What is the Accounting Cycle?
The accounting cycle is a sequence of steps that occur in order over an established period of time. The time frame is usually one month in duration; therefore, there are 12 accounting cycles per year. The steps required to complete a full accounting cycle are recording in the journal, posting to the ledger, preparing a trial balance, preparing the financial statements and closing the books.
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Journal
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Recording in the journal requires tracking all financial transactions over the period of a month. These transactions are recorded in the journal containing their account. Every transaction is tracked to certain accounts within a journal that will eventually be recorded into the general ledger. These transactions include liabilities, revenues, capital expenditures and all other financial transactions.
General Ledger
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Toward the end of the month, these transactions will be posted from the journal to the general ledger. This is the master set of books for the company. The general ledger contains an account for every possible category of transaction a company makes. The ledger is a complex piece of information. The transactions are usually completed by professional trained accountants. The ledger is updated and closed every 30 days to begin a new month.
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Trial Balance
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Once the entries have been recorded into the general ledger, a trial balance is created. This tests the accounts for accuracy and allows the accountant to determine if everything balances. If problems are detected, the corrections are made and the adjusting entries are entered. This checks the books over the period of the last month. Once this process is complete, the ledger is closed for the month. It is now ready for the next cycle.
Financial Statements
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Once the books are finalized for the month, the financial statements are created. A company will usually create a balance sheet, income statement, cash flow statement and retained earning statement. Several other statements may be included. Ratio analysis is created from the financial statements. This process is duplicated every month.
Closing the Books
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The books are closed for the month and cannot be reopened. If a mistake is found in a subsequent month, the adjustment is made in that month with a note referring back to the original error. The books should never be re-opened after they have been closed. A new and final trial balance is created. This proves the books for the month.
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