The Accounting Cycle
A complete period from transaction analysis to post-closing balances.
1) Analyze & Journalize
Identify transactions, determine affected accounts, and record entries.
- Use the accounting equation: Assets = Liabilities + Equity
- Every entry must balance: total debits = total credits
- Example: Paid cash for supplies 500 → Debit Supplies 500; Credit Cash 500
2) Post to Ledger
Transfer journal entries to T-accounts (general ledger).
- Update running balances in each account
- Helps prepare the trial balance and track balances over time
3) Trial Balance
List ending balances to check equality of debits and credits.
- If not equal, locate errors in posting or journalizing
- Not a guarantee of correctness (e.g., equal but wrong accounts)
4) Adjusting Entries
Accruals, deferrals, and estimates.
- Accruals: recognize revenues earned/expenses incurred but not recorded
- Deferrals: move from asset/liability to expense/revenue (e.g., prepaid rent)
- Estimates: depreciation, bad debts
5) Adjusted Trial Balance
Confirm balance equality after adjustments.
- Used to prepare financial statements
6) Financial Statements
Prepare core statements from the adjusted trial balance.
- Income Statement → profitability for the period
- Statement of Owner’s Equity/Retained Earnings → changes in equity
- Balance Sheet → position at period end
- Cash Flow Statement (if covered)
7) Closing Entries
Close temporary accounts to equity.
- Close Revenues and Expenses to Income Summary, then to Retained Earnings/Capital
- Close Dividends/Withdrawals directly to Retained Earnings/Capital
8) Post-Closing Trial Balance
Only permanent accounts remain with balances.
- Temporary accounts reset to zero for the next period