Concept Of Accounting Process Or Accounting Cycle And Its Steps

What Is Accounting Process ?

Accounting consists of a number of sequential steps of activities. Those include identifying, recording, classifying, summarizing and communicating financial transactions. The sequence of the steps to be followed in accounting activities is known as accounting process. The accounting process takes the form of a cycle. The sequential steps of accounting activities are taken in cyclical order. The cyclical order starts from the beginning of the transaction till financial results are derived by preparing final accounts at the end of the accounting year. This cycle follows the same order every year.

The accounting process or cycle has the following five steps.

1. Identifying the financial transaction

A business may perform several transactions. Of which, only financial transactions are recorded in accounts. In the first step of the accounting process, therefore, financial transactions are identified. Financial transactions are those which are expressed in monetary terms.

2. Recording Of Financial Transactions

In the second step of accounting process, all financial transactions performed by the business are systematically recorded in the journal, and subsidiary books.

3. Classifying Financial Transactions

In the third step of accounting process, financial transactions are classified mainly into the transaction related with persons that include enterprises, persons, assets and income-expenses. Then, they are recorded in their respective ledger accounts, such as debtors' and creditors' accounts, land and building accounts, commission received accounts, and rent account.

4. Summarizing Financial Transactions

All financial transactions are summarized in this step of accounting process. They are summarized by preparing a trial balance. Preparation of trial balance helps to prepare final accounts which disclose the profit and loss and financial position.

5. Communicating The Results Of Business

In the last step of accounting process, the results of business operations such as profit or loss and the company's financial position are communicated to the users. Those users include owners, creditors and managers who need financial information for decision making purposes.