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Accounting Cycle - Definition, Example, 9 Steps of Accounting Cycle - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of WallStreetmojo. Watch the video
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till the end also if you are new to this
channel then you can subscribe us by
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clicking the bell icon. Friends today a
a different topic that we are going to
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pick up that is the accounting cycle
accounting cycle I mean that
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flows in an around in around
every company now what exactly is the
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accounting cycle that's what we need to
understand see accounting cycle is like
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a traditional concept but if you
understand the accounting cycle
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completely you'll be able to make some
prudent decisions as you can see in the
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picture you know all the things which
are surrounded by the business things
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you know but what exactly is the
accounting cycle okay no issues we need
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to understand that the accounting cycle
is basically a combination of collecting
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the data it is the combination of
collecting the data and for basically
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creating post-closing trial balance so
that's why you collect data and
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accounting cycle starts with like you
know a transaction and it ends with
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the books of accounts which the books of
accounts gets closed right so there are
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9 steps of accounting standards we'll
be discussing each one of them a step by
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step process now this is the diagram for
the accounting cycle which the step by
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step process you'll first
collect the data then you will do a
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journal entries you'll be writing
journal entries from those journal
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entries the ledger accounts will be
prepared and once you have all the
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ledgers you'll pick up the
ledger and its balance and form an
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the unadjusted trial balance you'll do some
adjusting entries to evaluate trial
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balance if there are any problems there
then you'll prepare an adjusted trial
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balance from that trial balance you will
be posting the every single line item to
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various parts like the profit and loss
account to the balance sheet trading
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accounts
and once you're prepared like with the
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financial statements that is a CFS that
it includes the cash flow statements,
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balance sheets, P&L, notes, once you
prepared that you'll be closing your
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books of accounts and then you will be
preparing a post-closing trial balance
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so let's understand this every single
part of this step in a much detail form.
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the first is the collection of data and
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analysis of transaction right so at this
juncture you know the accounting cycle
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begins it's it has just started and in
the first step of the accounting cycle
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the accountants of the company they
basically, collect the data and
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analyze the transaction now for
smooth-running business you can say that
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there would be many transactions so the
accountant needs to look at each
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transactions and find out why they have
actually occurred and put it under the
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right accounts and basically analyze the
same so the step is the most critical of
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all because this is like you know a
kick start process for accounting the
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next step is the
journalizing or you can say journal
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entry basically journalizing after
collecting and analyzing the transaction
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it's time to record the entries into the
first books of accounts so in this type
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of accounting cycle each transaction ok
it is compared to the general you can
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say journal entries and and under each
entry and narration is written to
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mention the reason behind debiting or
crediting the item now recording the
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entries in the journal is important
since there is an error that is at this
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stage of recording and it will be it
will linger on the next books of
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accounts as well so needs to be taken
care of
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the third portion in this is the
recording of the journal entries into
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the ledger accounts right so in this
portion accounting is basically a series
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of steps that are taken one when one one
by one so after journalizing all the
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transaction
it's time for the accountant to record
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the entries into the secondary books of
accounts so that means if there there
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are cash and capital if there are
basically cash and capital will be like
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two tables in the general ledger and the
balance of the respective accounts will
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be transferred
so the general ledger basically they
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allow the accountants to get a closing
balance for preparing the trial
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balance and in the next step of the
accounting cycle of the accounting
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cycle it's creating the unadjusted trial
balance right now as you know that you
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know the trial balance is the source of
all differential statement and that's
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why special attention should be given to
the trial balance now from the closing
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balance of the general ledger account
and an adjusted trial balance is
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prepared
now in this trial balance the debit
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the balance will be recorded on the debit
side and then credit balance
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will be recorded in the credit side so
then the debit side is totaled and the
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credit side is basically totaled and then
the accountants will see whether both of
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the side has a similar balance or not
which is called as tallying the balance
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sheet right the 5 step in our
accounting process is performing
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adjusting entries now at this juncture
the unadjusted trial balance is already
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prepared so in this step of accounting
cycle the adjusting entries are been
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recorded so the adjusting entries are
typically related to you know any
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accrual adjustments or periodical
depreciation adjustments or amortization
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adjustments and so on and so forth so
without performing this adjustment
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entries just a trial balance will be
the prepared the 6 step is creating the
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adjusted the six step is basically
creating the adjusted trial balance
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right so after passing the adjusting
entries it's time to
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create
the fresh trial balance and the trial
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balance is called the adjusted trial
balance since it is prepared after the
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adjustments that has been done entries
after the after the adjustment entries
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have been has been passed as it isn't so
the trial balance can be used to prepare
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the most important for the financial
the statement now the 7-step is basically
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creating the financial statement from
the trial balance so this step of
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accounting cycle is the most critical
part of the accounting cycle see as an
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investor you must know how all the
financial statements are coming from so
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from the adjusted trial balance all the
financial statement are born so there
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are four most important financial
statements that are prepared using the
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adjusted trial balance the first
financial statement that every investor
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should look into the income statement so
in the income statement the first item
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are sales, cost of sales, and other
operating expenses that are deducted from
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the sales the next is the balance sheet
and that includes all the data on the
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list of the balance sheet like the
balance sheet we record the assets and
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the liabilities then you have the
shareholders equity this is the next
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financial item that would be prepared
here along with the share capital that
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retained earnings would be taken to
account. retained earnings are like the
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person is the profit that has been
reinvested in the company then you have
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the cash flow statement that is a CFS
finally they CFS would be prepared in
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cash flow you know accountant needs to
find the cash flow from the kind of
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various activities like operating,
financial, investment and can be prepared
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with two things like you know two ways
indirect and direct method then each
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step is basically closing the books now
now it's time to close the books the
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step is the last step I mean that this
is the third last step in the accounting
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cycle closing the books basically means
that all the financial statement are
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prepared and are recorded after closing
the books a new accounting period would
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start and would need to start repeating
the above steps of the accounting cycle
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once again the step 9 that will go is
finally creating the post-closing
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trial balance so the post-closing trial
balance is you know to ensure that the
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accounting transactions are properly recorded and analyzed and summarized so post trial
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balance is prepared and here all the
accounts are taken into account and then
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the closing balance are recorded as for the respective
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positions so then the credit side of the
and the debit side are being matched to
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see whether everything is right or not
so conclusion out of all the steps if an
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an investor can understand the nine steps
of the accounting cycle, it would
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be clear that how he or she should
approach the company and progress or
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decline so the knowledge of the
accounting side in cycle will help you
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to decide whether he or she should
invest in the company or not and at
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the same time he will get a concrete
idea about the financial accounting of
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the company so that's it for this
particular topic if you have learned and
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enjoyed watching this video please like
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