An accounting cycle is a systematic process of recording, classifying and summarizing business activities/transactions, so that the accounting information can be transformed into a more readable/understandable format for internal as well as external users of accounting information. That format is simply called a financial statement. In this article, I will try to elaborate this process step by step using images and figures. I will try to make it as simple as possible that a layman can understand this process easily. Let’s start!
After reading this article you will be able to:
- Understand the use of debits and credits
- Record transactions in the general journal
- Post journal entries to the general ledger
- Prepare a trial balance
- Record adjustments at the end of an accounting period
- Prepare an adjusted trial balance
- Prepare financial statements using an adjusted trial balance
- Post Closing Trial Balance
Following flowchart demonstrates the steps needed to create formal financial statements and complete the accounting cycle.