MAJOR STEPS IN THE

ACCOUNTING PROCESSING
CYCLE

LESSON 1
 ● to gather information

STEP 1: ● In the form of source documents

● Transactions are transfers or exchanges

Identify and Analyze of something with value between the
firm and one or more independent
Transactions or Events to outside parties.
be recorded
● Internal Events (ex. use of inventory for
production)

● External events (ex. sale of goods and

purchase of machinery)
 ● transactions and other economic events
are recorded chronologically in the

STEP 2:
general journal through journal entries

● debits and credits

Journalize ● two types of journals: General journal

Transactions and and Special Journal

Events ● General Journal- non-repetitive,

infrequently used accounts

● Repetitive entries of the same type (ex.

sales journal, purchase journal, cash
receipts journal
 ● ledger is a collection of all accounts for a business
entity

STEP 3: ● summarizes the effects of all events in an individual

account

● Posting is the process of periodically transferring all

Posting from Journals to debits and credits recorded in the general journal to
Ledger the ledger
(performed periodically) ● two types of ledgers: General and Subsidiary

● General ledger holds the individual accounts

grouped according to the seven account types

● Subsidiary ledger support general ledger accounts

that comprise many separate individual accounts
(ex. customer’s accounts)
 ● prepared after all transactions have been

STEP 4:
recorded and posted to the ledger

● is to check that the sum of the debit

account balances equals the sum of the
Prepare Unadjusted Trial credit balances.
Balance
(prepared at the end of ● A worksheet is prepared at that stage in
the reporting period) the accounting cycle when it is time to
adjust the accounts and prepare the
financial statements.
WORKSHEET ● Used to facilitate the adjusting and
closing processes, and ultimately, the
preparation of a company’s financial
statements.

● It is an informal document that helps

accumulate the accounting information
needed to prepare the financial
statements.

● It is a tool but it is not part of a company’s

formal accounting records.
 ● Adjusting entries bring all

STEP 5: permanent and nominal accounts up

to date

Journalize and Post ● With accrual accounting, revenues

are recognized when earned and
Adjusting Journal Entries expenses matched against those
revenues.

● Adjusting entries affect both

permanent and temporary accounts.
STEP 6: ● to confirm that debits equal credits

● include the balances after adjusting

Prepare Adjusted Trial entries have been made
Balance ● contains all accounts with balances
which will appear in the financial
statements
 ● Using the adjusted trial balance, financial
statements can now be prepared

STEP 7: ● Statement of Comprehensive Income to

determine the net income/loss

●
Prepare Financial
Statement of Owner’s Equity to determine the
ending balance of Owner’s Equity
Statements
● Statement of Financial Position reports a
company’s assets, liabilities and owner’s equity.

● Statement of Cash Flows reports information

regarding a company’s cash inflows and
outflows.
 ● Purpose of closing entries is to “ZERO OUT” all
temporary accounts into retained earnings

● All accounts can be identified as either permanent

STEP 8: accounts or temporary accounts

● Permanent accounts are the accounts presented on the

Journalize and Post Closing balance sheet. To be carried forward to the ff.
accounting period. (asset, liability, and owner’s
Journal Entries equity)

● Temporary accounts are used to gather information

for a particular accounting period. These accounts are
to be transferred to Income summary(closing
process). (revenue, drawing, dividend, and expense
accounts)

● The closing entries occur only at the end of an

accounting period.
 ● Close the revenue accounts. Debit each revenue
account for an amount equal to its current credit
balance, and credit the Income Summary account for
STEPS IN CLOSING ENTRIES the total amount of earned revenue.

● Close the expense accounts. Credit each expense

account for an amount equal to its current debit
balance, and debit Income summary account for the
total amount of expenses.

● Close the drawings account. Debit the Income

Summary account.

● Close the Income Summary account to Owner’s

equity account
 ● The post closing trial balance provides
evidence that an equity of debits and

STEP 9:
credits has been maintained in the
general journal.

● The General ledger is in balance to start

Prepare Post-Closing Trial the next accounting period.
Balance
● ONLY include statement of financial
position accounts

● All income statement accounts have

been closed out.
 ● Some accountants reverse certain
STEP 10: adjusting entries to simplify journal
entries in which the economic event
effects two accounting periods.
Journalize and Post
Reversing Journal Entries ● If recorded, reversing entries are
dated the first day of the new
period.

● Reversing entries are appropriate

for (1) deferred items, and (2)
accrued revenues and expenses.
 ● The steps in the accounting cycle do not
occur with equal frequency

Note: ● A business analyzes and records financial

transactions daily during the accounting
period

● It adjusts and reports accumulated financial

data whenever management needs financial
information

● usually at weekly, monthly, or quarterly

intervals, but at least manually

● Closing the books occurs just once, at the

end of the accounting period.
Thanks!
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