Accounting Cycle
Learn what an accounting cycle is and how it works in business accounting. Includes frequently asked questions.
Updated on September 29th, 2021
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The accounting cycle is the complete process that takes place when a business makes a transaction. Every transaction makes its way into a business's financial records, but there are usually several steps that take place before the final transaction is recorded.
Steps in the Accounting Cycle:
1. Transaction.
The accounting cycle always begins with a transaction, whether that is a purchase or a sale. Your business may be spending money to pay employees, purchase equipment, pay down debt, or cover utilities. Your business may also be receiving money as payment from customers for the sale of goods or services.
2. Journal entry.
A journal is used by bookkeepers to record individual transactions in chronological order. A transaction must be entered as both a debit and a credit, according to the principles of double-entry accounting, so that the journal always remains balanced.
3. Posting to General Ledger.
The general ledger is used to summarize all transactions so that you can see the total balance of each account. Every transaction will affect balances on the general ledger.
4. Trial Balance.
At this point in the cycle, all account balances are calculated to show an overall picture of a company's finances. A trial balance is found at the end of the accounting period, whether that is monthly, quarterly, or annually.
5. Worksheet.
If the debits and credits do not balance after working through the trial balance, a worksheet must be used to find errors and make adjustments.
6. Adjusting entries.
If any adjustments need to be made, they will be posted to accruals and deferrals at the end of the accounting period.
7. Financial statements.
Now that all of the balances have been calculated, financial statements like an income statement, cash flow statement and a balance sheet can be prepared.
8. Closing accounts.
To complete the accounting cycle, revenue and expense accounts are "closed" and brought back to zero so that the cycle can start all over again. The accounts must be closed because the records will be used to show financial activity during a defined period of time.
FAQs:
What are the 8 steps in the accounting cycle?
What is the full cycle of accounting?
The full accounting cycle begins with a transaction and ends with a closing balance. Some professionals define 10 steps, while others condense the cycle into just 7 or 8 steps. See our outline of the accounting cycle..
What is the accounting cycle? Do you have an example?
The accounting cycle is the complete cycle that bookkeepers must record from the time a transaction takes place to the time that financial statements are prepared. This cycle helps to track finances and prevent errors when recording transactions. For example, the purchase of new equipment begins a transaction that will eventually be recorded on a company's balance sheet.
What is the basic accounting cycle?
- Transaction.
- Journal entry.
- Posting to the general ledger.
- Trial balance.
- Worksheet.
- Adjusting entries.
- Financial statements.
- Closing.