The Accounting Cycle

"The accounting cycle is a series of activities that begins with a transaction and ends with the closing of the books" (Netmba.com, n. d). The accounting cycle must always include the following steps.

Identify and analyze the transaction - involves looking at the transaction and source document which describe the transaction and events. Source documents include purchase orders, checks and bank statements. Determine the amounts of the transactions and which accounts will be affected.

Journalize - Recording transactions as either debits or credits also known as double entry accounting in which transactions are recorded to two separate accounts and the debit must equal the credit.

Post to the ledger - Information is transferred from the journal to the correct T- accounts in the ledger. The ledger shows all the companies accounts and their balances.

Prepare the trial balance - a list of accounts with their balances for a specific period. To prepare the trial balance the balances are taken from the ledger, then applied to the appropriate accounts as debits or credits. This trial balance is also referred to as the unadjusted trial balance since the balances will have to be readjusted the close the period.

Prepare adjusting entries - The adjusting entries are used to adjust accrued and deferred items, bringing the assets and liabilities accounts to their correct balances. By doing this the related revenue and expense accounts will be updated. The adjusting entries are then recorded in the journal and posted to the general ledger.

Prepare adjusted trial balance - Once the adjustments have been made another trial balance is prepared to show the adjustments, this is referred to as the adjusted trial balance. The adjusted trial balance verifies that the debits and credits have equal balances. When the balances are verified the trial balance can be used to prepare the financial statement.

Prepare the financial statement- The financial statement must be prepared in a particular order for the information to be correct. The financial statements include the income statement, statement of owner's equity and the balance sheet which is the order they are prepared in. The income statement used the revenue and expenses to shows the net income or net loss, the statement of owner's equity uses the owner's capital at the beginning of the period and net income along with the owner's withdrawal to determine the owner's capital at the end of the period. The balance sheets show the total assets, total liabilities and owner's equity.

Prepare and Post closing entries - Transfers balances from temporary accounts such as revenue, expense, net profit and net loss. "These accounts are closed to a temporary income summary account, from which the balance is transferred to a retained earnings account (capital)" (Netmba.com, n. d). The closing entries are the posted to the ledger