Accounting Cycle

 
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The accounting cycle is a ten step process, starting with collecting data about the original economic event that affects the financial statements, to the final production of the financial statements for the period.

This online accounting section goes through each step in the accounting cycle, from collecting data to producing the final financial statements.

Although the best small business accounting software packages handle much of the accounting cycle automatically, such as posting to the general ledger, a thorough grasp of these accounting principles gives business stakeholders and analysts valuable information about the composition of the business financial statements and the underlying story behind them.

The Accounting Cycle

1). Collecting and Analyzing Data about an Economic Event
2). Recording the transaction in the Accounting Journal
3). Posting from the Accounting Journal to the General Ledger
4). Preparing the Unadjusted Trial Balance
5). Recording Adjusting Entries
6). Preparing the Adjusted Trial Balance
7). Preparing Financial Statements
8). Recording Closing Entries
9). Preparing a Final Trial Balance
10). Recording Reversing Entries

1). Collecting and Analyzing Data about an Economic Event

A source document provides evidence that an economic event has actually occurred. Examples of source documents include a receipt, an invoice, a depreciation schedule, and a bank statement.

Because the financial statements and the accounting cycle center on the accounting equation, the accounting cycle is set up to ensure that any transaction entered keeps the accounting equation in balance. This concept is known as double entry accounting.

The Accounting Equation and Double Entry Bookkeeping

Assets = Liabilities + Owner’s Equity

For example, an entry to increase an asset account must also increase liabilities, owners equity, or reduce another asset by the same amount to keep the accounting equation in balance.

Every account has a left side and a right side to enter a transaction. In accounting terms, a debit simply means an entry on the left side of an account, and a credit simply means an entry on the right side of an account.

General Ledger Account

Debit Side Credit Side

Debits and Credits


Debits are entries made on the left side of an account column, and a credit is an entry made on the right side of an account column.

The concept of debits and credits simply allows us to keep the accounting equation in balance without memorizing the process. Debits to the left of the equation, assets, increase the balance, and credits to the right side of the equation, liabilities and owners equity, increase the balance. Similarly, credits to assets decrease the balance, and debits to the right side of the equation also reduce the balance.

By analyzing the economic event, we determine what effect the transaction has on the accounting equation.

Debits and Credits and Double Entry Accounting

Debits Indicate Credits Indicate
Asset Increases Asset Decreases
Liability Decreases Liability Increases
Owners Equity Decreases Owners Equity Increases
Expenses Revenue

For example, when Sunny invested $50,000 to start his business, $50,000 increased the cash balance of the business, an asset, and also increased owners equity.

Assets: Cash = Liabilities + Owners Equity
$50,000 = $0 + $50,000

The accounting principle of debits and credits keeps the accounting equation in balance:
Cash Account

Debit Side Credit Side
$50,000

Owners Equity

Debit Side Credit Side
$50,000

Steps in the Accounting Cycle continued:

2). The Accounting Entry and the Accounting Journal

3). Posting to the General Ledger Accounts

A Look at the Chart of Accounts

4). Preparing the Unadjusted Trial Balance

5.) Recording Adjusting Entries

Adjusting Entries Illustrated

6). Preparing the Adjusted Trial Balance
7.) Preparing Financial Statements

Preparing the Income Statement

Preparing the Balance Sheet

Preparaing the Statement of Cash Flows

8). Recording Closing Entries
9). Preparing the Final Trial Balance
10). Recording Reversing Entries

Back from the Accounting Cycle|Debits and Credits to Accounting Terms
Back to the Small Business Accounting Home Page

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  11 Responses to “Accounting Cycle”

  1. Hi Hussain,
    Thank you for visiting! You will find a complete discussion of reversing entries here.
    Reversing Entry

    Kenneth Meunier

  2. Thanks a lot
    A great deal of information in a precise manner,
    just one question, if you could explain the Recording Reversing Entries, are you talking about any specific entry to be reversed, or any entry that is effecting our margin or anything else, will be reversed.

    So if you could answer this, it will be great.

  3. Thank you for this………..I am going nuts with this “accounting”.
    You just helped me a lot.

  4. Hi Jassi –

    I have resolved this by putting out my own book. It is considered the best bang for you buck by far. Check it out here
    !
    Kenneth

  5. Outstanding, solved all of my problems, god give you the reward.

    Regards

  6. great site, needs improvement. I also like how simple it is too not too overwelming. It is basic which is not too confusing. Thanks I learned somehting new just now bc of this site. Thanks

  7. Hi its a good site for those people who want to understand basic concept of the accounting. It really helps just go through it & jot down all the points on your note book & memorize them. instead of doing this you may visit Google on-line books there you may find some good material regarding to your needs Best Of Luck….

  8. Really it is great effort.Thanks dear

  9. Thank you for your comment Niraj. Please also see the accounting terms page for a definition of the accounting cycle in addition to other accounting topics on this site.

    Kenneth

  10. it’s good but you should also provide the definition

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