What is the accounting cycle?
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The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements and the closing of the books.
The accounting cycle is a series of steps that businesses follow to record, analyze, and report their financial transactions. It typically includes the following steps:
1. Identifying and analyzing transactions: Businesses identify and analyze the financial transactions that occur during a specific period.
2. Journalizing: Transactions are recorded in a journal, which is a chronological record of all financial events.
3. Posting: The information from the journal is transferred to the general ledger, which is a collection of individual accounts that track the changes in each specific account.
4. Adjusting entries: Adjustments are made to ensure that the financial statements reflect the correct financial position and results of the business.
5. Preparing financial statements: The adjusted information is used to prepare financial statements such as the income statement, balance sheet, and cash flow statement.
6. Closing entries: Temporary accounts, such as revenue and expense accounts, are closed to the retained earnings account to start fresh for the next accounting period.
7. Post-closing trial balance: A final trial balance is prepared to ensure that debits equal credits after the closing entries have been made.
The accounting cycle helps businesses maintain accurate financial records and provides a framework for financial reporting. It’s an important process for monitoring and evaluating the financial health of a business.