accounting cycle in accounting

The accounting cycle is the step-by-step process used to identify, record, and process a company’s financial transactions over a specific accounting period (monthly, quarterly, yearly). It ensures that all financial information is accurate, complete, and properly reported in the financial statements.

🔄 Steps in the Accounting Cycle

Here are the 8 main steps of the accounting cycle:

Step Name Description
1️⃣ Identify Transactions Recognize and gather all business transactions (e.g., sales, expenses, purchases).
2️⃣ Record in Journal (Journalizing) Record transactions in the journal in chronological order using double-entry accounting.
3️⃣ Post to Ledger (Ledgering) Transfer journal entries to individual ledger accounts (T-accounts).
4️⃣ Prepare Trial Balance List all ledger balances to ensure debits = credits.
5️⃣ Adjusting Entries Make adjustments for accrued and deferred items (e.g., depreciation, accrued expenses).
6️⃣ Adjusted Trial Balance Create a new trial balance after adjusting entries to confirm accuracy.
7️⃣ Prepare Financial Statements Use the adjusted trial balance to prepare:
    • Income Statement
    • Balance Sheet
    • Cash Flow Statement
    • Statement of Changes in Equity
8️⃣ Closing Entries Close temporary accounts (revenues, expenses) to retained earnings and prepare books for the next period.
🧾 Diagram: Simplified View
Transaction → Journal → Ledger → Trial Balance → Adjusting Entries → Adjusted Trial Balance → Financial Statements → Closing Entries

🧠 Why Is the Accounting Cycle Important?

Ensures accuracy in financial reporting

Helps in detecting errors

Provides a clear workflow for accountants

Fulfills audit and compliance requirements