The Accounting Cycle
Follow the full loop from transaction to closing that repeats every accounting period.
TL;DR
- Run the
accountingCyclefrom transaction to closing each period. - Journalize, post, and check with a
trialBalanceduring the period. - Close
temporaryAccountsinto equity and start the next period fresh.
The Steps
AnalyzeLook at each transaction and its two sides.
What changed, and howJournalize and PostRecord entries, then post to the ledger.
Journal -> ledgerTrial BalanceCheck that debits equal credits.
Confirm the mathAdjust, Report, CloseAdjust, build statements, then close.
Finish the periodDuring the Period
Record as You GoJournalize transactions when they happen.
Log it the day it occursPost to the LedgerMove entries into their accounts.
Keep balances currentKeep DocumentsFile receipts and invoices as proof.
Source docs on handWatch the BalancesGlance at cash and receivables often.
No month-end surprisesEnd of Period
Unadjusted Trial BalanceTotal the ledger before adjustments.
First balance checkAdjusting EntriesRecord depreciation, accruals, prepaids.
Put items in the right periodAdjusted Trial BalanceRecheck the totals after adjusting.
Ready for statementsBuild StatementsPrepare the three financial statements.
Income, balance, cash flowClose and Repeat
Close TemporariesZero out revenue, expenses, and draws.
Reset to $0Update EquityMove net income into retained earnings.
Profit -> equityPost-Closing CheckOnly permanent accounts remain.
Balance sheet accounts carry onBegin AgainThe next period starts fresh.
The cycle repeatsTips
- Do a little of the
cycleeach week, recording and posting as you go, so month-end is a quick review instead of a scramble. - Make
adjustingEntriesbefore the statements, since depreciation, accruals, and prepaids are easy to forget and change the results.
Warnings
- Skipping
adjustingEntriesleaves revenue and expenses in the wrong period and makes the statements misleading. - Forgetting to
closethe temporary accounts carries this period's revenue and expenses into the next, doubling them up.
In Practice
Close the temporary accounts and roll net income into equity.
At year-end your revenue accounts total $50,000 and your expense accounts total $34,000.
- Revenue and expenses are temporary accounts for this period.
- Net income: $50,000 - $34,000 = $16,000.
- Close both, moving the $16,000 into Retained Earnings.
- Revenue and expense accounts now start next period at $0.
The $16,000 net income rolls into equity; temporary accounts reset to zero.
Closing updates equity and clears the income accounts for a fresh start.
FAQ
It is the repeating sequence of steps a business follows each period to turn transactions into financial statements and then reset for the next period. The main steps are: analyze and journalize transactions, post to the ledger, prepare a trial balance, make adjusting entries, build the statements, and close the temporary accounts.
End-of-period entries that update accounts for things that happened but were not recorded as cash moved. Common ones record depreciation, wages earned but not yet paid, interest accrued, and prepaid expenses being used up. They make sure revenue and expenses land in the period they belong to, which is the heart of accrual accounting.
Entries that zero out the temporary accounts, revenue, expenses, and owner withdrawals, at period end and move their net effect into equity, usually retained earnings. This resets the income statement accounts to zero so the next period starts clean, while the balance sheet accounts carry their balances forward.
Temporary accounts, revenue, expenses, and withdrawals, track a single period and are closed to zero at the end of it. Permanent accounts, the assets, liabilities, and equity on the balance sheet, carry their balances into the next period. Closing is simply the step that empties the temporary accounts into equity.