The accounting cycle is a process of identifying, analyzing, and recording the accounting transactions of a company. It has 7 to 8 steps in process that begins when a transaction occurs and ends with its inclusion in the financial statements. The following is a depiction of the steps in the accounting cycle. Let us discuss them in brief:

1. Financial transactions occur, such as selling inventory, buying raw
   materials, or making lease payments, for example.

2. Those transactions are noted in the appropriate financial journal, depending
on what the money was spent on or originated from. Debits are used to
indicate money spent and credits are used for money that is received.

3. The transactions are then posted to the account in the general ledger, which
is the list of all the business’ financial accounts that it impacts, such as rent
or wages or marketing

4. At the end of the accounting period, you run a trial balance to see if all the
numbers balance.

5. The next step is trying to find the cause of the imbalance and correcting it.

6. At the end of the accounting period, adjustment entries must be posted to
accounts for accruals and deferrals.

7. Once the accounts are balance, financial statements are prepared.

8. At the end of the period, the books are closed out and new revenue and
expense accounts created with zero balances. These are used for the next
accounting period.

 A trial balance can trace the mathematical inaccuracy of the general ledger. However, there are a number of errors that cannot be detected by the Trial balance: Let us discuss those errors in brief:

Error of complete omission: The transaction was not entered into the system.

Error of original entry: The double-entry transaction includes the wrong amounts on both sides.

Error of reversal: When a double-entry transaction was entered with the correct amounts, but the account to be debited is credited and the account to be credited is debited

Error of Principle: The entered transaction violates the fundamental principles of accounting. For example, the amount entered was correct and the appropriate side was chosen, but the type of an account was wrong (e.g., expense account instead of liability account).

Error of Commission: The transaction amount is correct, but the account debited or credited is wrong. It is similar to the principle error described above, but commission error is usually a result of oversight, while principle error is a
consequence of a lack of knowledge of accounting principles.

Ledger: Accounts are prepared on the basis of entries made in the journal. The book that contains the accounts is called a ‘ledger’. A ledger is also called secondary book, as the entries in the ledger are made subsequent to the journal. 

 Journal: Transactions are first entered in this book to show which account should be debited, and which should be credited. Journal is also called primary book, as it is a book of first entry. Transactions are recorded in it in chronological order.

 Ans : As per the accounting equation, the broad categories of the account are:

Assets: Includes all the resources which the firm has.

Liabilities: Amounts that the firm owes to outsiders

Capital: Amounts that the firm owes to the owners and proprietor who have
invested in the firm.

Expenses: Amounts that have been spent, or even lost, in carrying on operations.

Incomes: Amounts earned by the firm.

Accounts may be classified in another manner:

Personal Account : Personal accounts relate to personal, debtors, or creditors.
Example ABC & Co., Ram Account, etc.

Real Account : Accounts which relate to assets of the firm. For example,
Machinery, Furniture, Cash, Plant, Land etc.

Nominal Account : Accounts, which related to expenses, losses, gains, revenue etc. like wages, salary, interest, commission etc. The net result of all the nominal accounts is reflected as profit or loss which is transferred to
the capital account. Nominal accounts are, therefore, temporary.

On the basis of the above, three classifications of accounts, three basic rules about
recording transactions are:

1. Personal account
   Debit the receiver and credit the giver

2. Real Account
Debit what comes in and credit what goes out

3. Nominal Account
Debit all expenses/losses and credit all income/gains

 Every company has various business units that help it function and grow. Of all these departments, it is probably finance that exists even before a company has started working. It is the finance people who decide if a venture is viable and how it can earn revenue to sustain itself. For such an important department, it is essential to have excellent management. Finance is a necessary and critical part of any organization. It is difficult for profit-making or other organizations to sustain themselves for long without proper finances. Apart from this reason, the efficient management of these financial resources is essential to be sustainable and viable in the long run. Financial Management helps organizations to do so. This term refers to the effective and efficient planning, organizing, directing, and controlling the financial activities and processes of an organization. This includes fund procurement, allocation of financial resources,

utilization of funds, etc., apart from various other functions.

