How does Accounting Cycle Create Linkage Between Previous And Current Year? [Notes with PDF]

In this article, we will learn in-depth about how the accounting cycle creates a linkage between previous and current years, and much more.

Linkage Between Previous And Current Year Accounting.

The continuous rotation of the accounting process is called the accounting cycle, and this rotation is rotated in a circle that’s why it is called the accounting cycle. Today we are going to learn how the accounting cycle creates a linkage between the previous and current year?

According to the going concern concept, every year the business organization maintains the accounts in accordance with certain procedures and rules. 

In other words, the concept is that business enterprise will continue indefinitely. If the business is not closed, the ownership of the company may change, but the existence of the company will remain in place indefinitely.  

In other words, the financial functions are divided into several stages or steps to determine the financial results of the financial year transactions of the organization and to express its financial status.

The first step in this process is to identify the financial transaction and record it in the Journal. Then, through the ledger and creation of a trial balance, financial statements are prepared and the results are released and assets, liabilities, and owners’ equity are determined.

Below is a discussion of how continuity between the past and the current accounting periods are maintained through the accounting cycle.  

The accounts of the previous year, which were recorded by the initials Journal, were opened and transferred to this year’s ledger accounts. The consolidated accounts of the current transactions were then transferred from the Journal to the Ledger and the closing transactions were calculated by adjusting the transactions with the previous year.  

As a result, the appropriate explanation and table show that the combination of the financial performance of the current year and the previous year creates a link between the accounts of both years.  

It also shows the link between the past and the current account, as the balance of the trial was prepared from the ledger. Trial balance is prepared to verify the mathematical accuracy of the Ledger balance, after that financial statements such as income statement and balance sheet or statement of financial position were prepared from the Trial Balance.  

The financial results of this year are calculated through the financial statements. To calculate these results, adjustments are made for the previous years, such as past outstanding rent, depreciation, and depreciation of assets from the previous year.  

On the other hand, the balance sheet includes assets and liabilities for the past and current years. For example, furniture purchased in the current year is shown in addition to furniture purchased in the last year.  

Thus, it can be stated that there are continuity and linkage between current and last year’s accounts by transferring the closing balance of last year’s accounts to current year’s accounts and by identifying, recording, classifying, summarizing, and compiling the current year’s financial statements.  

I hope you have understood how the accounting cycle creates a linkage between the previous and current year?

If there is any confusion don’t forget to comment or if you like it don’t forget to share it.    

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