events like purchase and sale of goods, receipt and payment of cash for services or on a personal account, loss of profit in dealings, etc. are the transactions. The cash transaction is one where cash receipt or payment is involved in the process of the exchange of goods.

Credit transaction, on the other hand, will not have cash " either received or paid ", for something given or receipt respectively, but gives rise to the debtor and creditor relationship. Non–cash transaction is the process or a situation where the question of receipt or payment of cash does not arise at all. For example, depreciation, a return of goods, etc.

  1. Debtor

A person who owes money to the firm, mostly on the account of credit sales of goods is called a debtor. For an example, when the products or goods are sold to a person on credit that person pays the price in the future, he is called a debtor because he owes the amount of firm.

  1. Creditor

A person whom money owes by the firm is called creditor. For example, if Maya purchases goods in credit from a shopkeeper, then Maya is a creditor of a shopkeeper.

  1. Capital

Capital is the amount which the proprietor has invested in the firm or can claim from the firm. It is an amount which an investor invest for long term basis. In other words, capital is the sum of money which is used for the formation of any business organization.

  1. Liability

Liability is the amount which the firm owes to outsiders. In the words of Finny and Miller, "Liabilities are debts; they are the amount owed to the creditors; thus, the claims of those who are not the owner are called liabilities".

  1. Assets

Assets are that expenditure which results is acquiring of some property or benefits of a long lasting nature. Any physical things that have money value are known as assets.

  1. Goods

It is a simple or general term which is used for the articles in which the business deals, that is only those articles which are brought for resale for profit are known as goods.

  1. Revenue

Revenue is generally incomes from sales, receipt, interest, commission, brokerage, etc. It inflow of assets which results in an increment of owner's equity.

  1. Expenses

The word "expenses" is regarded to the amount that is incurred in the process of earning revenue. If the benefit of an expenditure is limited to one year, it is treated as an expense (also known as a revenue expenditure) such as payment of salaries and rent.

  1. Expenditure

Expenditure takes place when an assets service is required. The purchase of goods,cost of goods, an asset acquired during the year, etc. are some examples of expenditure.

  1. Purchases

Buying of the goods by the trader for selling them to the customers is known as purchases. Purchases can be either cash purchases or credit purchases. If the cash is paid immediately for the purchase, it is said cash purchases and if the payment is postponed, it is credit purchase.

  1. Sales

When the goods purchased are sold out, it is known as sales. Sales can be either cash sales or credit sales. If the sale is for immediate cash payment, it is cash sales and if the payment for sales is postponed, it is credit sales.

  1. Stock

If the commodities or goods purchases for selling are not sold out completely, it is kept with the trade until sold out, it is which is said stock. If there is stock at the end of the year, it is called closing stock.

  1. Drawing

It is the amount of money or the value of goods which proprietor takes for his domestic personnel use. It is usually subtracted from the capital.

  1. Losses

The loss really means something against which the firms receives no benefit. It represents money given up without any return.

  1. Account

It is the statement of various dealings which occurs between the customer and the firm . It can also be expressed as a clear concise record of the transaction relating to a person or a firm or a property or expenses or an income.

  1. Invoice

While making a sale, the seller makes or prepares a statement giving a particular such as a quantity price per unit, the total amount payable, any decisions made and shows the net amount payable by the buyer, such a statement is called invoice.

  1. Voucher

A voucher is a written document in support of the transaction which has taken place for the value stated in a voucher.

  1. Proprietor

The person who makes the investment and bears all the risks connected with the business is known as proprietor.

  1. Discount

When the customer are allowed any type of deduction in the pieces of goods by the businessman that is called a discount.

  1. Solvent

If assets are more than the realizable value of liabilities, then it is said to be solvent.

  1. Insolvent

If liabilities are more than the realizable values of assets, then it is said to be insolvent.



References:

Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu

Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu

Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan, Kathmandu

Jogindar Goet, Bhesh Raj Banjade, Rajesh Kumar Dutta. (2012). Principal of Accounting, Dreamland Publication, Kalamati, Kathmandu

Accounting Terminologies. 28 March 2014. 2 Oct 2016 <http://vidarbhastudents.com/note/accounting-terminology/>.

Accounting terminologies areas follow:

  1. Transaction
  2. Debtor
  3. Creditor
  4. Capital
  5. Liability
  6. Assets 
  7. Goods
  8. Revenue
  9. Expenses
  10. Expenditure
  11. Purchase
  12. Sales
  13. Stock
  14. Drawing
  15. Losses
  16. Account
  17. Invoice
  18. Voucher
  19. Proprietor
  20. Discount
  21. Solvent
  22. Insolvent

 

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