Accounting is a dynamic and ever-evolving process – like the cells of a living organism, the components are always in flux and working together to keep everything running smoothly. The accounting cycle is an essential part of that process, providing structure and order so nothing falls through the cracks.
The accounting cycle follows a basic step-by-step approach: First, business transactions must be identified and recorded in the journal. Once all transactions have been logged, they are then posted to the respective ledger accounts. Then, trial balances can be prepared to make sure that everything adds up correctly. Afterward, adjusting entries can be made to account for any missed or incomplete transactions. The next step is preparing closing entries, which transfers the net balance of each account into the retained earnings statement. Finally, the financial statements are prepared and presented to management for review. This completed accounting cycle ensures accuracy and transparency throughout the entire process.