The Accounting Cycle

Accounting cycle

Contents

Key to resources

Introduction

Summary

This learning guide is based on the following resource:
Textbook
Duncan A (2006) Introductory Accounting, National Core Accounting Publications, Bondi

Key to resources

Resource / Textbook
1 / Chapter 4 Recording transactions, section 4.1 and 4.2
2 / Chapter 4, section 4.3 and 4.4

Introduction

The accounting cycle is the procedural flow of transactions through the accounting (bookkeeping) system from source documents to the preparation of the financial reports of the business.

Two of these procedural steps are the:

1entry (recording) of information from source documents into journals

2posting (entry) of information from journals into the ledger.

/ Now go to Resource 1

Journals and ledgers and their place in theaccounting (bookkeeping) cycle

A journal is a book of first entry. The information provided by the source documents enters the accounting system by way of recording in a journal.

At this stage, all of our initial recording of transactions will be by way of general journal entries. At a later stage, the use of transaction-specific journals for classes of transactions will be dealt with, such ascash receipts and cash payments journals.

The ledgeris a book of second entry. In the ledger, an accountis maintained for each class ofactivity of the business,with like transactions posted to that account (in the same way as the statement of your bank account or your creditcard account shows only yourtransactions.)

This posting to the ledger is the classifying process in the accounting cycle.

An important feature of both the journal and the ledger account is the folio or page number. In both records, the folio column is used to cross-reference the other record. The folio or page or account number to which the transaction is posted will be entered into the journal folio column. Similarly, the folio or page number of the journal from which the transaction is being entered will be entered in the ledger account folio column. This cross-referencing must be done at the time of posting so that items not posted can be readily identified.

/ Now go to Resource 2

Summary

In this learning guide you looked at the accounting cycle which is the procedural flow of transactions through the accounting system. We also mentioned here that the journal is the book of first entry while the ledger is the book of second entry in the accounting system. Posting to the ledger is the classifying process in the accounting cycle.

Accounting cycle1