In an accounting cycle, there are ten steps that should be conducted in order. In this accounting process, the bookkeeper will collect, record, and interpret financial information. The steps are as follows:
1. Analyze Transactions
In this step, every transaction will be looked at and analyzed to determine how it affects the financial position or the accounting equation. In this step, documents such as receipts, invoices, bank statements, etc., will be looked into, as they provide proof of each financial activity taking place.
2. Journalize Transactions
This is a method to track all the transactions by recording them in chronological order as they take place. Entries that are recorded are usually separated into credit and debit along with the date and a summary of the transaction.
3. Post Transactions
Posting transactions refers to the posting of entries from the journal to the general ledger accounts. General ledger accounts are accounts that have their own unique numbers and categories. When posting entries, the entries will be transferred to the account that is affected by the respective entry. For example, if the cash account in the journal is debited, the entry will be posted to the respective cash ledger account, which will be debited the same amount as recorded in the journal.
4. Prepare an Unadjusted Trial Balance
The unadjusted trial balance is the first trial balance that must be prepared. This balance is a listing of all the ledger accounts after all entries are posted. Usually, this listing is prepared at the end of a financial period. This step is important, as after all entries are shown, the bookkeeper will check and make sure that the total debit and credit balances are equal. Performing this step will ensure the record is accurate before moving on to the following steps.
5. Prepare Adjusting Entries
This step involves updating the ledger account to show an accurate position of balance. Some transactions may be made earlier in the accounting period and may have had a different impact when they happened compared to at the end of the accounting period, which will require an adjustment. For example, office furniture that is bought early in the accounting period may have been damaged and disposed of at the end of the accounting period, making the valuation of those assets on the account higher than it actually is.
6. Prepare the Adjusted Trial Balance
In this step, an adjusted trial balance will be produced that contains all of the account titles and balances of the general ledger after all the entries that require adjustment are adjusted and the accounts have been updated to reflect the financial situation of the business at the end of that accounting period.
7. Prepare Financial Statements
After completing the adjusted trial balance, different financial statements will be produced from it. In this step, an income statement should be prepared first. It shows a positive number if the company had a net profit and a negative number if the business had a net loss. After an income statement, a statement of retained earnings will be compiled. This shows the effect of loss or profit in this accounting period in relation to the retained earnings of the company. Then, a balance sheet will be prepared. A balance sheet shows the assets, liabilities, and stockholders' equity in the business. Finally, a cash flow statement will be produced, which shows the inflow and outflow of the cash of a business during the accounting period. These statements are considered the output of the accounting cycle.
8. Prepare Closing Entries
Closing entries are entries that close temporary accounts by transferring data from the temporary accounts to the permanent accounts or balance sheet. This step takes place after all the financial statements are prepared and note the beginning of another accounting period.
9. Post Closing Trial Balance
In this step, a final trial balance will be prepared in order to ensure that debits and credits are equal. This is a step to ensure the transfer and closing of temporary accounts is performed well and all of the data needed are recorded.
10. Recording Reversing Entries
This is an optional step in the accounting cycle. At the start of another accounting cycle, a reversing entry is made to take into account some adjusting entries before recording transactions in the next accounting period. This can ensure that no entry is double-counted.
To unlock this lesson you must be a Study.com Member.
Create your account
FAQs
There are ten steps in an accounting cycle, which include analyzing transactions, journalizing transactions, post transactions, preparing an unadjusted trial balance, preparing adjusting entries, preparing the adjusted trial balance, preparing financial statements, preparing closing entries, posting a closing trial ...
What the accounting cycle includes and what is the purpose of each step? ›
The eight steps of the accounting cycle are as follows: identifying transactions, recording transactions in a journal, posting, the unadjusted trial balance, the worksheet, adjusting journal entries, financial statements, and closing the books.
How do you teach accounting cycle? ›
Divide the class into nine groups and assign one of the steps of the cycle to each group:
- Collection and analysis.
- Journalizing the transactions.
- Post to general ledger.
- Unadjusted trial balance.
- Adjustments.
- Adjusted trial balance.
- Financial statements.
- Close accounts.
Defining the accounting cycle with steps: (1) Financial transactions, (2) Journal entries, (3) Posting to the Ledger, (4) Trial Balance Period, and (5) Reporting Period with Financial Reporting and Auditing.
What is the most important part of the accounting cycle? ›
A cash flow statement, while not mandatory, helps project and track your business's cash flow. These financial statements are the most significant outcome of the accounting cycle and are crucial for anybody interested in comparing your business's performance with others.
What are the most important steps in the accounting cycle? ›
These 8 steps are:
- Identify transactions. ...
- Record transactions in a journal. ...
- Post transactions to general ledger. ...
- Determine unadjusted trial balance. ...
- Analyze a worksheet. ...
- Adjust journal entries. ...
- Generate financial statements. ...
- Close the books.
What Is the Accounting Cycle? The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements and the closing of the books.
What is the accounting cycle simplified? ›
The accounting cycle is the holistic process of recording and processing all financial transactions of a company, from when the transaction occurs, to its representation on the financial statements, to closing the accounts.
What are the basic lessons of accounting? ›
Some of the basic accounting terms that you will learn include revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows.
What is the primary goal of the accounting cycle? ›
The main purpose of the accounting cycle is to keep track of all financial activities that occur during a specific accounting period, be it monthly, quarterly or annually. In short, the accounting cycle verifies that every dollar going into or out of the various general-ledger accounts is reported.
An example of the accounting cycle is a business owner collecting their financial information, journalizing it, posting it to the ledger by account, performing an unadjusted trial balance, making adjustments, performing an adjusted trial balance, preparing financial statements, closing accounts, and finally preparing a ...
What are the golden rules of accounting? ›
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
What is full cycle accounting? ›
Full cycle accounting refers to the complete set of activities undertaken by an accountant to record all business transactions during an accounting period and includes everything from the initial recording of a business transaction (the start of the cycle) to the preparation of the financial statements (the end of the ...
What are the 10 steps of the accounting cycle explain? ›
The ten steps are analyzing transactions, journalizing transactions, post transactions, preparing an unadjusted trial balance, preparing adjusting entries, preparing the adjusted trial balance, preparing financial statements, preparing closing entries, posting a closing trial balance, and recording reversing entries.
What are the 4 steps in the accounting cycle? ›
The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance.
What are the 4 phases of accounting and explain each? ›
Basic Phases of Accounting There are four basic phases of accounting: recording, classifying, summarising and interpreting financial. data. Communication may not be formally considered one of the accounting phases, but it is a crucial step as well.
What is the 4 step accounting cycle? ›
The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance.
What are the 11 steps in the accounting cycle? ›
The Accounting Cycle
- Identify transactions.
- Record transactions.
- Post journal entries to ledger accounts.
- Prepare unadjusted trial balance.
- Prepare adjusting entries.
- Prepare an adjusted trial balance.
- Prepare financial statements.
- Prepare closing entries.
- Step 1: Analyze Transactions. ...
- Step 2: Journalize. ...
- Step 3: Post. ...
- Step 4: Prepare Worksheet. ...
- Step 5: Prepare Financial Statements. ...
- Step 6: Journalize Adjusting and closing entries. ...
- Step 7: Post Adjusting and Closing Entries. ...
- Step 8: Prepare Post-Closing Trial Balance.
