The Accounting Cycle

Read this flyer to learn more about the accounting cycle.

1. Analyze Transactions

These transactions include memorandums, sales invoices, and checks.

2. Journalize

The transactions from above must then be journalized. This means that the account the transaction will affect is recorded and the amount that it will be affected is recorded as well. This is kept in chronological order. This is kept in the general journal.

3. Posting

The information from the general journal must then be transferred into the general ledger. This is an account by account summary of transactions.

4. Prepare Work Sheet

Next, you must prepare a work sheet. The trial balance on this work sheet will help to determine if an error was made somewhere else. In the trial balance, debits must always equal credits.

5. Prepare Financial Statements

The financial statement will show whether or not a business has achieved a net loss or net gain. The only accounts recorded here are sales, recorded as a credit, and all expenses, recorded as a debit. If the credit is larger than the debit, a net gain has been achieved. If this is not the case then a net loss has been achieved.

6. Journalize Adjusting and Closing Entries

In this step, adjusting and closing entries are journalized. Adjusting entries appear when the value of assets has diminished, such as using supplies. Assets are credited, and expenses are debited. Closing entries are required so a company can start each fiscal period fresh. The only accounts that need closed are temporary accounts, such as sales and expenses. All other accounts are know as permanent, such as cash and capital.

7. Post Adjusting and Closing Entries

All the adjustment and closing entries that were just journalized in the previous step must then be posted. They get posted in the general ledger.

Prepare Post-Closing Trial Balance

A post-closing trial balance checks the accuracy of the closing process. It proves that the books are in balance at the start of a new fiscal period.