The term, accounting cycle, refers to the steps involved in accounting for all of the business activities during an accounting period.
These steps are repeated each reporting period.
There are ten steps to the accounting cycle. We will go through each one in detail later. But let’s review the basics. Step one begins with analyze transactions. Step two – journalize. Step three – Post. Step four – prepare unadjusted trial balance. Step five – adjust. Step six – prepare adjusted trial balance. Seven – prepare financial statements. Step eight – close. Step nine – Prepare a post-closing trial balance and Step Ten – Reverse.
It’s important that you realize when the steps occur. Steps 1 through 3 occur often throughout the accounting time period.
Steps four through 10 occur only at the end of the accounting period. The accounting process begins with analyzing transactions. The company first looks at the source documents which describe the transactions and events. Source documents can be either hard copy or electronic. Some examples of source documents include bank statements, checks, and purchase orders. After analyzing the transactions, events and source documents, the company is now ready to complete step 2, journalize. When the company journalizes the accountant applies the rules of double-entry accounting. Remember that double-entry accounting means that each transaction must be recorded in at least two accounts or that the debits must equal the credits. After applying the rules of debits and credits, the accountant should then record the transactions in a journal, or journalize. A journal is a complete record of each transaction. It’s easy to remember, because journal entry has the word journal in it!
The third step in the accounting cycle is to post. This sounds complicated but it’s actually very easy. Posting involves transferring information from the journal to the ledger. A ledger is simply a collection of all accounts – it...