A primary purpose of Accounting is to communicate the results of business transactions. The steps in the accounting cycle include analyzing, recording, posting, and preparing financial statements. There discussed as under:
The accounting cycle
- First, the Accountant analyzes business transactions to determine which should be recorded and at what amount. Typically Accountants only record transactions that can be measured and verified with some degree of precision.
- Second, transactions are then recorded chronologically in a journal. A journal may be either a book (in a manual Accounting system) or a file (in a computerized Accounting system).
- Third, recording all of the transactions affecting a particular financial statement element. A business maintains separate Accounts for each of its assets, liabilities, revenues, and expenses.
- Fourth, all transactions affecting an Account are posted (recorded) from the general journal or specialized journal to the Account.
- Fifth, the final step of the Accounting cycle is preparing the financial statements. Financial statements present a company’s financial position, results of operations, and flow of cash during a particular period of time. They can be prepared for any time interval, but they have always prepared annually. Investors, creditors, creditors, company managers, and others interested in the firm’s financial positions all rely heavily on financial statements.
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