The Accounting Cycle

The Accounting Cycle

Quick Study Sheet

The accounting cycle is:

1)  Record transactions as journal entries

2)  Post amounts in “T” accounts for each account and balance the “T” account for each account to get the ending balance

See the section on journal entries for further discussion

3)  Prepare an unadjusted trial balance.  This is done before making adjustments so that you can see what accounts need adjusting.

The unadjusted trial balance will have 3 columns and debits must = credits

Assets and expense amounts go in the debit column. Liabilities, owner’s equity, and revenue amounts go in the credit column. Contra asset accounts go in the credit column

4)  Record adjusting journal entries

Entries made to adjust to the accrual basis – make sure the matching principle is followed – revenues when earned and expenses when incurred

See adjusting journal entries for further discussion 

5)  Post the amounts from adjusting journal entries in the “T” accounts and get a new final balance for each account.  This is the final balance.

6)  Prepare an adjusted trial balance

This will have 3 columns and will show the final amounts that will be reported on the financial statements.  Debits must = credits

7)  Prepare an income statement – use all revenue, expense, gains, and loss accounts

8)  Close all temporary accounts – accounts reported on the income statement and the dividends paid account 

9)  Prepare a post closing trial balance – this will show balance sheet accounts only and retained earnings will include this year’s earnings and dividend paid.

10)  Prepare the balance sheet. 

Trial Balance:

A list of all individual accounts in the left columns with two columns for the debit balance and the credit balance to the right of the account list.

The total of all debits must equal the total of all credits. This means the accounts are in balance.
It does not mean that all journal entries made were correct – wrong amounts and wrong accounts could have been used and the trial balance can still balance when debits equal credits for each individual journal entry.

Assets & Expenses must have debit balances
Liabilities & Owner’s Equity & Revenues must have credit balances

Contra asset accounts have a credit balance
Dividends paid has a debit balance

Permanent or Real Accounts:

Balance sheet accounts do not start over at the beginning of a period

Temporary or Nominal Accounts:

Income statement accounts that are used to record transactions for a certain period of time.

Closing Entry:  

Transfers income statement accounts – revenues, expenses, gains, and losses to R.E.