Table of Contents |
There are six phases in the accounting cycle, and we will discuss each phase individually.
The first step in the accounting cycle is to identify business events--both internal and external--that need to be documented in the accounting or financial system. These events can be identified by using source documents, which are an aid in determining what events took place that need to be documented. Once documented, it's important to assess the impact of those events: do they increase certain accounts, or do they decrease certain accounts?
Next, we move onto journalizing. In this phase, we use the general journal, which is a record of accounting events. Again, those source documents mentioned above are used to identify the specific accounts involved, debits and credits, and this information is all detailed in the general journal.
Now we can move on to posting. In this phase, we move those transactions from the general journal into the general ledger. When we do this, those events are now transferred to the accounting system. These events have been posted to the system, and the general ledger is used to review and track activity throughout the period.
After the events have been posted, we move on to making adjustments. Adjustments take place at the end of the period. Why are these adjustments made? Well, there are several important reasons:
After all adjustments are made, it's time to move on to the next step. Reporting is the final product that comes out of the accounting cycle. It is important to note that it is not the final phase, but rather it is the final product. What is this product? It is the financial statements, which tell the story of a business for the reporting period. There are four main financial statements:
After we've produced the financial statements and finished reporting, it's time to move on to the last phase, which is closing. Now, what gets closed in the accounting cycle? Well, it is the temporary accounts, which represent revenues and expenses. These accounts get closed to owner's equity, or retained earnings. We close these revenue and expense accounts because they are used to track activity for a specific period. Therefore, they must be reset for the beginning of the next period so that we can capture the revenues and expenses for only that period being reporting on.
After the closing phase has been completed, the accounting cycle starts all over again, working through all six phases and continuing perpetually.
Source: Adapted from Sophia instructor Evan McLaughlin.