The Accounting cycle

What is the Accounting Cycle?

The accounting cycle is often described as a process that includes the following steps: identifying, collecting and analyzing documents and transactions, recording the transactions in journals, posting the journalized amounts to accounts in the general and subsidiary ledgers, preparing an un-adjusted trial balance, determining and recording adjusted entries, preparing an adjusted trial balance, preparing the financial statements, recording and posting closing entries, preparing a post-closing trial balance, and perhaps recording reversing entries. The chart below shows a simplified version of what the account cycle looks like.

Transactions

Financial transactions start the process. Transactions can include the sale or return of a product, the purchase of supplies for business activities, or any other financial activity that involves the exchange of the company’s assets, the establishment or payoff of a debt, or the deposit from or payout of money to the company’s owners.

Journal entries

The transaction is listed in the appropriate journal, maintaining the journal’s chronological order of transactions. The journal is also known as the “book of original entry” and is the first place a transaction is listed.

Posting
The transactions are posted to the account that it impacts. These accounts are part of the General Ledger, where you can find a summary of all the business’s accounts.


Trial balance
At the end of the accounting period (which may be a month, quarter, or year depending on a business’s practices), you calculate a trial balance.


Adjusting journal entries
You post any corrections needed to the affected accounts once your trial balance shows the accounts will be balanced once the adjustments needed are made to the accounts. You don’t need to make adjusting entries until the trial balance process is completed and all needed corrections and adjustments have been identified.


Financial statements
You prepare the balance sheet and income statement using the corrected account balances.


Closing the books
You close the books for the revenue and expense accounts and begin the entire cycle again with zero balances in those accounts.

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