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Accounting Cycle: Definition, Steps & Process

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  • 0:01 Accounting Cycle Defined
  • 0:40 Steps in the Accounting Cycle
  • 5:16 Lesson Summary
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Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Accounting isn't just about working with numbers. It is about following guidelines to get the job done. In this lesson, you will learn what the accounting cycle is and the steps to complete it.

Accounting Cycle Defined

There is ebb and a flow to every industry. In accounting, the ebb and flow is the accounting cycle. The term accounting cycle refers to the specific steps that are involved in completing the accounting process. The cycle is like a circle. It begins at one point and revolves through specific steps, before starting again at the same point and then repeating those same steps.

The length of the accounting cycle varies from company to company. It may be monthly, quarterly, semiannually, or annually, depending on when the financial statements of the company are published. Regardless of the timing of the accounting cycle, the processes involved remain the same.

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Steps in the Accounting Cycle

There are ten basic steps to the accounting cycle.

1. Collect source documents

The very first step in the accounting cycle is to gather all the documents that are related to financial transactions of the organization. These documents, called source documents, are things like receipts, bank statements, checks, and purchase orders. They are the items that describe what a transaction was for.

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2. Analyze transactions

The second step in the accounting cycle is to analyze the source documents. The purpose of this is to look them over and then decide what effect they have had on company accounts.

3. Journalize transactions

The third step in the accounting cycle is to post entries into the journal for the analyzed transactions. A journal is the book or electronic record that documents all the financial transactions for a company and the accounts that are affected by each transaction. When a journal entry is made, the 'double-entry' rule is used. This means that for every one transaction, at least two accounts are affected. There must be a debit and a credit for each transaction, and the total of debits and credits must equal the amount of the transaction. Journal entries are entered in chronological order, and debits are entered before credits.

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4. Post transactions

The fourth step in the accounting cycle is to transfer information from the journal to the ledger. A ledger is a book or an electronic record of all the accounts that a company has. These accounts are broken down by account number and class. When the information from the journal is transferred to the ledger, it is transferred to each account that was affected by a transaction.

5. Prepare an unadjusted trial balance

A trial balance is a list of all the company's accounts and their balance at the time the trial balance is prepared. An unadjusted trial balance is a trial balance that is prepared before adjusting entries are made into accounts. This information comes directly from the ledger. The total debit balance and total credit balance must be equal.

6. Prepare adjusting entries

Adjusting entries are entries that are made in the journal and posted in the ledger. The purpose of these entries is to bring account balances to the proper amounts. Not all accounts will have an adjusting entry. Adjusting entries are made at the end of the accounting period but not the end of the accounting cycle.

7. Prepare trial balance

Remember, the trial balance is a list of all accounts and their balances after adjustments have been made. This trial balance is prepared to check and make sure that debits and credits equal after adjusting entries are made. It is used to prepare the financial statements.

8. Prepare financial statements

These are prepared in a specific order because information from one financial statement is often used in preparing another financial statement. The order that the financial statements need to be prepared is:

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