10 Steps of Accounting Cycle [Notes with PDF]

In this article, we will learn in-depth about the 10 steps of the accounting cycle including its definition, steps, and much more.

What is the Accounting Cycle?

According to the going concern concept, it is expected that business will continue on forever. The accounting process starts through the identification of transactions and ends with preparing financial statements.

These processes are rotated continuously in every accounting period. So, it is said that the accounting cycle is the continuous process of recording and processing all transactions of an organization.

10 Steps of Accounting Cycle:

Ten (10) steps of the accounting cycle are as follows:

  1. Identification of Transaction
  2. Journalizing
  3. Posting to Ledger
  4. Preparation of Trial Balance
  5. Adjusting Entry
  6. Adjusted Trial Balance
  7. Preparation of Financial Statements
  8. Closing Entry
  9. Post-Closing Trial Balance
  10. Reversing Entry

1. Identification of Transaction

The 1st step of the accounting cycle is the identification of transactions. Transactions are identified after analyzing all events. The only financial transaction would be considered a transaction.

The transaction may include the Purchase of Goods, Sales of Goods, any operating expenses, any payment, etc.

2. Journalizing

The 2nd step of the accounting cycle is Journalizing. Here analyzed transactions are recorded in the primary book of accounts as debit and credit in chronological order.

Purchase Book, Sales Book, Purchase Return Book, Sales Return Book, Note Receivable Book, Note Payable Book are the primary book of Transaction recording.

For example

Purchase of goods from OYO international $ 3,000 on credit

DateAccounts Title and ExplanationRef.Debit (Amount)Credit (Amount)
2019Purchase A/c——————Dr237$3,000
June,28OYO International A/C—–Cr321$3,000
(Since Goods purchased on Credit)
Journal

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3. Posting to Ledger

The 3rd step of the accounting Cycle is Ledger. Ledger is the main book of accounts. Here transactions are transferred into the Ledger as a separate head of accounts.

Different Ledger is prepared for each head of accounts. Such as Purchase A/c, Sales A/c, Salary A/c, Advertisement A/C, Capital A/c, Building A/c, etc.

For Example

Purchase A/C

DateParticularsRefDebit (Amount)Credit (Amount) Balance (Amount)
2019 June,28OYO International A/c     $3,000   $3,000

OYO International A/C

DateParticularsRefDebitCredit Balance
2019 June,28  Purchase A/c      $3,000  $3,000  

4. Preparation of Trial Balance

The 4th step of the Accounting Cycle is the Preparation of the Trial Balance. It is prepared to testify the mathematical accuracy of the recorded transactions.

The trial balance is prepared with the concerned accounts head along with the debit and credit balances of the ledger. It is prepared at a certain time period.


For Example:

Trial Balance

SL. NO.Accounts TitleRef.Debit (Amount)Credit (Amount)
1Purchase A/C$3,000
2OYO International A/C  $3,000
Total  $3,000  $3,000

5. Adjusting Entry

The 5th step of the accounting cycle is adjusting entry. The journal entry which is given for adjusting accrued and prepaid income and expenses to identify the actual financial condition of a business of a particular accounting period is called adjusting entries.

Such as, adjusting entries for Accrued Salaries, Prepaid insurance premium, unrealized income, and expenses, etc.

For example:

Accrued salary for the month of June 2019 is $4,000

DateAccounts Title and ExplanationRef.Debit (Amount)Credit (Amount)
2019Salary A/c—————Dr321$4,000
June,31Salary Payable A/c—–Cr543$4,000
(To record accrued Salary)

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6. Adjusted Trial Balance

The 6th step of the accounting cycle is the preparation of the adjusted Trial balance.

Here again, the adjusted transaction is transferred to Ledger as a separate head of accounts then the adjusted trial balance is prepared with the balances of debit and credit of Ledger.


For Example:

Adjusted Trial Balance

June 30, 2019

SL NOAccounts TitleRef.Debit (Amount)Credit (Amount)
1Purchase A/C$3,000
2OYO International A/C$3,000
3Salary A/C$4,000
4Salary Payable A/C  $4,000
Total$7,000$7,000

7. Preparation of Financial Statement

The 7th step of the accounting cycle is the preparation of Financial Statements. The financial statement is prepared to identify the profit and Loss, Assets, Liabilities, and owner’s equity of a business at the end of the accounting period.

The financial condition of a business is determined through financial statements.

For Example:

Income Statement

For the Year Ended June 30, 2019

ParticularsAmountAmount
Revenues:
Service Revenue****
Expenses:
Salaries Expenses***
Advertisement Expenses***
Rent Expenses***
Depreciation***
Total Expenses****
Net Income****

Balance sheet

June 30, 2019

ParticularsAmountAmount
Assets
Trade Receivable***
Closing Inventory***
Land***
Building***
Less: Acc. Depreciation(***)***
Total Assets****
Liabilities and Owner’s Equity
Liabilities:
Trade Payable***
Bank Overdraft***
Long Term Loan***
Total Liabilities****
Owner’s Equity
Owner’s Capital****
Total Liabilities and Owner’s Equity****

8. Closing Entry

The 8th step of the accounting cycle is a closing entry. There are two types of accounts in the business. One is income and expense related A/c another one is Asset and liability related accounts.

The necessity of income and expenditure-related accounts are finished in the accounting period. So, Closing entries are given to close the balance of revenues, expenses, and drawings account at the end of the year.

For Example

DateAccounts Title and ExplanationRefDebit (Amount)Credit (Amount)
2019Service Revenue A/c——-Dr  $4,000 
Jun-30Income Summary A/c—–Cr $4,000
(To close Revenue Account)

9. Post-Closing Trial balance

The 9th step of the accounting cycle is the preparation of the post-closing Trial Balance. After closing entries ledger balance of income and Expenses become Zero.

The next accounting period will start with the remaining balance of asset, liability, and owner’s equity account. Post-closing Trial Balance is prepared with these assets, liabilities, and owner’s equity balances of Ledger.

For Example

Post Closing Trial Balance

SL NOAccounts TitleRef.DebitCredit
1Cash     $3,000      
2Equipment$2000
3Prepaid Rent$1000  
4Salary Payable$2,500
5Owner’s Capital$3,500
 Total $6,000$6,000

10. Reversing Entry:

The 10th and final step of the accounting cycle are Reversing Entry. Reversing entry is the opposite of the adjusting entry made in the last accounting period.

Adjusting entries are made at the beginning of the next accounting period.

For Example

DateAccounts Title and ExplanationRef.Debit (Amount)Credit (Amount)
2019 Salary Payable A/c——–Dr 543  $4,000 
Jul-01Salary A/c——————–Cr321    $4,000
(To reverse Payable  Account)

Summary

10 Steps of Accounting Cycle
Accounting Cycle

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