Arjun has since written for investment firms, consultants, and SaaS brands in the Accounting and Finance space. As you can see, the Post-Closing Trial Balance consists of only permanent accounts on the Balance Sheet. All temporary accounts have been transferred to retained earnings after the closing process.

Step 2: Journalizing Transactions (Journal Entries)

Each step in the accounting cycle is equally important, but if the first step is done incorrectly, it throws off all subsequent steps. If you don’t track your transactions accurately, you won’t be able to create a clear accounting picture. Creating an accounting process may require a significant time investment.

In accounting, there are two types of accounts; Permanent Accounts and Temporary Accounts. Permanent accounts refer to all of the assets, liabilities as well as share capital or share premium. Therefore, any increase in expense shall be recorded on the debit side and vice versa. Thus, any increase in revenue shall be recorded on the credit side and vice versa.

Once a trial balance has been prepared, the next step of the accounting cycle involves the preparation of financial statements. In this step, we are able to prepare all four main types of financial statements. These are the Income Statement or Profit and Loss Statement, Balance Sheet or Statement of Financial Position, Statement of Changes in Equity, and Statement of Cash Flow. The first step to preparing an unadjusted trial balance is to sum up the total credits and debits in each of your company’s accounts. These are used to calculate individual balances for each account.

1. Depending on each company’s system, more or less technical automation may be utilized.
2. This stage can catch a lot of mistakes if those numbers do not match up.
3. The framework offers bookkeepers and accountants the chance to verify the recorded transactions for uniformity and accuracy, both of which are critical compliance parameters.
4. At the end of the fiscal year, financial statements are prepared (and are often required by government regulation).
5. Accounts payable software is an important tool for your business.

Below is a detailed explanation as well as examples of each step. In practice, steps 3, 4, 6, 7, and 9 are often automatically generated by a computerized accounting system. Accruals have to do with revenues you weren’t immediately paid for and expenses you didn’t immediately pay.

Record, Report, Repeat

The ledger is a large, numbered list showing all the quick guide to retained earnings your company’s transactions and how they affect each of your business’s individual accounts. There are lots of variations of the accounting cycle—especially between cash and accrual accounting types. For simplicity’s sake, we’re going to divide it into six steps.

Calculate the Adjusted Trial Balance

Every individual company will usually need to modify the branches of accounting eight-step accounting cycle in certain ways in order to fit with their company’s business model and accounting procedures. Modifications for accrual accounting versus cash accounting are often one major concern. The accounting cycle is used comprehensively through one full reporting period. Thus, staying organized throughout the process’s time frame can be a key element that helps to maintain overall efficiency. Most companies seek to analyze their performance on a monthly basis, though some may focus more heavily on quarterly or annual results.

You can modify it to fit your company’s business model and accounting processes. With that foundation set, let’s talk about the eight accounting cycle steps in detail. The accounting cycle includes eight steps required to record transactions during an accounting period. In this guide, I explain the steps in the accounting cycle in detail, with examples. The accounting cycle consists of the 10 important steps that are very important in order to manage and present financial information. As accountants and bookkeepers, they shall need to understand clearly about these steps process.