The accounting cycle refers to a series of steps taken to aggregate accounting transactions into financial statements.
For a manual accounting system, the cycle begins when transactions are recorded in the journal. Transactions are then periodically posted into ledgers, which record the transactions in each account. Account balances may then be aggregated into a general ledger. The general ledger is comprised of all of the firm’s accounts.
At the end of the accounting period, the accountant prepares a trial balance, which lists the period-ending balances in the general ledger. The accountant reviews the trial balance and makes sure that the total debit balance equals the total credit balance.
The accountant then makes any adjusting entries to the trial balance. Adjusting entries are made to bring the accounts in-line with accounting requirements, such as GAAP. The accountant then prepares and reviews the final trial balance. If the final trial balance is satisfactory, the accountant will then “close the books” – i.e., shift balances from period accounts (such as revenue and expenses) to the financial statements. These period accounts begin each period at zero, and thus must be “closed” each period. The accountant will then prepare the financial statements.
With computerized accounting software, many of these steps are aggregated. However, it still helps to know the steps in the full accounting cycle.