Accounting Cycle

Journal Entries
Accounting Cycle
Identify your transactions.

A business starts its accounting cycle by identifying and gathering details about the
transactions during the accounting period. When identifying a transaction, you’ll need
to determine its impact. Transactions include expenses, asset acquisition, borrowing,
debt payments, debts acquired and sales revenues.
Record the transactions.

The next step is to record your financial transactions as journal entries in your
accounting software or ledger. Some companies use point-of-sale technology linked
with their books, combining steps one and two. Still, it’s essential for businesses to
keep track of their expenses.
Your accounting type and method determine when you identify expenses and income.
For accrual accounting, you’ll identify financial transactions when they are incurred.
Cash accounting, on the other hand, involves looking for transactions whenever cash
changes hands.
Double-entry accounting suggests recording every transaction as a credit or debit in

separate journals to maintain a proper balance sheet, cash flow statement and income
statement. On the other hand, single-entry accounting is more like managing a
checkbook. It doesn’t require multiple entries but instead gives a balance report.
Post your transactions to a ledger.

Once transactions are recorded in journals, they are also posted to the general ledger.
A general ledger is a critical aspect of accounting, serving as a master record of all
financial transactions.
The general ledger breaks down the financial activities of different accounts so you
can keep track of various company account finances. A cash account is by far the
most crucial account in a general ledger, as it gives an idea of the cash available at
any time.
Create the trial balance.

While earlier accounting cycle steps happen during the accounting period, you’ll
calculate the unadjusted trial balance after the period ends and you’ve identified,
recorded and posted all transactions. The trial balance gives you an idea of each
account’s unadjusted balance. Such balances are then carried forward to the next step
for testing and analysis.
Creating an unadjusted trial balance is crucial for a business, as it helps ensure that
total debits equal total credits in your financial records. If they don’t, something is
either missing or misaligned. This step generally identifies anomalies, such as
payments you may have thought were collected and invoices you thought were
cleared but actually weren’t.
Regardless of the scenario, an unadjusted trial balance displays all your credits and
debits in a table. In the next step, you’ll investigate what went wrong.
Analyze the worksheet.

The accounting cycle’s fifth step involves analyzing your worksheets to identify
entries that need to be adjusted. As every transaction is recorded as a credit or debit,
this step requires ensuring that the total credit balance and debit balance are equal.
Apart from identifying errors, this step helps match revenue and expenses when
accrual accounting is used. Any discrepancies should be addressed by making
adjustments, which happens in the next step.
Adjust journal entries.

When the accounting period ends, you’ll adjust journal entries to fix any mistakes and
anomalies found during the worksheet analysis. Since this is the final step before
creating financial statements, you should double-check everything with the help of a
new adjusted trial balance.
Create Financial Statement.

Once the company has made all the adjusting entries, it creates financial statements.
Most companies create balance sheets, income statements and cash flow statements.
The balance sheet and income statement depict business events over the last
accounting cycle. Most businesses produce a cash flow statement; while it’s not
mandatory, it helps project and track your business’s cash flow.
Close your book.

The last step in the accounting cycle is to make closing entries by finalizing expenses,
revenues and temporary accounts at the end of the accounting period. This involves
closing out temporary accounts, such as expenses and revenue, and transferring the
net income to permanent accounts like retained earnings.
After you close the books, the financial statements produced provide a comprehensive
performance analysis for the time frame. Then the accounting cycle starts again for
the new reporting period.

Accounting Cycle

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Journal Entries

Identify your transactions.

Record the transactions.

Double-entry accounting suggests recording every transaction as a credit or debit in

Post your transactions to a ledger.

Create the trial balance.

Analyze the worksheet.

Adjust journal entries.

Create Financial Statement.

Close your book.

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