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    Accounting Cycle

    Uploaded by

    Arshad Chaudhary
    The accounting cycle has 5 main steps: 1. Collect source documents for transactions. 2. Record transactions in books of prime/original entry like sales journals. 3. Post transactions from journals to ledger accounts using double-entry system. 4. Prepare a trial balance to check for errors before financial statements. 5. Create financial statements like income statement and balance sheet.

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    Accounting Cycle

    Uploaded by

    Arshad Chaudhary
    56 views10 pages
    The accounting cycle has 5 main steps: 1. Collect source documents for transactions. 2. Record transactions in books of prime/original entry like sales journals. 3. Post transactions from journals to ledger accounts using double-entry system. 4. Prepare a trial balance to check for errors before financial statements. 5. Create financial statements like income statement and balance sheet.

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    The accounting cycle has 5 main steps: 1. Collect source documents for transactions. 2. Record transactions in books of prime/original entry like sales journals. 3. Post transactions from journals to ledger accounts using double-entry system. 4. Prepare a trial balance to check for errors before financial statements. 5. Create financial statements like income statement and balance sheet.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    56 views10 pages

    Accounting Cycle

    Uploaded by

    Arshad Chaudhary
    The accounting cycle has 5 main steps: 1. Collect source documents for transactions. 2. Record transactions in books of prime/original entry like sales journals. 3. Post transactions from journals to ledger accounts using double-entry system. 4. Prepare a trial balance to check for errors before financial statements. 5. Create financial statements like income statement and balance sheet.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    ACCOUNTING CYCLE

    STEP 1
    Collection of source
    documents

    STEP 2
    Books
    of Prime/Original Entry

    STEP 3
    Ledger
    ( double entry accounts )

    STEP 4

    Trial Balance

    STEP 5
    Financial statements
    Documents
    • Accountants are not involved in day to day
    activities of business such as purchases, sales ,
    receipts & Payments etc.

    • But it is their Job to record & Process all


    transactions.

    • How do Accountants Get information to be


    recorded ?

    • Through Documents / Hardcopy of all transactions

    • Accountants keep a copy of all document as a


    evidence [to satisfy audit team , analysts and other
    external stakeholders]
    Documents
    1. Invoice(Bill): A document issued by Seller to customer at the time of trade ,
    showing details i.e. quantity and price of goods being traded.

    Sales invoice: Copy retained by Seller

    Purchase invoice: Copy received by customer

    2. Credit note / debit note: Documents used at the time of returns

    Credit note is issued by seller whereas debit note is issued by customer.

    if customer has right to return , then immediately after returning the goods
    he / she would record transaction in books ( as it is confirmed that goods
    have been returned) and issue relevant document i.e. debit note. A copy of
    debit note would be sent to seller.

    Whereas in some cases, customer don't have right to return the goods , but
    he can request seller to accept those returns. In this case customer cannot
    record the transaction until seller accepts them. In such situation document
    i.e. credit note is issued by seller if he accepts the goods and a copy of
    that is sent to customer.
    Documents
    3. Cheque counterfoil: small portion in cheque book
    retained as an evidence of cheques issued.

    4. Receipt: acknowledgement of cash received.

    5. Voucher: Evidence of Cash payments

    6. Statement of account: A statement issued by


    seller showing all transaction over a certain period
    e.g. bank statement , credit card statement.
    Books of Prime / Original Entry
    Books in which all transactions are initially recorded

    1. Sales Journal / day book :

    to record Credit Sales only

    2. Purchases journal / day book:

    to record Credit purchases only

    3. Sales return Journal / day book :

    to record Credit Sales return only

    4. Purchases return journal / day book:

    to record Credit purchases return only


    Books of Prime / Original Entry
    5. Cash book :

    to record all transactions relating to Cash , Bank


    and Cash discounts only

    6. General Journal:

    to record all remaining transactions


    Ledger
    A book used to keep double entry accounts (T accounts )

    1. Sales Ledger : contains Credit customers Accounts only

    2. Purchases Ledger : contains credit suppliers accounts only

    3. Cash Book : containsCash Account & Bank Account

    4. General Ledger: All Remaining accounts


    Trial Balance
    A list of balances extracted from Ledger

    To check arithmetical accuracy of Books before


    preparation of financial statements.

    If totals in both columns are equal to each other, it


    means most probably no errors.

    If totals in both columns aren't equal to each other , it


    means some errors have taken place.

    In case of computerised accounting , trial balance


    always balance
    Types of Discounts Related to cash
    Trade related Movements

    Trade discount Cash discount

    Reduction in List price / Tag price/ Amount waived off by payee at the
    Retail price at the time of trade time of reciept

    due to due to prompt payment


    1. bulk buying Discount allowed: amount waived off
    2. to attract new customers by us if receivables pay us promptly
    3. to retain existing customer Discount received: amount waived
    4. to dispose off obsolete items off by other if we pay them promptly
    Not recorded in books of double entry properly recorded in accounting
    system books

    as per historical cost concept, all Discount allowed is included in


    trade related activities are recorded expenses and discount received is
    at Net invoice value i.e. list price - added into Gross profit as other
    trade discount income.

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