ACCOUNTING CYCLEACCOUNTING CYCLE

ACCOUNTING CYCLE

• The Accounting Cycle is a series of steps.

• Starts with making accounting entries for each transaction and goes through closing the books.

DEFINITION

• The accounting cycle refers to nine steps, repeated in each reporting period, to verify transactions and prepare financial statements for internal and external users.

• These 9 steps are-• Analyze• Journalize• Post A Business Transaction• Unadjusted Trial Balance• Adjusting• Preparing• Preparing Financial

Statements• Closing the account• Post-Closing Trial Balance

9-Post closingTrial

Balance

1-Analyze

2-Journalize

3-PostA

Transaction

4-Unadjusted

TrialBalance

5-Adjusting

6-Preparing

7-PreparingFinancial

Statement

8-ClosingAccount

AccountingCycle

1-Analyze-• The first step of accounting

cycle.• First analyze a transaction and

its source documents.• Apply double-entry accounting

to recognize its effect on account balances.

2- Journalize-

• Transactions are recorded in a General Journal.

• Journalizing leaves a record of all transactions in one document.

• Helping to prevent mistakes and linking the debits and credits for each transaction.

3-Post A Business Transaction-• The third step in the accounting cycle is

posting.• Also known as LEDGER Account.• After recording in the journal, transaction

are transferred and posted to the ledger.• All transactions for the same account are

collected and summarized.• It is important to leave this paper trail to

verify accuracy and troubleshoot later in the process if accounts are not adding up.

4-Prepare An Unadjusted Trial Balance

• Preparing an unadjusted trial balance tests the equality of debits and credits as recorded in the general ledger.

• Additionally, this provides the balances of all the accounts that may require adjustment in the next step.

• Debit and credit merely signify position— left and right, respectively .

• Both sided recorded amount must be equal.

5-Adjusting of Trial Balance-• The fifth step, adjusting, accounts for

internal transactions, like the use of prepaid rent or unearned revenue.

• Adjustment may be required to record an expense that may have been incurred but not yet recorded.

6-Prepare an adjusted trial balance-

• The sixth step is the preparation of the adjusted trial balance.

• Again tests the equality of debits and credits, encompassing all internal and external transactions for the reporting period.

7-Preparing Financial Statements-1. Financial statements are prepared.2. The Income Statement and Statement

of Owner's Equity are prepared first, followed by the Balance Sheet, which pulls information from the Statement of Owner's Equity.

3. These are one of the primary outputs of the financial accounting system.

8-Closing the account

• The eighth step in the accounting cycle is to close accounts in preparation for the next accounting period.

• Temporary or nominal accounts are closed, while permanent or real accounts carry their balances into the next period.

• Once completed, all revenue, expense, withdrawal and Income Summary balances should be zero.

9-Post-Closing Trial Balance-• Finally, the post-closing trial balance

lists the balances of the accounts that were not closed, such as assets, liabilities, and owner's equity.

• This trial balance helps verify that permanent accounts balance, with equal debit and credit sums, and that all temporary accounts were closed properly.

• DEFINITION-• Series of steps in recording an

accounting event from the time a transaction occurs to its reflection in the financial statements; also called bookkeeping cycle, The order of the steps in the accounting cycle are: recording in the journal, posting to the ledger, preparing a trial balance, and preparing the financial statements.