The accounting cycle is a process of identifying, analyzing, and recording the accounting transactions of a company. It has 7 to 8 steps in process that begins when a transaction occurs and ends with its inclusion in the financial statements. The following is a depiction of the steps in the accounting cycle. Let us discuss them in brief:
- Financial transactions occur, such as selling inventory, buying raw
materials, or making lease payments, for example.
2. Those transactions are noted in the appropriate financial journal, depending
on what the money was spent on or originated from. Debits are used to
indicate money spent and credits are used for money that is received.
3. The transactions are then posted to the account in the general ledger, which
is the list of all the business’ financial accounts that it impacts, such as rent
or wages or marketing
4. At the end of the accounting period, you run a trial balance to see if all the
numbers balance.
5. The next step is trying to find the cause of the imbalance and correcting it.
6. At the end of the accounting period, adjustment entries must be posted to
accounts for accruals and deferrals.
7. Once the accounts are balance, financial statements are prepared.
8. At the end of the period, the books are closed out and new revenue and
expense accounts created with zero balances. These are used for the next
accounting period.
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