The accounting cycle is the process by which businesses track and record their financial transactions and produce financial statements that provide information about the financial performance and position of the company. There are several key terms that are used in the accounting cycle, including: Click this hire reliable accounting firms in UAE.
Financial transactions are any events that result in a change in the financial position of a business. Examples include the sale of goods or services, the purchase of inventory or equipment, and the receipt or payment of cash.
A journal is a book that is used to record financial transactions in chronological order as they occur. There are several types of journals, including the general journal, which is used to record transactions that do not fit into specific categories, and special journals, which are used to record transactions of a specific type (e.g., sales journal, purchases journal).
A ledger is a book that is used to record financial transactions by account. Each account in the ledger has its own page, and transactions are recorded on that page in chronological order. The ledger includes both balance sheet accounts (assets, liabilities, equity) and income statement accounts (revenues, expenses).
A trial balance is a report that lists all of the accounts in the ledger and their balances and is used to check for errors in the recording of financial transactions. The trial balance is prepared after the ledger has been completed and should show that the debits equal the credits.
Adjusting entries are journal entries that are made at the end of an accounting period to update the balances of certain accounts. Adjusting entries are necessary because some financial transactions may not have been recorded in the journal or ledger in the period in which they occurred.
Financial statements are reports that provide information about the financial performance and position of a business. The three main financial statements are the balance sheet, which shows the company’s financial position at a specific point in time; the income statement, which shows the company’s financial performance over a specific period of time; and the statement of cash flows, which shows the company’s cash inflows and outflows over a specific period of time.
By understanding these key terms, you will have a better understanding of the accounting cycle and how it is used to track and record financial transactions and produce financial statements that provide valuable information about the financial performance and position of a business.