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1.3 Accounting

The accounting cycle is the process by which all financial transactions are recorded, processed, and reported. It involves recording transactions in journals, posting to general ledger accounts, preparing an adjusting trial balance, making any necessary adjusting entries, and generating final financial statements. The cycle then repeats at the end of each accounting period as long as the company remains in business.

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51 views4 pages

1.3 Accounting

The accounting cycle is the process by which all financial transactions are recorded, processed, and reported. It involves recording transactions in journals, posting to general ledger accounts, preparing an adjusting trial balance, making any necessary adjusting entries, and generating final financial statements. The cycle then repeats at the end of each accounting period as long as the company remains in business.

Uploaded by

nez.829.a
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is the Accounting Cycle?

The accounting cycle is the holistic process of recording and processing all financial transactions of
a company, from when the transaction occurs, to its representation on the financial statements, to
closing the accounts. One of the main duties of a bookkeeper is to keep track of the full accounting
cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in
business.

The accounting cycle incorporates all the accounts, journal entries, T accounts, debits, and credits,
adjusting entries over a full cycle.

Accounting Cycle Diagram


Steps in the Accounting Cycle

#1 Transactions

Transactions: Financial transactions start the process. If there were no financial transactions, there
would be nothing to keep track of. Transactions may include a debt payoff, any purchases or
acquisition of assets, sales revenue, or any expenses incurred.

#2 Journal Entries

Journal Entries: With the transactions set in place, the next step is to record these entries in the
company’s journal in chronological order. In debiting one or more accounts and crediting one or
more accounts, the debits and credits must always balance.

#3 Posting to the General Ledger (GL)

Posting to the GL: The journal entries are then posted to the general ledger where a summary of
all transactions to individual accounts can be seen.
#4 Trial Balance

Trial Balance: At the end of the accounting period (which may be quarterly, monthly, or yearly,
depending on the company), a total balance is calculated for the accounts.

#5 Worksheet

Worksheet: When the debits and credits on the trial balance don’t match, the bookkeeper must
look for errors and make corrective adjustments that are tracked on a worksheet.

#6 Adjusting Entries

Adjusting Entries: At the end of the company’s accounting period, adjusting entries must be
posted to accounts for accruals and deferrals.

#7 Financial Statements

Financial Statements: The balance sheet, income statement, and cash flow statement can be
prepared using the correct balances.

#8 Closing

Closing: The revenue and expense accounts are closed and zeroed out for the next accounting
cycle. This is because revenue and expense accounts are income statement accounts, which show
performance for a specific period. Balance sheet accounts are not closed because they show the
company’s financial position at a certain point in time.
# 9 General Ledger

The general ledger serves as the eyes and ears of bookkeepers and accountants and shows all
financial transactions within a business. Essentially, it is a huge compilation of all transactions
recorded on a specific document or in accounting software.

For example, if you want to see the changes in cash levels over the course of the business and all
their relevant transactions, you would look at the general ledger, which shows all the debits and
credits of cash.

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