Accounting isn't just about working with numbers. It is about following guidelines to get the job done.
In this lesson, you will learn what the accounting cycle is and the steps to complete it.
Accounting Cycle Defined
There is ebb and a flow to every industry. In accounting, the ebb and flow is the accounting cycle.
The termaccounting cycle refers to the specific steps that are involved in completing the accounting
process. The cycle is like a circle. It begins at one point and revolves through specific steps, before
starting again at the same point and then repeating those same steps.
The length of the accounting cycle varies from company to company. It may be monthly, quarterly,
semiannually, or annually depending on when the financial statements of the company are
published. Regardless of the timing of the accounting cycle, the processes involved remain the
same.
Steps in the Accounting Cycle
There are ten basic steps to the accounting cycle.
1. Collect source documents
The very first step in the accounting cycle is to gather all the documents that are related to financial
transactions of the organization. These documents, called source documents, are things like
receipts, bank statements, checks, and purchase orders. They are the items that describe what a
transaction was for.
2. Analyze transactions
The second step in the accounting cycle is to analyze the source documents. The purpose of this is
to look them over and then decide what effect they have had on company accounts.
3. Journalize transactions
The third step in the accounting cycle is to post entries into the journal for the analyzed transactions.
A journal is the book or electronic record that documents all the financial transactions for a company
and the accounts that are affected by each transaction. When a journal entry is made, the 'doubleentry' rule is used. This means that for every one transaction, at least two accounts are affected.
There must be a debit and a credit for each transaction, and the total of debits and credits must
equal the amount of the transaction. Journal entries are entered in chronological order, and debits
are entered before credits.
4. Post transactions
The fourth step in the accounting cycle is to transfer information from the journal to the ledger. A
ledger is a book or an electronic record of all the accounts that a company has. These accounts are
broken down by account number and class. When the information from the journal is transferred to
the ledger, it is transferred to each account that was affected by a transaction.
5. Prepare an unadjusted trial balance
A trial balance is a list of all the company's accounts and their balance at the time the trial balance is
prepared. An unadjusted trial balance is a trial balance that is prepared before adjusting entries are
made into accounts. This information comes directly from the ledger. The total debit balance and
total credit balance must be equal.
6. Prepare adjusting entries
Adjusting entries are entries that are made in the journal and posted in the ledger. The purpose of
these entries is to bring account balances to the proper amounts. Not all accounts will have an
adjusting entry. Adjusting entries are made at the end of the accounting period but not the end of the
accounting cycle.
7. Prepare trial balance
Remember, the trial balance is a list of all accounts and their balances after adjustments have been
made. This trial balance is prepared to check and make sure that debits and credits equal after
adjusting entries are made. It is used to prepare the financial statements.
8. Prepare financial statements
These are prepared in a specific order because information from one financial statement is often
used in preparing another financial statement. The order that the financial statements need to be
prepared is:
