The Accounting Cycle


Lesson One: Accounting Cycle (this lesson)
Lesson Two: Basic Accounting Journal Entries 
Lesson Three: Accounting Journals 
Lesson Four: T Accounts 
Lesson Five: Balancing T-accounts 
Lesson Six: Posting Journals 
Lesson Seven: Control Accounts 
Lesson Eight: Trial Balance





There is a cycle of action in accounting for any business. This cycle is depicted diagrammatically below: 

The Accounting Cycle

What do all these new words mean? 

Writing a Check

1. SOURCE DOCUMENTS – Source documents are documents, such as cash slipsinvoices, etc. that form the source of (and serve as proof for) a transaction. In other words, they are the first documents that exist relating to a transaction.

Invoices, cash slips, receipts, check counterfoils, bank deposit slips and even internet payment confirmations are all source documents.


2. JOURNALS - These are chronological (date-order) records of transactions entered into by a business. Journals are that first basic entry of debit and credit for each transaction. In the examples we have been doing in the previous chapters, where we have debited one account and credited another, we have been doing journals

Read through this first lesson on basic accounting journal entries for a brief overview.

There are actually a few types of journals, and they don't all look exactly like the above debit and credit. We'll run through each of them in the second lesson on accounting journals, from the cash receipts journal to the general journal, so you get a good idea of what each one is for and how it works.


3. LEDGER (T-ACCOUNTS) - The ledger is a collective term for the accounts of a business (a ledger of accounts is like a school of fish). The accounts are in the shape of a ‘T’ and thus are often referred to as ‘T-accounts’. In this step we take all the debits and credits (journals) relating to one account – let’s say ‘bank’ – and draw up an account for bank that shows all the transactions relating to it. 

There a few lessons available on T accounts. In our first T-account lesson called T Accounts we'll look at how to draw up a T-account.

After this basic grounding we'll look at balancing T-accounts. 

Next we'll look at posting journals (posting means transferring information from the journals to the T accounts).

And, in our final lesson on T accounts, we'll go over control accounts and take a closer look at the debtors and creditors ledgers.


Balance

4. TRIAL BALANCE - A sheet displaying all the accounts of a business, drawn up as a trial (test) of whether the total of all the debit balances equal the total of all the credit balances (A balance is the amount of an item at a point in time. For example, The balance in the bank account on the 1st of January was $5,000.). The trial balance is prepared as a final check just before the financial statements are drawn up. Click here for a brief lesson on the trial balance. 

Accounting Reports

5. FINANCIAL STATEMENTS - A statement is a reportFinancial statements are the most important reports of a business. These statements are prepared from the information in the trial balance. The purpose of these statements is to show the reader the financial positionfinancial performance and cash flows of a business, as well as other useful information concerning the business. Financial statements are usually prepared once a year.

Financial statements consist of (amongst other things) an income statementstatement of changes in the owner’s equitybalance sheetcash flow statement and (where needed) an auditor’s report.

We will deal with the various components of the financial statements in our next section, entitled Accounting Reports. 



Return from Accounting Cycle to the Home Page 


Lesson One: Accounting Cycle (this lesson)
Lesson Two: Basic Accounting Journal Entries 
Lesson Three: Accounting Journals 
Lesson Four: T Accounts 
Lesson Five: Balancing T-accounts 
Lesson Six: Posting Journals 
Lesson Seven: Control Accounts 
Lesson Eight: Trial Balance


Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to this page... (if there is no published solution to the question/exercise, then try and solve it yourself)

Accounting Question: Analyze, Record Journals and T-accounts, Create Trial Balance 
ASSIGNMENT#2 The following are the transactions of Overnight Auto Service for the month of November 2006: • Nov 1: McBryan started business by …

Income Statement vs
Profit and Loss Account
 
Q: What is the difference between the income statement and the profit and loss account? A: The income statement is a statement (a report) and forms …

Accounting Cycle Question 
Q: Which steps in the accounting cycle require the most thought and judgement by the accountant: (a) preparing a trial balance, (b) posting adjusting, …


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