Accounting Cycle Steps to Know for Financial Accounting I

The accounting cycle is a series of steps that help businesses track their financial activities. Understanding these steps is crucial for mastering financial accounting, as they ensure accurate reporting and compliance with accounting standards.

1. Identify and analyze transactions

   • Determine the economic events that affect the business.
   • Classify transactions into categories such as revenue, expenses, assets, liabilities, and equity.
   • Assess the impact of each transaction on the accounting equation (Assets = Liabilities + Equity).

2. Record transactions in the journal

   • Use the double-entry accounting system to ensure that debits equal credits.
   • Record transactions chronologically in the journal, including date, accounts affected, and amounts.
   • Provide a brief description of each transaction for clarity.

3. Post transactions to the ledger

   • Transfer journal entries to the appropriate accounts in the general ledger.
   • Update account balances to reflect the effects of the recorded transactions.
   • Ensure accuracy by cross-referencing journal entries with ledger postings.

4. Prepare an unadjusted trial balance

   • Compile a list of all account balances from the ledger to verify that total debits equal total credits.
   • Identify any discrepancies that may need further investigation.
   • Serve as a preliminary check before making adjustments.

5. Prepare and post adjusting entries

   • Identify necessary adjustments for accrued and deferred items to align with the accrual basis of accounting.
   • Record adjusting entries in the journal and post them to the ledger.
   • Ensure that adjustments reflect the true financial position of the business.

6. Prepare an adjusted trial balance

   • Create a new trial balance that includes the effects of adjusting entries.
   • Confirm that total debits still equal total credits after adjustments.
   • Use this trial balance as the basis for preparing financial statements.

7. Prepare financial statements

   • Generate the income statement, balance sheet, and statement of cash flows based on the adjusted trial balance.
   • Ensure that financial statements comply with relevant accounting standards (e.g., GAAP or IFRS).
   • Provide a clear and accurate representation of the company's financial performance and position.

8. Close temporary accounts

   • Transfer the balances of temporary accounts (revenues, expenses, dividends) to retained earnings.
   • Reset temporary accounts to zero for the next accounting period.
   • Ensure that the closing process reflects the net income or loss for the period.

9. Prepare a post-closing trial balance

   • Compile a final trial balance that includes only permanent accounts (assets, liabilities, and equity).
   • Verify that total debits equal total credits after closing entries.
   • Confirm that the accounting records are ready for the next accounting period.