In an accounting cycle, there are ten steps that should be conducted in order. In this accounting process, the bookkeeper will collect, record, and interpret financial information. The steps are as follows:
1. Analyze Transactions
In this step, every transaction will be looked at and analyzed to determine how it affects the financial position or the accounting equation. In this step, documents such as receipts, invoices, bank statements, etc., will be looked into, as they provide proof of each financial activity taking place.
2. Journalize Transactions
This is a method to track all the transactions by recording them in chronological order as they take place. Entries that are recorded are usually separated into credit and debit along with the date and a summary of the transaction.
3. Post Transactions
Posting transactions refers to the posting of entries from the journal to the general ledger accounts. General ledger accounts are accounts that have their own unique numbers and categories. When posting entries, the entries will be transferred to the account that is affected by the respective entry. For example, if the cash account in the journal is debited, the entry will be posted to the respective cash ledger account, which will be debited the same amount as recorded in the journal.
4. Prepare an Unadjusted Trial Balance
The unadjusted trial balance is the first trial balance that must be prepared. This balance is a listing of all the ledger accounts after all entries are posted. Usually, this listing is prepared at the end of a financial period. This step is important, as after all entries are shown, the bookkeeper will check and make sure that the total debit and credit balances are equal. Performing this step will ensure the record is accurate before moving on to the following steps.
5. Prepare Adjusting Entries
This step involves updating the ledger account to show an accurate position of balance. Some transactions may be made earlier in the accounting period and may have had a different impact when they happened compared to at the end of the accounting period, which will require an adjustment. For example, office furniture that is bought early in the accounting period may have been damaged and disposed of at the end of the accounting period, making the valuation of those assets on the account higher than it actually is.
6. Prepare the Adjusted Trial Balance
In this step, an adjusted trial balance will be produced that contains all of the account titles and balances of the general ledger after all the entries that require adjustment are adjusted and the accounts have been updated to reflect the financial situation of the business at the end of that accounting period.
7. Prepare Financial Statements
After completing the adjusted trial balance, different financial statements will be produced from it. In this step, an income statement should be prepared first. It shows a positive number if the company had a net profit and a negative number if the business had a net loss. After an income statement, a statement of retained earnings will be compiled. This shows the effect of loss or profit in this accounting period in relation to the retained earnings of the company. Then, a balance sheet will be prepared. A balance sheet shows the assets, liabilities, and stockholders' equity in the business. Finally, a cash flow statement will be produced, which shows the inflow and outflow of the cash of a business during the accounting period. These statements are considered the output of the accounting cycle.
8. Prepare Closing Entries
Closing entries are entries that close temporary accounts by transferring data from the temporary accounts to the permanent accounts or balance sheet. This step takes place after all the financial statements are prepared and note the beginning of another accounting period.
9. Post Closing Trial Balance
In this step, a final trial balance will be prepared in order to ensure that debits and credits are equal. This is a step to ensure the transfer and closing of temporary accounts is performed well and all of the data needed are recorded.
10. Recording Reversing Entries
This is an optional step in the accounting cycle. At the start of another accounting cycle, a reversing entry is made to take into account some adjusting entries before recording transactions in the next accounting period. This can ensure that no entry is double-counted.
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