Accounting Cycle Steps & Examples

Christine Liddell, Shawn Grimsley
  • Author
    Christine Liddell

    Christine Liddell graduated from the University of Nevada, Reno in 2019 with a Bachelor of Science in Mining Engineering. She has tutored English and History, as well as STEM classes, such as Statics, Calculus, and Thermodynamics.

  • Instructor
    Shawn Grimsley

    Shawn has a masters of public administration, JD, and a BA in political science.

Understand what is the accounting cycle. Learn about the definition of accounting cycle and know about the steps of accounting cycle along with some examples. Updated: 12/17/2021

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What is the Accounting Cycle?

What is accounting cycle? The accounting cycle definition consists of nine steps, performed in sequential order, for the purpose of collecting financial information that will then be processed and included in financial reports. Why is the accounting cycle important? The accounting cycle is important because the reports generated during the accounting cycle are then used by management to make decisions regarding the operation of the business.

Why is the Accounting Cycle Important?

Balance sheets, income statements, and cash flow statements are all produced from information obtained during the accounting cycle. The balance sheet provides insight regarding a company's assets, liabilities, and shareholder equity at a specific point in time. The balance sheet effectively provides a look into what the company owns versus what it owes, and details how much money was invested by shareholders. Income statements show a firm's profit and loss over a period of time by taking all revenues and subtracting all expenses from both operating and non-operating activities. The cash flow statement summarizes the amount of cash and cash equivalents entering and leaving a company.

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  • 0:07 Accounting Cycle Defined
  • 0:42 Step One: Collection &…
  • 3:04 Step Five: Adjustments
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Accounting Cycle Steps

There are nine steps in the accounting cycle. Like any process, the accounting process steps begin with the acquiring of information to then be analyzed and ends with checking one's work to ensure accuracy. The accounting cycle process is usually performed over a month, or a specified accounting period. The accounting cycle order builds on all prior steps. Information obtained in one of the accounting process steps will be used in the successive accounting cycle steps.

Step 1: Identifying Transactions

All financial transactions taken on by a company must be collected and analyzed. The analysis shows how the company's financial health is being affected. Transactions are analyzed in the order in which they occurred. Transactions are only analyzed if they are monetary and involve the business. The CEO's personal finances will not be analyzed or recorded, for instance. An analyst or accountant may analyze all sales and payments made each day to complete this step.

Step 2: Journaling Transactions

Once the transactions are identified and their relevant accompanying data is collected, all transactions are then entered into the general journal in a process known as journalizing. The general journal is where all transactions are listed in the order they occurred. To journalize is to record a transaction in the company's general journal.

Step 3: Ledger Posting

After the transactions are posted in the general journal, they will subsequently be posted in the general ledger. The general ledger is organized by account. Each transaction belongs to a certain account. The list of accounts a company is utilizing is known as the chart of accounts. This posting of the ledger is of vital import as it assures that the company has a complete accounting transaction record. Each transaction recorded in the general ledger has a trickle-down effect as it impacts subsidiary ledgers and the collective sum.

A ledger from the 1800s. Even then, ledgers have to balance out where debits equal credits.

Ledger from the 1800s

Step 4: Unadjusted Trial Balance

After the ledger posting, in which all transactions have been posted to the general ledger in the appropriate accounts, an unadjusted trial balance will be prepared. Debits, appearing on the left side of a T account, and credits, appearing on the right side of a T account, must balance. To balance, debits must equal credits. For every debit entry, there must be an equal and opposite credit entry. For instance, if an account is debited - $5,000, another account must be credited + $5,000.

Step 5: Adjusting Entries

After the unadjusted trial balance, any necessary adjustments are made to bring the accounts and balances up to date. For instance, under the accrual method (a method of accounting used by most larger businesses as mandated by the generally accepted accounting principles), income must be recorded when it is earned, even if money has not been received. For example, if a customer made a purchase of $500 using in-store credit, but doesn't have to make the payment for another month, the $500 would still be recorded when the sale was made under the accrual method. Expenses will also be subtracted, even if they have not yet been paid. If the company received a bill from the utility company, for instance, but wasn't obligated to pay it until a week after the bill was received, the payment would have been recorded upon receipt of the bill. This step provides a crucial first glance at how much money a company is earning and spending and is necessary to complete the sixth step.

Step 6: Preparing Adjusted Trial Balance

Step six involves the adjusted trial balance being prepared. The adjustments made in the previous step must place all debits and credits in balance in order for this step to be successful. Any accounts that are still not in balance by this step will need to be further investigated and corrected.

Step 7: Financial Statements

The financial statements, such as the balance sheet, income statement, and cash flow statement can now be prepared from the information recorded in the general ledger.

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Frequently Asked Questions

What is accounting cycle with example?

An example of the accounting cycle is a business owner collecting their financial information, journalizing it, posting it to the ledger by account, performing an unadjusted trial balance, making adjustments, performing an adjusted trial balance, preparing financial statements, closing accounts, and finally preparing a post-closing trial balance. Once all the nine steps are performed and the financial statements are analyzed, the business owner may realize they need to shut down their business.

What are the 9 accounting cycle steps?

The accounting cycle refers to steps taken to collect, process, and report all financial transactions a company participates in. The steps are as follows: collection and analysis, journalizing the transactions, posting to the general ledger, unadjusted trial balance, adjustments, adjusted trial balance, financial statements, close accounts, post-closing trial balance.

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