Accounting cycle and its steps


The Accounting Cycle

Steps in the accounting cycle

There are several steps that are usually followed in the accounting process within an accounting period.  These are repeated every accounting period during the 'life' of the business. They make up what is known as an accounting cycle.




The successive steps that make up the accounting cycle are:

(a)        Journalizing - From source documents the dual effect of each transaction is analyzed and recorded in chronological order in books of prime entry or journals.

(b)        Posting – This is the process of transferring the debit and credit entries from the journals to the respective accounts in the ledgers.

(c)        Preparing a Trial Balance - A list of the balances of all accounts in the ledger is extracted at a particular date in order to check the arithmetic equality of the debit and credit balances and to provide a summary of the data from the ledger.

(d)        Preparing Adjusting Entries - End-of-period adjustments are made by journalizing and posting events which need to be included at the end of the period in order to update the accounts. An adjusted trial balance is normally prepared after adjusting entries have been made.

(e)        Preparing Financial Statements - Usually an income statement (profit and loss account) and balance sheet are prepared from the adjusted trial balance. A cash flow statement is prepared from details of the income statement and the balance sheet.

(f)        Preparing Closing Entries - Entries are made to close temporary accounts like revenue and expense accounts. Closing entries reduce the balance of these accounts to zero.

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