Accounting Cycle Video Lecture - Commerce

hello friends in our previous session we
have learned the classification and the
golden rules of accounts so today we are
going to learn the steps to be followed
to prepare final statements we are going
to just have an overview of it well we
all know my friend Peter this month met
his friend Alfred Alfred showed his
financial statements but Peter didn't
understand how this financial statement
has been prepared he was very curious to
know about the procedure of preparing it
and he got his questions to us but well
there is no quick answer for those
questions we need to follow some steps
in order to get to the final statements
we can broadly say there are three
stages the first one is collecting data
then recording and transferring them in
an organized format and different
accounting books and then comes a
finalizing stage so let us see what
these stages are to be followed in
detail which will help us as well as
Peter in preparing the final statements
so the first stage is collecting data
for any of the transaction that takes
place the first thing we need is a proof
or an objective evidence of the
transaction we must have a documentary
evidence or the source document for each
transaction for example if we have
purchased some goods we must have a bill
or a cash memo or any kind of supporting
voucher we must collect all these
evidence and keep them safely and
organized so here we end with our first
stage that is collecting data
then comes this again stage that is
recording and transferring so the first
step is from these source documents
collected we will record all the
transactions in a book called s journal
in a journal we narrate and record all
our daily transactions as and when they
take place as we know a transaction is
an exchange of two things we will record
two accounts that are equally affected
in this book it is always done date wise
in a chronological order however it is
difficult to locate transactions in a
journal if the company is relatively big
and has thousands of transactions in one
particular accounting period so these
companies prefer dividing their journal
into supplementary or subsidiary
journals like purchase book sales book
and cash book etc instead of one entire
journal book in these subsidy books the
transactions belonging to one particular
class are recorded separately in detail
so here we end with our first step of
recording and transferring so now we
will move on to our next step
that is transfer so from the journal all
the transactions are then posted into
different accounts and all these group
of accounts are collectively called as
ledger a ledger has multiple accounts
which contains all the information this
is a summarized book of all our
transactions
for any reference in detail we need to
go back to the journal and check it so
now we will move on to our next stage
but we must be cautious before moving on
to the final stage as it is the last and
final step so before that we will follow
a transitional step so that our further
statements give us a correct picture so
we will check our passbook and our bank
account which we may intend suppose bank
deduct some amount as Bank charges and
has not sent us any intimation as we are
not aware of the charges we have not
recorded it in our books so there would
be a mismatch in our book as well as
banks passbook similarly there can be
many situations where our book may not
match our tally with the passbook so to
avoid these type of errors and to
rectify it a statement is prepared which
is known as bank reconciliation
statement
the process of recording and
transferring ends here hope we have
understood all the processes so far
these first two stages are followed as
in when the transaction takes place but
we will move on to the last and final
stage only when we need to prepare the
final statements and since we need to
prepare it for Peter let's proceed to
the third stage that is the final stage
so in this stage we have to follow two
steps so the first step is very
important which will help us in
preparing our final accounts all the
closing balances of the ledger accounts
would be then posted to a statement
called as trial balance this trial
balance broadly gives us the summary of
all accounts it helps in checking
accuracy and the balances of all the
accounts can be found easily in this
statement so the next step is financial
statements it is a very important and
crucial step as it is a very important
step we will check our books that we
have maintained so far so as a prudent
businessman
we will scrutinize all our accounts and
have a look on our trial balance to
check if we might have missed any entry
or any transaction so we will go back to
all our accounts and check if there are
any errors and then rectified
immediately by passing reverse entries
to nullify or neutralize the wrong
entries and if certain things are missed
out they are noted as adjustments and
adjusted in the trial balance itself or
at the end in the financial statements
so after all the errors and
rectification and all the adjustments
now let us quickly move on to the last
and final step of preparing final
statements it consists of three parts or
three statements namely trading account
where purchases sales and all trading
related expenses are recorded so from
this trading account we get a gross
profit which is transferred to the
profit and loss account so the next
statement is profit and loss account
where expenses and incomes related to D
today administration selling and
distribution and Finance are recorded
this profit and loss statement gives us
the net profit for the entire accounting
period the last and most important of
all is the balance sheet where all
assets and liabilities are recorded the
asset side and liability side should
give us an equal and balancing figure we
call this as a back bone or x-ray of our
business it gives a complete picture of
the health of our business and is
responsible for million decisions to be
made the financial statements are used
by many users to arrive on the
conclusions about our business so with
this we complete our process of
preparing final statements the whole
process which we have followed that is
from the source documents to the balance
sheet is continued from start to end in
each accounting period and
we call it as the accounting cycle my
friend Peter has already made his notes
on this and the process seems to be
clearer now hope this was easy to
understand we will learn about all the
topics in detail in our subsequent
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you soon in our next session thank you
you