There are nine steps in the accounting cycle. Like any process, the accounting process steps begin with the acquiring of information to then be analyzed and ends with checking one's work to ensure accuracy. The accounting cycle process is usually performed over a month, or a specified accounting period. The accounting cycle order builds on all prior steps. Information obtained in one of the accounting process steps will be used in the successive accounting cycle steps.
Step 1: Identifying Transactions
All financial transactions taken on by a company must be collected and analyzed. The analysis shows how the company's financial health is being affected. Transactions are analyzed in the order in which they occurred. Transactions are only analyzed if they are monetary and involve the business. The CEO's personal finances will not be analyzed or recorded, for instance. An analyst or accountant may analyze all sales and payments made each day to complete this step.
Step 2: Journaling Transactions
Once the transactions are identified and their relevant accompanying data is collected, all transactions are then entered into the general journal in a process known as journalizing. The general journal is where all transactions are listed in the order they occurred. To journalize is to record a transaction in the company's general journal.
Step 3: Ledger Posting
After the transactions are posted in the general journal, they will subsequently be posted in the general ledger. The general ledger is organized by account. Each transaction belongs to a certain account. The list of accounts a company is utilizing is known as the chart of accounts. This posting of the ledger is of vital import as it assures that the company has a complete accounting transaction record. Each transaction recorded in the general ledger has a trickle-down effect as it impacts subsidiary ledgers and the collective sum.
A ledger from the 1800s. Even then, ledgers have to balance out where debits equal credits.
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Step 4: Unadjusted Trial Balance
After the ledger posting, in which all transactions have been posted to the general ledger in the appropriate accounts, an unadjusted trial balance will be prepared. Debits, appearing on the left side of a T account, and credits, appearing on the right side of a T account, must balance. To balance, debits must equal credits. For every debit entry, there must be an equal and opposite credit entry. For instance, if an account is debited - $5,000, another account must be credited + $5,000.
Step 5: Adjusting Entries
After the unadjusted trial balance, any necessary adjustments are made to bring the accounts and balances up to date. For instance, under the accrual method (a method of accounting used by most larger businesses as mandated by the generally accepted accounting principles), income must be recorded when it is earned, even if money has not been received. For example, if a customer made a purchase of $500 using in-store credit, but doesn't have to make the payment for another month, the $500 would still be recorded when the sale was made under the accrual method. Expenses will also be subtracted, even if they have not yet been paid. If the company received a bill from the utility company, for instance, but wasn't obligated to pay it until a week after the bill was received, the payment would have been recorded upon receipt of the bill. This step provides a crucial first glance at how much money a company is earning and spending and is necessary to complete the sixth step.
Step 6: Preparing Adjusted Trial Balance
Step six involves the adjusted trial balance being prepared. The adjustments made in the previous step must place all debits and credits in balance in order for this step to be successful. Any accounts that are still not in balance by this step will need to be further investigated and corrected.
Step 7: Financial Statements
The financial statements, such as the balance sheet, income statement, and cash flow statement can now be prepared from the information recorded in the general ledger.
Step 8: Closing the Books
In step eight, the books are considered closed. It is important to close the books so that no revenues or expenses from previous accounting periods can be mistakenly entered into the current accounting period. The net balance from the closed account will be transferred into the owner's equity account. The only accounts that are allowed to carry a balance into each successive accounting period are the balance sheet accounts, which include assets, liabilities, and owner's equity.
Step 9: Post-Closing Trial Balance
By this step, all the revenue and expense accounts are closed. The balance sheet accounts, assets, liabilities, and owner's equity, are in balance, meaning debits equal credits.
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FAQs
The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.
What is the process of accounting explain each step with an example? ›
The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.
What is the accounting cycle lesson plan? ›
There are ten steps in an accounting cycle, which include analyzing transactions, journalizing transactions, post transactions, preparing an unadjusted trial balance, preparing adjusting entries, preparing the adjusted trial balance, preparing financial statements, preparing closing entries, posting a closing trial ...
What are the five steps of the accounting cycle explain? ›
To quickly summarize, the five steps in the accounting cycle include: collecting and analyzing transactions, journalizing the entries, posting the entries into the ledger, checking for errors and trial balance, and lastly, the reporting period.
What is the accounting cycle and examples? ›
An example of the accounting cycle is a business owner collecting their financial information, journalizing it, posting it to the ledger by account, performing an unadjusted trial balance, making adjustments, performing an adjusted trial balance, preparing financial statements, closing accounts, and finally preparing a ...
What is an example of a transaction that would be a step in an accounting cycle? ›
An example of a transaction that would be a step in an accounting cycle is paying for employee training seminars. This transaction involves the transfer of funds from the company's account to the training organization's account, which is recorded as an expense in the company's books.
What is the basic concept of accounting cycle? ›
Basic concepts are the foundation of a child's education. They are words that a child needs to understand in order to perform everyday tasks like following directions, participating in classroom routines, and engaging in conversation.
What does cycle mean on a lesson plan? ›
The Lesson Cycle is a process by which the teacher selects activities, strategies, and materials that are appropriate for the learner to master the objectives. Reference: Hunter, Madeline. (1982) Mastery Teaching. El Segundo, CA: TIP Publications.
What is the difference between the accounting cycle and the accounting process? ›
The accounting process is a series of activities that begins with a transaction and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these major steps: Identify the transaction or other recognizable event.
How to learn accounting step by step? ›
Step-by-Step Guide
- Step 1: Understanding the Accounting Equation. ...
- Step 2: Familiarize Yourself with Financial Statements. ...
- Step 3: Learning to Record Business Transactions. ...
- Step 4: Posting Journal Entries to the Ledger. ...
- Step 5: Prepare the Trial Balance. ...
- Step 6: Make Adjusting Entries. ...
- Step 7: Prepare Financial Statements.
Defining the accounting cycle with steps: (1) Financial transactions, (2) Journal entries, (3) Posting to the Ledger, (4) Trial Balance Period, and (5) Reporting Period with Financial Reporting and Auditing.
What are the golden rules of accounting? ›
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
What is full cycle accounting? ›
Full cycle accounting refers to the complete set of activities undertaken by an accountant to record all business transactions during an accounting period and includes everything from the initial recording of a business transaction (the start of the cycle) to the preparation of the financial statements (the end of the ...
What is the accounting process in short note? ›
Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.
What are the four steps in the accounting process explain? ›
First Four Steps in the Accounting Cycle. The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance. We begin by introducing the steps and their related documentation ...
What is the accounting process and procedures? ›
The accounting process is the series of steps followed by the business entity to record the business financial transactions that include steps for collecting, identifying, classifying, summarizing, and recording the business transactions in the books of accounts of the company so that the financial statements of the ...
What is the process accounting system? ›
A process costing system accumulates costs when a large number of identical units are being produced. In this situation, it is most efficient to accumulate costs at an aggregate level for a large batch of products and then allocate them to the individual units produced.
What are the 3 important steps in accounting process? ›
Three fundamental steps in accounting are:
- Identifying and analyzing the business transactions.
- Recording of the business transactions.
- Classifying and summarising their effect and communicating the same to the interested users of business information.
