In this lesson we're going to take a step back and look at the big picture of accounting and the cycle of actions an accountant needs to take.
Be sure to check your understanding of this lesson by taking the quiz in the Test Yourself! section further below. And right at the bottom of the page, you can find more questions on the topic submitted by fellow students.
What is the Accounting Cycle?
The accounting cycle is the various steps or stages of work or activity that we go through each year in accounting.
The cycle is depicted diagrammatically below:
The cycle above is a cycle of actions we go through when accounting for any business.
Steps in the Accounting Cycle
1. Source Documents
Source documents are documents, such as cash slips, invoices, 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.
Bookkeepers and accountants need to keep source documents for each transaction.
There is a final step in the accounting cycle not shown above, which is the closing off of accounts (or closing entries), which are done at the end of each year along with the production of the financial statements.
This involves closing out temporary accounts (incomes and expenses), and transferring their balances through a profit account into the owners equity (reserves).
It is important to note that these days many businesses use computerized accounting systems, and so the accounting cycle is largely automated.
This means that the bookkeeper or accountant simply enters the basic data about a transaction, and the posting is then automatically done to the relevant accounts and through the trial balance to the financial statements. Temporary accounts are also automatically closed off at the end of the period.
Additionally, errors occur less often with computerized systems, but even when these do occur, the bookkeeper or accountant can make a quick adjusting entry and watch as the correction is automatically carried through to the revised T-accounts, trial balance and financial statements.
But even with this automation, it is still important that bookkeepers and accountants understand the accounting cycle and its various stages.
Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.
Difficulty rating: Beginner
Quiz length: 4 questions
Time limit: 5 minutes
Important:The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.
Okay, that's it for our tutorial on the accounting cycle.
Hopefully you now understand the big picture of accounting and the various stages of work that need to be done.
When you're ready, click on any of the links above to go through a lesson on a specific topic.