The Accounting Cycle

1. Record in a Journal

The first stage in the accounting cycle is to record a transaction in a journal. Mostly transactions are recorded in special journals (Cash Receipts, Cash Payments, Sales and Purchases) but some special transactions are recorded in the General Journal.

2. Post to the Ledger

Journal entries are posted to the General Ledger. Sometimes this happens for individual transactions (from the General Journal) but mostly they are done in bulk at the end of the month. If a credit transaction is involved, this will also require a posting to one of the two Subsidiary Ledgers.

3. Summarise in the Trial Balance

The Trial Balance reports the balance of each account in the general ledger. We call this the Unadjusted Trial Balance.

End of Period Adjustments

The accounting principles tell us that all income and expenditure needs to be matched to a particular accounting period. As a result at the end of a period we will need to adjust some accounts. Depreciation is a great example of an adjustment. Even though we may not have spent any cash on a particular asset for a year, we still need to allocate a portion of its cost to the year. End of Period Adjustments are a loop within the Accounting Cycle. When we have calculated our end of period adjustments we need to record these in the General Journal and then post to the General Ledger. We then need to produce a new summary of the General Ledger Accounts in the Trial Balance. We refer to this Trial Balance as the Adjusted Trial Balance.

4. Report in the Financial Statements

We study three Financials Statements. The Income Statement, The Balance Sheet and the Statement of Changes in Equity. There is a fourth statement - Statement of Cash Flows. The information or the Financial Statements comes straight out of the Trial Balance (in this case the Adjusted Trial Balance).

5. Closing Entries

When we have completed all of our transactions for the year and have produced our financials statements, we need to prepare the accounts for the next accounting period. To do this we need to empty all of the temporary accounts (the ones that make up retained earnings) into the owners equity capital account See the page on Permanent and Temporary Accounts. We then produce one final Trial Balance. We call this the Post Closing Trial Balance. This trial balance is easy to recognise because all of the temporary accounts are zero.