The 10 Steps of the Accounting Cycle

The Accounting Cycle

The accounting cycle entails the multistep procedure utilized by companies to create

accurate records of their financial position as summarized on their financial statements. During

these cycle phases, businesses record their financial transactions in a journal, transfer the details

into a general ledger, analyze the entries, and ensure the books are error-free and balanced prior

to producing financial statements and closing the books for the period. The advancement from

one cycle to the other is influenced by diverse factors such as the type of financial close, whether

it uses automated accounting software and the volume of transactions. Generally, the cycle

encompasses the entire process, from the initial transaction analysis to the preparation of

impact on a business. Transactions include sales revenue, debt payment, expenses, and cash

received from customers. During this stage, businesses go through each transaction that impacts

their financials.

2. Recording Transactions in a Journal

This step entails recording all the details of all financial transactions, in sequential order, as

journal entries, whether in an accounting program or an actual book. When the transactions are

recorded, it depends on whether the company prefers the cash accounting method, which

requires transactions to be recorded when cash is either paid or received, or accrual accounting,

which requires expenses and revenues to be matched and booked at the time of the sale. In this

case, to facilitate a fully developed income statement, balance sheet, and cash flow, double-entry

bookkeeping is required, where two entries must be made for every transaction: every transaction

is recorded as a debit and corresponding credit in two or more sub-ledger accounts.

3. Posting Transactions to General Ledger

After journal entries are recorded and approved, they are posted to an account in the general

ledger accounts. According to Jonick (2017), a ledger is the second accounting record book that

lists a business's individual accounts in order of account category: while a journal lists all

transactions chronologically, the ledger categorizes this same information and separates them

errors such ad unbalanced credits and debits. This is the stage to check if every account's debit

and credit balances are equal, and if they are not, there is a need to go back and double-check

every journal entry.

5. Adjusting Entries

This is a critical stage prior to preparing the financial statements, which entails adjusting

entries at the end of every accounting period for accrual-basis accounting. The three types of

adjusting entries include missing transaction adjustments, tax adjustments and accruals. Tax

adjustments account for tax deductions such as depreciation. Accruals entails to revenues or

expenses that you have earned or incurred have not been received or paid to ensure that financial

statements take into account future expenses or payments. Missing transaction adjustments

accounts for any transactions that may have not been entered, missed, or forgotten in step one.

6. Reviewing the Adjusted trial Balance

After making all the adjustments, preparation of an adjusted trial balance follows. The

adjusted trial balance lists all company’s accounts and its current ledger balances after the

adjustment have been made (Dauderis & Annand, 2019).

7. Preparing Financial Statements

This stage utilizes the adjusted trial balance to prepare financial statements. There are three

9. Post-Closing Trial Balance

Since credits and debits must ever balance, after closing the temporary accounts, there is

need to prepare a closing trail balance by adding up the totals for both credit and debit columns

of the general ledger to ensure they balance. According to Daniel (2020), the trail balance in this

stage assures that total debits are equal to total credits before starting a new accounting period.

10. Reversing Entries

These are journal entries made on the first date of an accounting period to do way with

accrual adjusting entries that were made at the end of the previous accounting period. This phase

allows a more effective and efficient processing of the actual invoices that will be processed in

the new accounting period. It also significantly reduces the chance of double-counting expenses

or revenues.

Deliverable 2 - Financial Statements Order and Representations

1) First: The Income statement

2) Second: Statement of Retained Earnings

3) Third: Balance sheet

4) Fourth: Statement of cash flows

First: The Income Statement

Second: Statement of Retained Earnings

Statement of retained earnings comes second and displays the changes in retained

earnings for a given accounting period. It explains how profits are either reinvested in the

company or distributed to shareholders. The statement reconciles the starting and the ending

retained earnings for the period by utilizing information including net income from the income

statement.

Third: Balance Sheet

It appears third in the order and presents an image of a business's financial position at a

given accounting period. It lists all company’s assets, liabilities, and equity (Jonick, 2017). It

demonstrates an accounting equation that assets is equal to the total of liabilities and equity

(Assets = Liabilities + Equity). It presents the basis for computing business’s capital structure

and rates of return for investor.

Fourth: Statement of Cash Flows

This comes fourth and processed last as it use all of financial data from the other there

statements. Statement of cash flows shows how ash has changed in company’s revenue, expense,

asset, equity, and liability accounts (Dauderis & Annand, 2019). It presents details of cash inflow

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Daniel. (2020, March). The Accounting Cycle and its Steps. The University of the South.

https://www.researchgate.net/publication/365442661_The_Accounting_Cycle_And_its_S

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