Thursday, 10 May 2012

Accounting Cycle

Hello,

Accounting is a tricky business. It is important to know from where its implication basically starts taking place. If the origin point is missed then the same could lead to a lot of complications later on. Now this accounting process follows a certain pattern which forms a cycle pattern and we call the same accounting cycle.

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Now what cycle does it exactly follow is important to know. Does it have any over lapping issues or can we skip certain steps of cycles is also a thing to know and understand. Now the simplest of accounting cycle looks something like this.

The point of origin of any accounting cycle is usually a monetary transaction or transfer or exchange. Whenever money changes hand or an exchange of any kind takes place that can have impact on business. Such exchange or transfer is a transaction and one such transaction is the point of origin of accounting. The other thing about this transaction is we can have many such transactions, so it is not possible to do accounting of every transaction every second. On the other hand we can not memorise each and every transaction as well. So what we do is keep it with us in a chit or note before it is entered in a voucher and then officially accounted for it. Though with the Rise of the Machine :-), record keeping procedure has become easier.

Next thing in the cycle is journal entry. Journal entry is very important pillar of accounting. And with the advent of ERP systems they have become even more important before. We'll see and talk about the rules of journal entries later on but one wrong entry could lead to faulty financial statements.

Now, when I was in school they said all the next phases of accounting cycles are more important and harder to master or even understand. So one can understand how hard it is to prepare them.But with ERP systems such tough tasks have become easier then before. The very next phase of accounting is Posting of Journal entries in its respective ledgers. Earlier it used to be very tedious and boring work that used to take up a lot of time. But now it has become simpler. The software it self posts entry in the ledgers based on the journal entries. That means if your  journal entry is wrong the system will put wrong entry in its ledger and after that consequences are just as heartbreaking as any failed love story in the world.

The next phase is called preparing Trial Balance. What is a trial balance? It is live in relationship of accounting. It checks the compatibility of accounting. If they are compatible with each other then we can go on marrying it. Trial balance is a statement that shows the closing balances of ledgers in an organised statement manner and points out if there is any difference. Such Trial balance must tally. If it doesn't then we have to find any mistake and rectify the same.

Now the next phases will be in continued manner....

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