Completing the Accounting Cycle

The accounting cycle is the process of entering records and transactions into the appropriate accounts and closing the accounts in the journal each accounting period. After all entries are posted appropriately, an accountant or bookkeeper can create several financial reports including a trial balance, income statement, balance sheet, statement of retained earnings and a statement of cash flows. The steps involved in the accounting cycle are always the same, and are commonly used by both for-profit and nonprofit organizations.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Calculator
• Accounting software

During the Accounting Period

1. Identify the transaction and find locate its source document. You will need to classify the transaction and determine which accounts are affected by it before posting the numbers into each account.

2. Record the transaction in the general journal and related journals. In most cases, the transactions will be posted in a purchase journal, sales journal and/or cash receipt journal.

3. Post transactions to the ledger accounts. You will need to post all general journal transactions into the appropriate ledger accounts.

End of Accounting Period

4. Prepare the trial balance. Use the general ledger account totals to prepare the trial balance.

5. Make sure the trial balance totals are equal. If trial balance totals are not equal, there may be a posting error somewhere in the trial balance entry or the general journal or general ledger.

6. Prepare any adjusting entries in the trial balance. This will account for any deferred and accrued amounts related to various accounts. You will need to post these to the general ledger.

7. Create an adjusted trial balance. This will take into account all additions made in Step 3.

8. Create your financial statements. This includes the income statement, balance sheet, statement of retained earnings and cash flow statement for the period. You will be using the information from the adjusted trial balance to populate the data for each report.

9. Prepare the closing journal. This is where you will "close" any temporary accounts which will then be posted to temporary income summary account.

10. Post to the general ledger. You will need to post all closing journal entries directly to the general ledger.

11. Create the after-closing trial balance. This is the second round of checking that totals in the debit and credit columns are equal.

Tips & Warnings

• The accounting cycle is also known as the accounting process
• The accounting cycle can be performed bimonthly, biannually or at other frequencies depending on the organization’s specific needs
• Steps 1 – 3 are typically performed in batches to save time
• Verifying every transaction’s source document is essential for keeping the records accurate
• Maintaining copies of all changes made to the general journal and ledger accounts is essential. Backing up files may also be a part of the posting process each period
• Common posting errors can create discrepancies in the trial balance; check for double postings, posting in the wrong column, neglecting a posting or transposition errors if the final numbers do not match