Accounting Cycle 10 Steps

Accounting Cycle 10 Steps.If you are a businessman and your business is a trade-related business then you must understand the accounting cycle of a trading company. This is very important because knowing the cycle that occurs will minimize the occurrence of fraud. The following is a complete explanation of the simple trading company accounting cycle.The accounting cycle consists of a series of steps that businesses follow to record, process, and report their financial transactions.

The ten steps in the accounting cycle are:

1. Analyze transactions: The first step is to identify and analyze the transactions that have occurred during the accounting period. This involves reviewing source documents, such as receipts, invoices, and bank statements, to determine the nature and amount of each transaction.
2. Journalize transactions: Once the transactions have been analyzed, they are recorded in a journal. The journal is a chronological record of all the transactions that have occurred during the accounting period.
3. Post to the ledger: The information from the journal is then transferred to the ledger, which is a set of accounts that shows the changes in each account’s balance over time.
4. Prepare a trial balance: The trial balance is a list of all the accounts in the ledger and their balances at a specific point in time. It is used to ensure that the total debits equal the total credits in the ledger.
5. Adjust entries: Adjusting entries are made to ensure that the accounts reflect the correct amounts at the end of the accounting period. These entries include accruals, prepayments, depreciation, and other adjustments.
6. Prepare an adjusted trial balance: Once the adjusting entries have been made, a new trial balance is prepared to ensure that the accounts are now balanced.
7. Prepare financial statements: The financial statements are prepared using the information from the adjusted trial balance. The financial statements include the income statement, balance sheet, and statement of cash flows.
8. Close the books: Closing the books means that all temporary accounts, such as revenue and expense accounts, are closed out and their balances are transferred to the retained earnings account.
9. Prepare a post-closing trial balance: The post-closing trial balance is a list of all the accounts and their balances after the closing entries have been made.
10. Reverse entries (optional): If necessary, some adjusting entries may be reversed at the beginning of the next accounting period to ensure that the accounts are correctly stated.