The Accounting Cycle
The sequence of activities beginning with the occurrence of a transaction is known as the accounting cycle. This process is shown in the following diagram:
Steps in The Accounting Cycle
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Identify the Transaction
Identify the event as a transaction
and generate the source document.
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Analyze the Transaction
Determine the transaction amount,
which accounts are affected,
and in which direction.
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Journal Entries
The transaction is recorded in
the journal as a debit and a credit.
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Post to Ledger
The journal entries are transferred
to the appropriate T-accounts
in the ledger.
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Trial Balance
A trial balance is calculated
to verify that the sum of the debits
is equal to the sum of the credits.
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Adjusting Entries
Adjusting entries are made for
accrued and deferred items.
The entries are journalized and
posted to the T-accounts
in the ledger.
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Adjusted
Trial Balance
A new trial balance is calculated
after making the adjusting entries.
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Financial Statements
The financial statements
are prepared.
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Closing Entries
Transfer the balances of the
temporary accounts
(e.g. revenues and expenses)
to owner’s equity.
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After-Closing
Trial Balance
A final trial balance is
calculated after the closing
entries are made.
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The above diagram shows the financial statements as being prepared after the adjusting entries and adjusted trial balance. The financial statements also can be prepared before the adjusting entries with the help of a worksheet that calculates the impact of the adjusting entries before they actually are posted.
