The Accounting Cycle

1. Analyze Transactions

In this step, businesses analyze and identify all financial transactions that have occurred during a specific period, such as a month or quarter.

2. Record Transactions

Once transactions are identified, they are recorded in a journal or ledger. This involves creating a record of the transaction that includes the date, the accounts involved, and the amount of the transaction.

3. Post Transactions

After transactions are recorded in the journal, they are then transferred to a general ledger. The general ledger is the central location for all financial transactions and account balances

4. Trial Balance

At the end of the accounting period, a trial balance is created to ensure that the debits and credits in the ledger match.

5. Adjust Entries

Once the trial balance is complete, adjusting entries are made to ensure that all accounts are accurately reflected. This includes entries for accrued expenses, depreciation, and other items.

6. Adjusted Trial Balance

After adjusting entries are made, a new trial balance is created to ensure that all accounts are properly adjusted.

7. Financial Statements

Using the information from the ledger and the adjusted trial balance, financial statements are prepared, including the income statement, balance sheet, and statement of cash flows.

8. Closing Entries

At the end of the period, closing entries are made to reset the balances of temporary accounts to zero. This includes entries for revenue, expenses, and dividends.

9. Post Closing Trial Balance

Once all closing entries are made, a final trial balance is created to ensure that all accounts are properly balanced.