What is the accounting cycle?

The accounting cycle is a step-by-step process used to record, process, and report all of a business's financial transactions. It ensures that a company's financial records are accurate and that its financial statements are prepared correctly at the end of each Bookkeeping and Accounting Services Jersey City period.

The Eight Key Steps

Analyze and Journalize Transactions: The cycle begins with identifying and analyzing business transactions from source documents like invoices and receipts. Each transaction is then recorded in the general journal in chronological order using the double-entry bookkeeping method, where every debit must have an equal credit.

Post to the Ledger: After journalizing, the entries are transferred, or posted, to their respective general ledger accounts. This organizes all transactions by account (e.g., cash, sales revenue, accounts payable) and shows a running balance for each one.

Prepare an Unadjusted Trial Balance: At the end of the accounting period, a list of all general ledger accounts and their balances is created. This unadjusted trial balance confirms that the total debits equal the total credits, helping to catch mathematical errors.

Journalize and Post Adjusting Entries: These are made to record revenue and expenses that haven't been entered yet, such as depreciation or accrued salaries. This step is crucial for the accrual basis of accounting, which matches expenses to the revenue they helped generate.

Prepare an Adjusted Trial Balance: After the adjusting entries are posted, a new trial balance is created. This adjusted trial balance is the final, verified list of all account balances used to prepare the financial statements.

Prepare Financial Statements: Using the adjusted trial balance, the three main financial statements are created: the income statement (profit and loss), the statement of retained earnings, and the balance sheet. These reports summarize the company's financial performance and position.

Journalize and Post Closing Entries: At the end of the period, the balances of all temporary accounts (revenue, expenses, and dividends) are transferred to the retained earnings account. This "resets" the temporary accounts to zero, so they're ready for the next cycle.

Prepare a Post-Closing Trial Balance: This final trial balance is prepared to ensure that only permanent accounts (assets, liabilities, and equity) have balances. It verifies that the total debits and credits are still equal and that the books are ready for a new Accounting Services in Jersey City.