The Accounting Cycle - Complete 10-Step Guide
Step 1: Analyze Transactions
The process of identifying specific financial events from raw documents like receipts and invoices.
Not every event is a transaction. We only record events that change the financial position of the company and can be measured in money. If you sign a contract? No entry. If money or goods move? Entry.
Step 2: Journalize
Recording the transaction in the General Journal using double-entry bookkeeping where Debits must equal Credits.
For every Debit action, there is an equal and opposite Credit reaction. We record transactions chronologically here using double-entry bookkeeping.
Step 3: Post to General Ledger
Transferring journal entries to specific T-accounts in the General Ledger to track current balances.
The Journal is organized by Time (Chronological). The Ledger is organized by Account (Categorical). We are just sorting the mail into pigeonholes.
Step 4: Unadjusted Trial Balance
A list of all accounts to verify that total debits equal total credits before adjustments.
Before we do the hard math, we verify the basics. If Total Debits don't equal Total Credits here, stop everything—the engine is broken.
Step 5: Adjusting Entries
Entries made at period-end to assign revenues and expenses to the correct period (accruals and deferrals).
Cash isn't the only reality. We use the Matching Principle to record revenue when earned and expenses when incurred, regardless of when cash moves.
Step 6: Adjusted Trial Balance
A final check of account balances after adjusting entries are posted to verify equality.
Everything must be perfect here because the next step is Opening Night (The Financial Statements). This is our final proof before reporting.
Step 7: Financial Statements
The formal output: Income Statement, Statement of Retained Earnings, and Balance Sheet.
We stop recording and start reporting. We translate raw data into three stories: Did we profit? (Income Statement), How much is ours? (Retained Earnings), What's our position? (Balance Sheet).
Step 8: Closing Entries
Resetting temporary accounts to zero by transferring their balances to Retained Earnings.
We drain the temporary buckets (Revenue, Expense, Dividends) so they are empty for next year's rain. Their balances flow into Retained Earnings.
Step 9: Post-Closing Trial Balance
A list of permanent accounts that remain open for the next accounting period.
The storm has passed. If you see 'Rent Expense' here, you failed. Only Permanent Accounts (Assets, Liabilities, Equity) survive to see New Year's Day.
Step 10: Reversing Entries
Optional entries at the start of a new period to reverse certain adjusting entries.
A pro-move for Day 1 of the new period. We flip certain accruals from Step 5 to simplify the next month's data entry. Optional but elegant.