The accounting cycle refers to the process which begins with the analyzing & journalizing of transactions….and ends with preparing the accounting records for next period/year’s transactions.
It can be summarized as follows (click on the links for details):
1. Transactions are analyzed and recorded in the journal.
This is where accounting/double entries – the debit and credit entries - are created.
2. Transactions are posted to the ledger.
Here, the accounting/double entries are posted/transferred to the individual ledger accounts.
3. An unadjusted trial balance is prepared.
Closing balances are extracted from the finalized individual ledger accounts. Debit balances will enter the debit column of the trial balance; credit balances will enter the credit side.
4. Adjustment data are assembled and analyzed.
Adjusting entries are posted into the ledger accounts to update them.
Four types of accounts will require adjustment:
a. Prepaid expenses
b. Unearned revenues
c. Accrued revenues
d. Accrued expenses
5. Adjusting entries are journalized and posted to the ledger.
This is done in the same way as (2).
6. An adjusted trial balance is prepared.
The trial balance prepared in (3) is updated with the adjusting entries.
7. Financial statements are prepared.
Balances from the adjusted trial balance are used in drafting the income statement, statement of owner’s equity and the balance sheet.
8. Closing entries are journalized and posted to the ledger.
Some final housekeeping work is done in preparing the accounting records for next period’s transactions.
9. A post-closing trial balance is prepared.
This is done to ensure that the accounts balance prior to the opening of next period’s accounts.For more details, go to Closing Entries.