Why learn how to the complete accounting cycle?

Each step in the accounting cycle plays an important role in creating accurate entries.

So far you’ve covered the first four steps that define basic, daily bookkeeping:

1. Every transaction made, whether money spent or received, is analyzed so the accountant knows the exact amount, the purpose of the transaction, the date and time of the transaction, and everything is properly documented.
2. Every transaction is logged into the journal.
3. Every journal entry is posted to the general ledger.
4. The general ledger is tested periodically by running a trial balance.

There are 10 steps in the complete accounting cycle:

The Accounting Cycle. Click for a larger image.

Periodically, the accounting department must prepare a financial annual report for investors and shareholders. The accounting cycle ensures the data presented in the report is organized and accurate, as step seven of the report involves creating financial statements covering the company’s fiscal year. First, though, all the accounts have to be verified and adjusted if necessary (steps five and six. The financial statements must then be prepared in a certain order: the income statement must be prepared first, followed by the statement of owner’s equity, then the balance sheet, and finally the statement of cash flows.

At the end of this process, the books are closed to prevent any changes and to restart the income and expense accounts for the next period.

This module completes the accounting cycle, covering steps 5–10.

5. Make Adjusting Journal Entries
6. Prepare Adjusted Trial Balance
7. Prepare Financial Statements
8. Prepare Closing Entries
9. Prepare Post-Closing Trial Balance
10. Create and Post Reversing Entries (if needed)