the Accounting Cycle
The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial records. The process starts with making accounting entries for each transaction and ends with closing the books.
- Trial Balance
- Adjusted Trial Balance
- Financial Statements
- Closing Entries
- Post Closing Trial Balance
- Reversing Entries (optional)
Often included as part of the journalizing step, identifying and analyzing is the start of any entry. Here we determine which events represent transactions that should be recorded, and which accounts are effected.
Transactions are initially recorded in a journal (also called the book of original entry). Journals are kept in chronological order and list transactions in terms of debits and credits to accounts. Besides a general journal businesses may have specialized journals: sales journal, purchases journal, cash receipts journal, cash payments journal…
Transferring amounts from the journal to the ledger is called posting. Transactions posted from the general journal must be posted individually; postings from specialized journals are generally posted by columnar totals. A ledger is a book that usually contains a separate page for each account.
The remaining steps in the cycle occur at the the end of the accounting period.
A trial balance is a list of all open accounts in the ledger and their balances. The book is “in balance” when the sum of all debits matches the sum of all credits. A trail balance checks for a math error in the posting as well as provides a list of accounts to be used in preparing financial statements.
Adjusting entries reflect the accrued and deferred transactions that are not reflected in trial balance. They are necessary to achieve a proper matching of revenues and expenses in the period. Adjusting entries affect at least one real account and one nominal account.
Adjusted Trial Balance
The adjusted trail balance checks for mechanical accuracy of the adjustments, and shows the balance of all accounts at the end of the accounting period.
Prepare financial statements from the adjusted trial balance.
Prepare and post closing entries to transfer the balances from all nominal (temporary) accounts to the
Income Summary account. The net balance of the income summary account is equal to net income (loss) for the period. Income summary is closed out to
Post Closing Trial Balance
A final trial balance may be prepared to check for mechanical errors in the closing.
Reversing Entries (optional)
Before starting the new period, some of the adjusting entries may be reversed.