Accounting Cycle Simplified: A Step-by-Step Guide for Businesses

accounting cycle 6 steps

The post-closing trial balance is used to demonstrate the equality of the balances carried over from one accounting period to the next in permanent accounts. Following the journalizing and posting of closing entries, the post-closing trial balance shows the permanent accounts and their balances. Words used to describe the double-sided nature of financial transactions.

  • At the end of the accounting period, some expenses may have been incurred but not yet recorded in the journals.
  • It is important to set proper procedures for each of the eight steps in the process to create checks and balances to catch unwanted errors.
  • Adjustments include the recording of depreciation expense, the gradual release of prepayments, and the recording of earned revenue from unearned revenues at the end.
  • Reversing entries is a bookkeeping technique that is optional; it is not an essential step in the accounting cycle.
  • Mapping out plans and dates that coincide with your accounting deadlines will increase productivity and results.

Figure 3.7 includes information such as the date of the transaction, the accounts required in the journal entry, and columns for debits and credits. The accounting cycle is a series of eight steps that a business uses to identify, analyze, and record transactions and the company’s accounting procedures. Regardless of the scenario, an unadjusted trial balance displays all your credits and debits in a table.

Why Is the Accounting Cycle Important?

The result of posting adjusting entries should be an adjusted trial balance where the total credit balance and the total debit balance match. Business transactions are usually recorded using the double-entry bookkeeping system. They are recorded in journal entries under at least two accounts (at least one debited and at least one credited). The accounting process starts with identifying and analyzing business transactions and events.

After analyzing transactions, now is the time to record these transactions in the general journal. A general journal records all financial transactions in chronological order. The general journal format includes the date, accounts affected, amounts, and a brief description of the transaction. Some accountants prefer to make a reversing entry at the start of the following accounting period in order to reverse specific adjusting entries. Since their utilities ceased during the specific accounting period and were not carried over to the following year like assets and liabilities, closing expenses and incomes became necessary.

Guide to Understanding Accounts Receivable Days (A/R Days)

Creating an unadjusted trial balance is vital for a business as it helps ensure that total debits equal total credits in your financial records. This step generally identifies anomalies, such as payments you may have thought were collected and invoices you thought were cleared but weren’t. The trial balance gives you an idea of each account’s unadjusted balance.

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