STEPS OF ACCOUNTING CYCLE

Identification and Analysis of Business Transactions or Events

Process Label: Identifying and Analyzing Transactions

Timing: During the period

Purpose: To determine which business activities must be recorded

EE: This step involves recognizing and analyzing business activities that qualify as accounting transactions. Source documents like sales invoices, receipts, bank records, and contracts are evaluated. Only activities that affect the accounting equation (Assets = Liabilities + Equity) are recorded.

Journalizing Transactions

PL: Recording Process

T: During the period

P: To record each transaction chronologically and accurately

EE: Once transactions are identified, they are recorded in the general journal using the double-entry system. Each entry includes the date, account titles, debit and credit amounts, and a brief explanation.

Posting Journal Entries to the Ledger (T Accounts)

PL: Classifying Process

T: During the period

P:To classify and summarize transaction data by account

EE: Entries from the journal are posted to the general ledger. Each ledger account (e.g., Cash, Equipment, Payables) is updated with related transactions to help organize financial data for reporting.

Preparation of the Unadjusted Trial Balance

PL: Worksheet Preparation

T: End of the period

P: To check equality of debits and credits before adjustments

EE: A trial balance is prepared from the ledger to ensure that total debits equal total credits. It serves as the starting point before making adjusting entries.

Posting of Adjusting Journal Entries

PL: Worksheet Preparation

T: End of the period

P: To update accounts using accrual basis adjustments

EE: Adjusting entries are journalized and posted to reflect revenues earned and expenses incurred during the period. Common adjustments include accrued expenses, depreciation, and deferrals.

Preparation of the Adjusted Trial Balance

PL: Worksheet Preparation

T: End of the period

P: To verify ledger balances after adjustments

EE: After posting adjusting entries, an adjusted trial balance is prepared. This ensures the updated ledger remains balanced and is used to prepare financial statements.

Preparation of Financial Statements

PL: Preparation of Financial Statements
P: Preparation End of the period

EE: To summarize financial performance and position Based on the adjusted trial balance, the four key financial statements are prepared: (1) Income Statement, (2) Statement of Changes in Equity, (3) Balance Sheet, and (4) Cash Flow Statement.

Closing the Books (Journalizing and Posting Closing Entries)

PL: Completing the Accounting Cycle

T: End of the period

P: To reset temporary accounts and update capital

EE: Revenue, expense, and drawing accounts are closed to the Income Summary and ultimately to Capital. This resets temporary accounts for the next period.

Preparation of the Post-Closing Trial Balance

PL: Completing the Accounting Cycle

T: End of the period

P: To verify that only permanent accounts remain and books are ready

EE: A final trial balance is prepared to ensure that only permanent accounts (Assets, Liabilities, Capital) carry balances into the next period.

Journalizing and Posting Reversing Entries (Optional)

PL: Completing the Accounting Cycle

T: Beginning of the next period

P: To simplify recording of recurring accruals and deferrals

EE: Optional reversing entries are made to reverse selected adjusting entries (e.g., accruals) from the previous period. This simplifies the recording of actual payments or receipts in the current period.

STEPS OF ACCOUNTING CYCLE

1. Identification and Analysis of Business Transactions or Events

2. Journalizing Transactions

3. Posting Journal Entries to the Ledger (T-accounts)

4. Preparation of the Unadjusted Trial Balance

5. Posting of Adjusting Journal Entries

6. Preparation of the Adjusted Trial Balance

7. Preparation of Financial Statements

8. Closing the Books (Journalizing and Posting Closing Entries)

9. Preparation of the Post-Closing Trial Balance

10. Journalizing and Posting Reversing Entries (Optional)