The Accounting Cycle

Definition
•It’s a financial process starting with
recording business transactions up to the
preparation of financial statements.
•It facilitates preparation of quality
statements for users
•The accounting cycle is a set of steps that
are repeated in the same order every
period.
 The Accounting Cycle
• Some companies prepare financial
statements on a quarterly basis
whereas other companies prepare
them annually.
• This means that quarterly companies
complete one entire accounting cycle
every three months
 Accounting Cycle Steps
• Journal entries
• Ledger accounts
• Unadjusted trial balance
• Adjusting entries
• Adjusted trial balance
• Prepare financial statements
• Closing entries
• Post closing trial balance
• Reversing entries
 Flow Chart

• After this cycle is complete, it starts

over at the beginning.
 Step 1: Journal entries
• As transactions take place, journal
entries are recorded in the general
journal to show the effect on the
accounting equation.
– Identify Transactions
– Analyze Transactions
– Journalizing Transactions
Step 2:Post Journal Entries to Ledger
Accounts
• Once journal entries are made, they
are posted and transferred to the T-
accounts or ledger accounts.
• The purpose of journalizing is to
record the change in the accounting
equation caused by a business event.
Ledger accounts categorize these
changes as debits and credits into
specific accounts.
 Step 3: Unadjusted Trial Balance
• Its a list of all accounts to appear on the
financial statements
Format
• Its displayed in three columns: a column for
account names, debits, and credits
Preparation
• Basically, each one of the account balances is
transferred from the ledger accounts to the
trial balance. All accounts with debit
balances are listed on the debit column and
all accounts with credit balances are listed on
the credit column.
 Step 4:Adjusting Entries
• These are journal entries before
preparation of FS
• Adjusting entries are made in
accordance with the accrual/matching
principle to match revenue and
expenses in the period in which they
occur.
AJEs are used to record:
• Prepaid expenses or unearned revenues
• Accrued expenses and accrued revenues
• Non-cash expenses – depreciation
 Step 5: Adjusted Trial Balance
• List of all accounts that will appear on
the financial statements.

Preparation -Two ways

1.Same as creating unadjusted trial
balance, or
2.Take unadjusted trial balance and
replace the changed accounts only
Note: Accounts with Zero balance are
excluded
 Step 6:Financial Statement Preparation
They include:
•the balance sheet,
•income statement,
•statement of changes in equity
•statement of cash flows
•Notes to accounts
Preparation
•By transferring the account balances on
the adjusted trial balance to a set of
financial statement templates.
 Step 8: Closing Entries
• Entries made to make temporary
accounts zero and transfer their
balances to permanent accounts. –
closing the books of accounts
• Temporary accounts are income
statement accounts
• Permanent accounts are balance sheet
accounts that last longer than an
accounting period.
Step 10: Post Closing Trial Balance
• A list of all accounts and their
balances after the closing entries
• In other words, a list of accounts or
permanent accounts that still have
balances after the closing entries have
been made.
 Step 11: Reversing Entries
• These are entries made to reopen the
closed temporary accounts of the
previous year
• Reversing entries are usually made to
simplify bookkeeping in the new year.
• For example, if an accrued expense was
recorded in the previous year, the
bookkeeper or accountant can reverse
this entry and account for the expense in
the new year when it is paid.