The Accounting Cycle
The 8 Steps
1. Analyze Transactions
Starting off the accounting cycle, you must first analyze the transaction of the business. Review the source documents such as receipts, memorandums, and checks. Analyzing your companies activity is crucial before moving on. This includes the review of your businesses exchange of assets, the paying off of debts, and the withdrawing and depositing of cash.
Once you have analyzed your transactions, it is time to journalize. Keeping your records in chronological order is a very important aspect of journalizing and accounting in general. When journalizing you are transferring the information on your source documents to general journal. This will help you move further in your preparation for future steps
Moving on in the accounting cycle, you must post. Posting consists of transferring your financial data from the general journal to the general ledger. The general ledger is, in whole, a collection of all the accounts.
4. Prepare a Worksheet
Once you're done, you must create a worksheet. The worksheet is a chronological page of everything you've done so far. It consists of 4 columns; trail balance, income statement, balance sheet, and adjustments.
5. Preparing Financial Statements
You're done with one of the most strenuous steps. Now you must prepare financial statements. The purpose of this is to show the current financial state of the company.
6. Journalize Adjusting and Closing Entries
The next step is to journalize these adjustments that you just did in the worksheet. In essence, you must transfer the adjustments from the worksheet to the general journal. The purpose of closing entries is to close temporary accounts back to zero. Some temporary accounts are sales and expenses.
7. Post Adjusting and Closing Entries
Now you must post these entries. The purpose is to officially close these entries.
8. Prepare Post-Closing Trial Balance
View video on how to properly prepare a post closing trail balance. This is a crucial step when finishing the accounting cycle.
Preparing a Post-Closing Trial Balance