The accounting cycle

The accounting cycle is the collective process of recording and sorting out a company's
financial transactions. It ensures that a company's financial statements are prepared
accurately and are a true reflection of its financial position. It is considered a cycle
because the workflow is circular—moving from one accounting period to the next. The
full accounting cycle consists of nine steps, which in the past were done manually and
recorded in journals. Today, most accountants use accounting software to process
many of these steps simultaneously. Here's a look at the steps in the accounting cycle:

1. Transactions
2. Journal entries
3. Posting from the journal to the general ledger
4. Trial balance
5. Adjusting entries
6. Adjusted trial balance
7. Financial statements
8. Closing entries
9. Post-closing trial balance

1. Transactions

The accounting cycle starts with transactions. This means that every time a sale is
made, an asset is purchased, a product is returned or debt is paid, the accounting cycle
begins. All financial activities that involve the exchange of a company's assets are
considered a transaction.

2. Journal entries

A journal is a physical record or digital document kept as a data, spreadsheet or book

within the company's accounting software. When a financial transaction is made, a
bookkeeper records it as a journal entry. If the income or expense affects one or more
business accounts, the journal entry will reflect that as well. Journaling is a crucial part
of record-keeping and allows for a brief review and records-transfer later in the
accounting process. Along with the general ledger, journals are carefully reviewed as
part of the audit process.

3. Posting from the journal to the general ledger

All information recorded in the journal is posted to the general ledger. The general
ledger contains the account information that is needed to create the company's financial
statements. The transaction data recorded in the general ledger is segregated by type
into accounts for expenses, revenues, shareholder's equity, liabilities and assets.

4. Trial balance
When the business transactions are summarized or closed out to the general ledger,
the accountant creates a trial balance, which serves as a report of every ledger
account's balance. A company generates a trial balance periodically, typically at the end
of every reporting period. The trial balance helps a company ensure that entries in its
bookkeeping system are mathematically correct. The trial balance is carefully reviewed
to make sure there are no errors and adjusted by adding necessary entries.

5. Adjusting entries

When accountants adjust entries, they take into account deferrals and accruals that
have affected the final balances of accounts on the general ledger. These adjustments
are made to make sure that the reported results are consistent with the financial
position of the company before financial statements are made.

6. Adjusted trial balance

Once the adjustments on the entries are made and finalized, the accountant prepares
the adjusted trial balance. Like the trial balance, the adjusted trial balance ensures the
debits and credits match after adjustments on the entries are made. The adjusted trial
balance is the most accurate record of a company's financial transactions.

7. Financial statements

Using the adjusted trial balance, the accountant prepares the cash statement, income
statement and balance sheet. These will be used to show the company's financial
condition, results and cash flow.

8. Closing entries

At this stage, the accountant moves data from temporary accounts to permanent
accounts on the balance sheet. Temporary accounts include expenses, revenues and
dividends. These accounts must be closed (reduced to zero) at the end of the
accounting period to prepare them for the next period of transactions. For instance,
$500 in revenue this year doesn't count as $500 of revenue for next year, even if your
company retained the funds for use next year.

9. Post-closing trial balance

The post-closing trial balance is the final step of the accounting cycle. At this stage, the
accountant checks the debits and credits match after closing entries are made. They
also make sure that the trial balance only contains permanent accounts, since
temporary accounts are already reduced to zero.

What Is Basic Accounting? | Indeed.com