The Accounting Cycle

The sequence of activities beginning with the occurrence of a transaction is known as the accounting cycle. This process is shown in the following diagram:

Steps in The Accounting Cycle

Identify the Transaction Identify the event as a transaction and generate the source document.

Analyze the Transaction Determine the transaction amount, which accounts are affected, and in which direction.

Journal Entries The transaction is recorded in the journal as a debit and a credit.

Post to Ledger The journal entries are transferred to the appropriate T-accounts in the ledger.

Trial Balance A trial balance is calculated to verify that the sum of the debits is equal to the sum of the credits.

Adjusting Entries Adjusting entries are made for accrued and deferred items. The entries are journalized and posted to the T-accounts in the ledger.

Adjusted Trial Balance A new trial balance is calculated after making the adjusting entries.

Financial Statements The financial statements are prepared.

Closing Entries Transfer the balances of the temporary accounts (e.g. revenues and expenses) to owner's equity.

After-Closing Trial Balance A final trial balance is calculated after the closing entries are made.

The above diagram shows the financial statements as being prepared after the adjusting entries and adjusted trial balance. The financial statements also can be prepared before the adjusting entries with the help of a worksheet that calculates the impact of the adjusting entries before they actually are posted.

Recommended Reading

Schaum's Outline: Principles of Accounting