The Accounting Cycle
All 10 steps visualized and explained — from transactions to financial statements.
Why This Matters
Everything you've learned so far—debits, credits, journal entries, ledgers, source documents—is about to come together into one complete, continuous process.
The accounting cycle is the rhythm of business accounting. It repeats every period (month, quarter, year), and if you understand it, you'll understand how every piece of accounting fits into the bigger picture.
Master this, and you've mastered the entire foundation of accounting.
What Is the Accounting Cycle?
The accounting cycle is the continuous process of recording, organizing, and reporting financial transactions during an accounting period.
It's called a "cycle" because it repeats:
The 10 Steps of the Accounting Cycle
THE ACCOUNTING CYCLE
Real-World Example: A Month in ABC Consulting
Let's trace through all 10 steps using ABC Consulting's January transactions.
During January, ABC Consulting has these transactions:
| Cash | 8,000 | |
| Service Revenue | 8,000 |
| Rent Expense | 2,000 | |
| Cash | 2,000 |
| Salary Expense | 3,000 | |
| Cash | 3,000 |
| Supplies Expense | 500 | |
| Cash | 500 |
After posting: Cash = $8,000 - $2,000 - $3,000 - $500 = $2,500
Permanent vs. Temporary Accounts
Permanent Accounts (NOT Closed)
- Assets: Cash, Equipment, A/R
- Liabilities: Accounts Payable, Notes Payable
- Equity: Owner's Equity, Retained Earnings
These carry forward. Ending balances become next period's opening balances.
Temporary Accounts (Closed at Period-End)
- Revenue: Service Revenue, Sales Revenue
- Expenses: Rent Expense, Salary Expense
- Dividends: Owner's Drawings
These are zeroed out each period to measure only that period's performance.
Why Each Step Matters
| Steps | Purpose | Why It Matters |
|---|---|---|
| 1-3 | Record & organize | Creates permanent record of all transactions |
| 4 | Verify balance | Catches errors before they compound |
| 5 | Adjust accounts | Ensures statements reflect economic reality |
| 6 | Verify again | Confirms adjustments didn't create errors |
| 7 | Create reports | Communicates financial results to users |
| 8-9 | Reset for next period | Ensures next period measures only new activity |
| 10 | Final check | Confirms only permanent accounts remain |
Modern Software & the Accounting Cycle
In QuickBooks, Xero, Sage...
Happen automatically as you enter transactions
Generated on-demand (software calculates instantly)
Generated automatically (reports with one click)
Handled with one "close period" command
You still need to understand the cycle, but the software does the mechanical work.
Key Takeaway
The accounting cycle is the heartbeat of accounting. It takes raw transactions and transforms them into financial statements, then resets for the next period. Understanding all 10 steps—from recording to reporting to closing—is understanding how accounting actually works in the real world.
Test Your Understanding
1. In what order do Steps 4 and 5 occur?
2. Which accounts are zeroed out during closing entries?
3. What is the purpose of the post-closing trial balance?
4. When do adjusting entries occur in the accounting cycle?
5. True or False: The accounting cycle is a linear process that ends after step 10 and never repeats.
Ready to Practice?
You now understand the complete accounting cycle. The Practice Lab is where you'll experience it—record transactions, prepare trial balances, make adjustments, and close accounts.