What is accounting cycle? How the accounting transactions pass through various books of accounts before?

Question

What is accounting cycle ? How the accounting transactions pass through various books of accounts before they get reflected in the final accounts ?

Answer 1

It probably starts with you placing an order for some goods. When the goods arrive, you need to pass a journal entry in the purchases journal to record the purchase of merchandise inventory. This will find its way subsequently into the general ledger (GL). In the course of business, you'd need to make payments to other vendors and employees. These entries will be in the cash book and subsequently into the GL. When you make a sale, you need to pass journal entries too. These will be in the sales journal which will again find their way into the GL. When your customers pay you, these are again cash book entries, again ending up in the GL. From the GL you extract your trial balance, then pass adjusting journal entries, then you'll have your adjusted TB from which you can prepare your income statement and balance sheet. This is as brief as I can make it.

Answer 2

Accounting cycle is the whole accounting process of recording, classifying, analyzing, presenting and interpreting data.

Recording is called journalizing, because in this phase you make an entry to a journal, on a per transaction basis.

Classifying is called posting, because in this phase you post to the ledger, per account, all the transactions you have recorded in your journal.

And then you extract the balances of your ledger accounts and come up with a trial balance. You are now in the analyzing phase. You make necessary adjustments to your trial balance.

From the adjusted trial balance you can now present the datas in an income statement and a balance sheet.

In the interpretation phase, you make use of ratios like current ratio, debt to equity ratio, etc. to determine the liquidity, solvency, profitability, etc. of the company. This is to help decision makers.

That's it.