Accounting Cycle

Accounting Cycle Diagram:

Steps in the accounting cycle

• 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.

• 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.

• Posting to the General Ledger (GL)

 The journal entries are then posted to the general ledger where a summary of all transactions to individual accounts can be seen.

• 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.

• 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.

• Adjusting Entries

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

• Financial Statements

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

• 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.

Accounting Cycle: General Ledger

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 on accounting software, which is the predominant method nowadays. 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.

Accounting Cycle Fundamentals

To fully understand the accounting cycle, it’s important to have a solid understanding of the basic accounting principles. You have to know about revenue recognition (when a company can record sales revenue), the matching principle (matching expenses to revenues), and the accrual principle.