Accounting Cycle: 10 Steps of the Accounting Process

The financial statements can now be prepared from the adjusted trial balance. Items relating to the income statement are transferred to the next two columns and items relating to the balance sheet are transferred to the final two columns. At the start of the next accounting period, occasionally reversing journal entries are made to cancel 10 steps of the accounting cycle out the accrual entries made in the previous period. After the reversing entries are posted, the accounting cycle starts all over again with the occurrence of a new business transaction. When the accounts are already up-to-date and equality between the debits and credits have been tested, the financial statements can now be prepared.

Step 10: Record reversing entries (if necessary)

An accounting cycle is a continuous and fixed process that needs to be followed accordingly. This is the output of the accounting process, which is used by the interested parties both within and out of the organization. Experts use “Accounting Cycle” and “Accounting Process”; to describe the ten steps of accounting procedure in any organization. This is a straightforward guide to the chart of accounts—what it is, how to use it, and why it’s so important for your company’s bookkeeping. Accruals have to do with revenues you weren’t immediately paid for and expenses you didn’t immediately pay.

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After recording the closing entries, the next step in the accounting cycle is to prepare the post-closing trial balance. This document ensures that the ledger is balanced and that all temporary accounts (such as revenues and expenses) have been closed properly. The post-closing trial balance contains only permanent accounts such as assets, liabilities, and equity. This is because all temporary accounts, like revenue, expenses, and dividends, are reset to zero during the closing process. As a result, only the balances of accounts that carry over to the next accounting period are included in the post-closing trial balance. Adjusting entries are recorded as journal entries, and then posted to the relevant ledger accounts.

Journalizing:

Tax adjustments happen once a year, and your CPA will likely lead you through it. In short, an accounting cycle makes sure that all of the money passing through your business is actually “accounted” for. Our team is ready to learn about your business and guide you to the right solution. This is done to take care of any accruals or prepayments that occurred between the two cycles, so it may not be a necessary step for each business. He’s a co-founder of Best Writing, an all-in-one platform connecting writers with businesses. He has built multiple online businesses and helps startups and enterprises scale their content marketing operations.

Within the ever-evolving landscape of financial management, the accounting cycle assumes a crucial role as a foundational process that establishes the basis for precise and insightful decision-making. Essentially, the accounting cycle represents a carefully orchestrated series of steps that converts raw financial data into meaningful and comprehensible reports. When all adjusting entries have been completed an adjusted trial balance is prepared in the next two columns of the worksheet. All postings to the ledgers are double entry postings and therefore must balance which every debit having an equal and opposite credit entry.

After ABC Co has prepared its Adjusted Trial Balance, it is time to prepare the Financial Statements. Below are the preparation of both the Income Statement and Balance Sheet. For illustration purposes, let’s assume that the below expenses have not been adjusted yet by an accountant of ABC Co.

After the adjusting entries have been passed and posted to respective ledger accounts, the unadjusted trial balance needs to be corrected to show the impact of these adjustments. For this purpose, an amended trial balance, known as an adjusted trial balance, is prepared. Finally a post closing trial balance is drawn up to ensure that the debits and credits balance for the start of the new accounting period. Obviously, business transactions occur and numerous journal entries are recording during one period.

Double-entry bookkeeping states that for every transaction, there must be a debit entry and a credit entry. This ensures that the accounting equation is balanced and that assets are always equal to liabilities plus equity. The next step in the accounting cycle is to prepare the unadjusted trial balance.

These concepts shape how transactions are identified, recorded, adjusted, and reported in financial statements to ensure that financial information is relevant, reliable, and comparable. Adhering to established accounting principles and standards is essential for maintaining credibility and avoiding financial issues. Companies should ensure compliance with Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS), depending on their jurisdiction.