Accounting Cycle
1. Identifying and Analyzing the Transaction
2. Making Journal entries
3. Posting to ledger
4. Unadjusted Trial balance
5. Adjusting entries
6. Adjusted Trial balance
7. Financial Statements
8. Closing entries
9. Post-closing trial balance
1. Identifying and Analyzing the Transaction
Transactions that need recording in the company’s books are financial in nature. Examples of financial transactions :
purchase of inventories
sale of these inventories
payment of salaries
payment of rent and utilities
purchase of equipment and office supplies
One of the accounting principles in the verifiability concept. Therefore, accounting transactions always need supporting documents. Examples of source documents are:
invoices
purchase orders
delivery receipts
bank statements
customer contracts
vendor contracts
official receipts
Identifying and analyzing the transactions is critical step in the process. It is determining whether you should record the transaction and timing on when it should be recorded.
2. Making Journal entries
The basis for recording any transaction is/are the source document/s. Creation of journal entries is the recording stage of the accounting process.
You have to identify the general ledger account and the amount to be recorded. Debits should equal the credits. You can refer on double entry accounting and journal entries examples.
3. Posting to ledger
The summarizing stage of accounting is to know the balance of all accounts. All journal entries will be posted to the respective general ledger accounts.
For example, in cash account, all cash receipts and disbursements are summarized in the ledger of Cash account. At the end of the period you will have the ending balance of Cash which is reported in your financial statements.
T-Account is a basic example of a ledger, below is for a Cash account.
4. Unadjusted Trial balance
Now that you made your entries and are now posted in their respective general ledger accounts, we will then create a trial balance. This is a list of all the accounts in your books with their ending balance. When you made the entries for any transaction, you know that your debits should equal your credits, so in your trial balance it should be the same. Debits equal credits.
Sample trial balance:
5. Adjusting entries
What are adjusting entries ? These are journal entries made for any correction or adjustment to accounts. The accounting principles of matching and accrual concept tells us that expenses must be recorded in the period they were incurred and record income on the period they were earned. Examples of adjusting entries are accruals, amortization, and depreciation.
6. Adjusted Trial balance
After recording the adjusting entries and posting this to general ledger accounts, we can now prepare for the adjusted trial balance.
7. Financial Statements
Accounting is the language of business, the end -products of the accounting is the preparation and presentation of the financial statements. These reports communicate to the decision makers as to business performance and status. The three basic financial statements are; (1) Balance Sheet (2) Income Statement and (3) Cash Flow Statement.
8. Closing entries
Balance Sheet accounts are also known as Real Accounts while income statement accounts are known as Nominal Accounts. At the end of an accounting year, we close all nominal accounts to a real account. For corporations, this real account is the "Retained Earnings", for sole proprietorship it is "Owner's Equity".
Example of closing entry
9. Post-closing trial balance
This is another trial balance being prepared after the closing entries. Accounts in a post-closing trial balance therefore do not include nominal or temporary accounts.