The accounting cycle is the process of recording, sorting, and crediting payments within a business. In most cases, this occurs at the end of the year, although some companies balance their books daily. The information from the transactions in the accounting cycle is used to prepare financial statements such as the balance sheet and cash flow report. After completing these steps, business accounts are closed out and prepared for the next accounting period.
The fourth step of the accounting cycle involves calculating the trial balance, which tells the company the unadjusted balances in all accounts. This information is then carried forward to the fifth step, where it is analyzed and tested. The goal of this step is to ensure that the total credit balance equals the total debit balance. The trial balance must also be verified to ensure that there are no errors.
The final step in the accounting cycle is recording transactions. These should be done in a chronological order, in accordance with accrual accounting principles. The accounts that are affected by the transaction can be recorded in a general record or in a discrete record. Another option is using double-entry accounting, which records the transaction as both a credit and a debit. This method, called T-accounts, makes closing entries easier.
