Accounting Cycle Steps

The first step in the accounting cycle involves identifying the specific accounts affected by a transaction. This can be done by examining source documents like invoices, receipts, and contracts.

The second step analyzes the impact of the transaction on the accounting equation (Assets = Liabilities + Equity). This helps determine how the transaction changes the company's financial position.

The third step involves determining whether the transaction requires a debit or a credit to the affected account balance. Debits increase asset and expense accounts, while credits increase liability, equity, and revenue accounts.

The fourth step involves recording the transaction in the journal. This chronological record includes the date, accounts affected, and dollar amounts for each transaction.

The fifth step involves transferring the information recorded in the journal to the general ledger (T-accounts). Each T-account represents a specific account and tracks its debits and credits.

The sixth step involves creating a trial balance, which is a list of all accounts and their balances. Debits should equal credits in a balanced trial balance.

The seventh step involves recording adjusting entries at the end of the accounting period. These entries are needed to ensure that revenue and expenses are accurately recognized and recorded.

The eighth step involves preparing the key financial statements: Income Statement, Statement of Stockholders' Equity, Balance Sheet, and Statement of Cash Flows. These statements provide a summary of the company's financial performance and position.

The ninth step involves recording closing entries at the end of the accounting period. These entries zero out temporary accounts (revenues, expenses, and dividends) and transfer their balances to retained earnings.