Accounting Cycle – The Process

Find below the Accounting Cycle scheme and Accounting Cycle steps. This is the process, which should be followed in order to account for business transactions properly and provide accounting data to its users for decision making purposes.

Accounting cycle represents a sequence of certain accounting activities to be followed in a determined order with the purpose to record business transactions and prepare financial statements.

Depending on the accounting period, the activities in this cycle are repeated through each accounting period – month, quarter, year.

Below you will be able to inspect all steps in the accounting cycle separately and understand, what exact actions must be taken under each of them.

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Steps of the Accounting Cycle

Analyze, journalize transactions
Summarize accounts, general ledger posting
Trial balance preparation
Period-end adjusting entries
Adjusted trial balance preparation
Preparation of financial statements
Close general ledger accounts (income/expenses)

Let’s analyse, what accounting procedures are done under each of the above steps in the Accounting Cycle:

So, what is an accounting cycle?

Accounting cycle is a process of analyzing, recording, and summarizing financial data of business, which includes actual business transactions, which have impact on the financial position of business

Purpose of this process is to prepare financial statements, and have accurate and timely financial data for decision making

Accounting cycle

Financial data must provide information on the results of business operations for the period, and information on the structure of assets & their financing sources, which include liabilities and equity, at the end of the period

Step 1

Analyze and journalize transactions

accounting cycle steps

Under this step:

all transactions are analyzed
only those, which had impact on business financial position, are recorded in accounting, i.e. general journal

Step 2

Summarize accounts, perform general ledger posting

accounting cycle steps

Under this step:

at the end of the reporting period (for example, month) all general journal entries are summarized, and
are posted to general ledger accounts

Step 3

Trial Balance preparation

accounting cycle steps

Under this step trial balance is prepared

Trial balance is a summary of all general ledger accounts, used to check, whether posting from general journal to general ledger was correctly done. Total debit amounts in trial balance must be equal to total credit amounts

Step 4

Recording of Period end adjusting entries

accounting cycle steps

Under this step period end ajudsting entries are recorded in the accounting books of the business

certain accounting facts and data might not be accounted for in the general journal for a particular period
such facts and data have to be recorded at the end of period as adjusting entries
examples: depreciation, consumption of low value inventory

Step 5

Adjusted Trial Balance preparation

accounting cycle steps

Under this step adjusted trial balance is prepared

it has the form & layout, the same as trial balance
in addition, it includes adjusting entries

Step 6

Preparation of financial statements

accounting cycle steps

Based on the adjusted trial balance, financial statements are prepared

Step 7

Closing of general ledger accounts

accounting cycle steps

certain general ledger accounts are used only to reflect result of business transactions for a particular period
their results must be closed at the end of each period
these accounts are income & expenses
the accumulated balances are transferred to the retained earnings account

We have covered all 7 steps of the accounting cycle

Now you know, what are those steps, and what accounting procedures are performed under each of these steps

So, in the Accounting Cycle the last step is:

close general ledger accounts, which balances at the end of the accounting period should be zero – Income and Expenses.