8 steps in the Accounting Cycle

Step 8: Closing the Books

Finally, a company ends the accounting cycle in the eighth step by closing its books at the end of the day on the specified closing date. The closing statements provide a report for analysis of performance over the period.

Step 6: Adjusting Journal Entries

In the sixth step, a bookkeeper makes adjustments. Adjustments are recorded as journal entries where necessary.

Step 3: Posting

Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account. This allows a bookkeeper to monitor financial positions and statuses by account. One of the most commonly referenced accounts in the general ledger is the cash account which details how much cash is available.

Step 1: Identify Transactions

The first step in the accounting cycle is identifying transactions. Companies will have many transactions throughout the accounting cycle. Each one needs to be properly recorded on the company's books.

Step 2: Record Transactions in a Journal

The second step in the cycle is the creation of journal entries for each transaction. Point of sale technology can help to combine Steps 1 and 2, but companies must also track their expenses. The choice between accrual and cash accounting will dictate when transactions are officially recorded. Keep in mind, accrual accounting requires the matching of revenues with expenses so both must be booked at the time of sale.

Step 7: Financial Statements

After the company makes all adjusting entries, it then generates its financial statements in the seventh step. For most companies, these statements will include an income statement, balance sheet, and cash flow statement.

Step 5: Worksheet

Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made.

Step 4: Adjusted Trial Balance

At the end of the accounting period, a trial balance is calculated as the fourth step in the accounting cycle. A trial balance tells the company its adjusted balances in each account. The adjusted trial balance is then carried forward to the fifth step for testing and analysis.