Accounting Cycle – Introduction
The Accounting Cycle is a series of steps which are repeated every reporting period. The process starts with making accounting entries for each transaction and goes through closing the books.
Accounting Cycle – Steps During the Accounting Period
These accounting cycle steps occur during the accounting period, as each transaction occurs:
Analyze the transaction – determine which accounts are affected, how (increase or decrease), and how much
Make Journal entries – record the transaction in the journal as both a debit and a credit
Post to ledger – transfer the journal entries to ledger accounts
- Identify the transaction through an original source document (such as an invoice, receipt , cancelled check, time card, deposit slip, purchase order) which provides:
- description (account or business purpose)
- name and address of other party (if practical)
- journals are kept in chronological order
- journals may include sales journal, purchases journal, cash receipts journal, cash payments journal, and the general journal
- ledger is kept by account
- ledger accounts may be T-account form or include balances
- (Learn more about the Chart of Accounts.)
Accounting Cycle: Steps at the end of the accounting period
These accounting cycle steps occur at the end of the accounting period:
- Trial Balance – this is a calculation to verify the sum of the debits equals the sum of the credits. If they don’t balance, you have to fix the unbalanced trial balance before you go on to the rest of the accounting cycle. (If they do balance you could still have a problem, but at least it balances!)
- Adjusting entries – prepare and post accrued and deferred items to journals and ledger T-accounts
- Adjusted trial balance – make sure the debits still equal the credits after making the period end adjustments
- Financial Statements – prepare income statement, balance sheet, statement of retained earnings, and statement of cash flows (this can occur at other points in time with appropriate adjustments)
- Closing entries – prepare and post closing entries to transfer the balances from temporary accounts (such as the revenue and expenses from the income statement to owner’s equity on the balance sheet).
- After-Closing trial balance – final trial balance after the closing entries to make sure debits still equal credits.