The past two decades have been witnessing radical changes in the financial system
world over. The significant changes which have been taking place over the years are:

a) Low interest rate regime
b) Exchange control and convertibility
c) Development of capital markets
d) Less intermediation
e) Introduction of hybrid financial instruments
f) Increase in risk exposure
g) Volatility in commodity prices
h) Substantial lowering of custom duty (Removal of trade barriers.

These changes coupled with changing customer needs, technology driven innovations and regulatory changes are imposing substantial changes in the financial systems world over.

The impacts of these changes are as follows:

1) Increased competitions have resulted in the rationalization of pricing and costs. Companies having high cost structure are being forced to rationalize operations.

2) National financial system is now more closely integrated with international financial system.

 Financial management is the process of managing the funds both for individuals and organizations to ensure proper utilization of funds. The principles of financial management work as a guideline for managing financial activities. If you follow the core principles then you will never become financially loser. To get the most benefit from a financial action, the person needs to be careful enough to handle the risk and return trade balance. The broad principles of corporate finance are: 

1) Investment Decision 

2) Financing Decision 

3) Dividend Decision 

4) Liquidity Decision 

1. Investment Decision 

The firm has scarce resources that must be allocated among competing uses. On the one hand the funds may be used to create additional capacity which in turn generates additional revenue and profits and on the other hand some investments results in lower costs. In financial management the returns, from a proposed investment are compared to a minimum acceptable hurdle rate in order to accept or reject a project. The hurdle rate is the minimum rate of return below which no investment proposal would be accepted. In financial management we measure (estimate) the return on a proposed investment and compare it to minimum acceptable hurdle rate in order to decide whether or not the project is acceptable. The hurdle rate is a function of riskiness of the project, riskier the project higher the hurdle rate. There is a broad argument that the correct hurdle rate is the opportunity cost of capital. The opportunity cost of capital is the rate of return that an investor could earn by investing in financial assets of equivalent risk. 

2. Financing Decision

Another important area where financial management plays an important role is in deciding when, where, from and how to acquire funds to meet the firm’s investment needs. These aspects of financial management have acquired greater importance in recent times due to the multiple avenues from which funds can be raised. Some of the widely used instruments for raising finds are ADRs, GDRs, ECBs Equity Bonds and Debentures etc. The core issue in financing decision is to maintain the optimum capital structure of the firm that is in other words, to have a right mix of debt and equity in the firm’s capital structure. In case of pure equity firm (Zero debt firms) the shareholders returns should be equal to the firm’s returns. The use of debt affects the risk and return of shareholders. In case, cost of debt is used the firm’s rate of return the shareholder’s return is going to increase and vice versa. The change in shareholders return caused by change in profit due to use of debt is called the financial deaverage. 

3. Dividend Decision

Dividend decisions is the third major financial decision. The share price of a firm is a function of the cash flows associated with the share. The share price at a given point of time is the present value of future cash flows associated with the holding of share. These cash flows are dividends. The finance manager has to decide what proportion of profits has to be distributed to the shareholders. The proportion of profits distributed as dividends is called the dividend pay out ratio and the retained proportion of profits is known as retention ratio. The dividend policy must be designed in a way, that it maximises the market value of the firm’s share. The retention ratio depends upon a host of factors the main factor being the existence of investment opportunities. The investors would be indifferent to dividends if the firm is able to earn a rate or return which is higher than the cost of the capital. Dividends are generally paid in cash, but a firm may also issue bonus shares. Bonus share are shares issued to the existing shareholders without any charge. As far as dividend decisions are concerned the finance manager has to decide on the question of dividend stability, bonus shares, retention ratio and cash dividend. 

4. Liquidity Decision 

A firm must be able to fulfill its financial commitments at all points of time. In order to ensure that the firm should maintain sufficient amount of liquid assets. Liquidity decisions are concerned with satisfying both long and short-term financial commitments. The finance manager should try to synchronise the cash inflows with cash outflows. An investment in current assets affects the firm’s profitability and liquidity. A conflict exists between profitability and liquidity while managing current assets. In case, the firm has insufficient current assets it may default on its financial obligations. On the other hand excess funds result in foregoing of alternative investment opportunities.