The Accounting Cycle

The total set of accounting procedures that must be carried out during each accounting period.

The accounting cycle is a series of activities that begins with the source documents and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and involves the following major steps: 

Collect source documents and identify transactions

Collecting invoices, receipts, sales orders, contracts and other relevant source documentation and identifying that a transaction or other recognizable event has occurred. This involves ensuring the source document is complete and in existence, properly authorized and within the scope of the law.

Analyze and classify the transaction. 

This step includes ensuring transactions are properly classified to the correct chart of accounts, whether those accounts are to be debited or credited and transactions are properly classified with the correct tax code. 

Journalize each transaction and post to the ledger

Record the transaction by making entries in the appropriate journal, whether that be the sales, purchase, cash or payroll journal. Enter the double side of each transaction to the ledger accounts. 

While todays automated technology and accounting software ensures that posting to the correct ledger accounts are are automatically carried out - care should still be taken to ensure all transactions comply and are balanced.

Prepare the Trial Balance

Once all the transactions for a period are entered a preliminary trial balance can be printed and will form part of your work papers. Each account is then reconciled against supporting documents.  Eg Trade Creditors against creditor statements, bank accounts against bank statements etc etc. 

Post Adjusting Entries

Post any adjustments needed including any balance day adjustments. Note the figure below has a couple of extra steps but it goes without saying that once you have made adjustments you can then reprint the adjusted trial balance.

Prepare Reports

You can now prepare reports in accordance with your reporting schedule. 

Close Period

The period is then closed, the data file should be locked.