Accounting Cycle

There are five main parts of accounting cycle

  • General Journal.
  • Ledger.
  • Trial balance.
  • Income statement.
  • Balance sheet.

Journal is the book maintained by the company to record daily transactions. Format of journal is very simple and easy to understand. Date, details, ledger folio, debit and credit come under the format of journal. Ledgers are the accounts for individual heads. We can find the debit credit of individual heads by the use of ledgers. Accounts come under the head of details should be that against which account is debited or credited. Trial balance is simply the combination of results obtained by the ledgers. Both sides of trial balance should be equal. All the expenses and assets will be at debit side and all the incomes and liabilities will at credit side.

Income statement which is also known as profit and loss account is the statement which is drawn to view the profit of the company. There are two main things in income statement. First is gross profit and other is net profit. Gross profit is obtained by deducting purchases and direct expenses from sales. Net profit is obtained by deducting indirect expenses and adding incomes in gross profit. Balance sheet is also known as statement of financial position. It is the balance assets and liabilities. Current assets and non current assets come under the head of assets. Capital, current liabilities and non current liabilities come under the head of liabilities.

Journal entries are posted in general journal. These entries are transferred to ledgers where debit and credit balances of individual accounts are determined. These debit and credit balances are then transferred to trial balance. Both sides of trial balance must be equal. Then income statement is made by taking expenses and income from trial balance. And profit is calculated. Then balance sheet is made by taking assets and liabilities from the trial balance. Both sides of balance sheet must also be equal.

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