The Accounting Cycle
Learn the steps and proccess here!
Step 1: Analyze Transactions
The first step is to analyze every transaction that affects the business. Since the accounting equation must remain in balance, you must analyze to see how it affects owner's equity.
Step 2: Journalize
The second step is journalizing, in order to journalize, you must record the transactions in a journal.
Step 3: Post
The third step is to post. In order to post, you must record the information contained in the journal into the ledger accounts.
Step 4: Prepare a Work Sheet
The fourth step is to prepare a work sheet. The main purpose of a worksheet is that it reduces the likelyhood of forgeting an adjustment and it reveals arithmatic errors. A typical worksheet consists of a column on the left showing main account titles and 10 more columns of debits and credits showing trial balance, adjustments, adjusted trial balance, incomes statement and balance sheet.
Step 5: Prepare Financial Statements
The fifth step is to prepare financial statements. The purpose of financial statements is to show the financial performance and financial position of a business and how its financial position has changed over time. The information can be found using the ledger accounts.
Step 6: Journalize Adjusting and Closing Entries
The sixth step is to journalize adjusting and closing entries. To do this, you must transfer the adjustments from the worksheet to the journal.
Step 7: Post Adjusting and Closing Entries
The seventh step is post adjusting and closing entries. Each adjusting and closing entry must be posted to the appropriate general ledger account. Only permanent accounts in the ledger will have non-zero balances.
Step 8: Prepare Post Closing Trial Balance
The last step in the accounting cycle is the eighth, to prepare post closing trial balances. This occurs once the closing entries have been passed and posted to the ledger accounts. When preparing the post closing trial balances the sum of debits must equal the sum of credits.
Preparing a Post-Closing Trial Balance