The accounting cycle

Journalize Transactions (Step 1)

Purpose: To record all business transactions in chronological order. Review source documents, Determine which accounts increase or decrease, Apply double-entry rules, Record the transaction in the General Journal

Post Transactions to the Ledger

Purpose: To classify and summarize journal entries by account. Transfer each journal entry to the appropriate General Ledger account.

Prepare an Unadjusted Trial Balance

Purpose: To verify that total debits equal total credits after posting. List all accounts from the General Ledger with their ending balances.

• Calculate total debits and total credits.

• Identify and correct any posting or arithmetic errors if totals do not match.

Prepare Adjusting Entries

Purpose: To update accounts for accrued, deferred, and estimated items before preparing financial statements. (accrued revenues). (accrued expenses). Adjust prepaid and unearned items. Record depreciation

Prepare an Adjusted Trial Balance

Purpose: To ensure the accuracy of accounts after all adjustments. Prepare a new trial balance using updated account balances.

• Use this adjusted trial balance to create financial statements.

Prepare Financial Statements

Purpose: To communicate financial performance and position to stakeholders. (The big 4).

Journalize and Post Closing Entries

Purpose: To transfer the balances of temporary accounts to retained earnings and reset them for the next period.

Close revenue accounts to Income Summary.

• Close expense accounts to Income Summary.

• Close Income Summary to Retained Earnings

• Close dividends to Retained Earnings.

Prepare a Post-Closing Trial Balance

Purpose: To confirm that permanent accounts are in balance and ready for the next period. List all asset, liability, and equity accounts, Use this as the starting point for the next accounting cycle.