"How it works"
Accounting Cycle steps
1. Analyze Transactions- Decide which accounts are being affected by a transaction, whether an account is increasing or decreasing, and whether to put the transaction on the left (debit) side of an account or the right (credit) side.
2. Enter transactions in journal- The journal is called the "book of original entry" because this is the first place a transaction shows up in the accounting system. The journal is kept in date order and all of the debits and credits associated with the transaction are recorded together.
3. Post Transactions- From the journal, each part of the transaction is moved from the journal to the individual accounts so that all similar transactions can be summarized. This collection of accounts is known as the general ledger.
4. Create a Trail Balance- At the end of each accounting period, the totals from each general ledger account is placed on the trial balance so that the accountant can check to make sure that the total of all debits equal the total of all credits.
5. Gathering Adjusting Entries- Not all information about a business comes from the source documents. Supply information may be needed. Once deducted money has been determined, that information is entered into accounting records through the adjusting entries.
6. Prepare Financial Statements- Beginning with the income statement, the trail balance will be used to prepare the financial statements.
7. Journal and Post the Adjusting Entries and Closing Entries- Closing entries serve to close the income statement accounts so that they will be ready for the new accounting period.
8. Prepare a Post-Closing Trail Balance- This serves to make sure that debits = credits and that are acquired, so balances can be brought forward to the next accounting period on the permanent (balance sheet) accounts.