10 Steps of Accounting Cycle [Notes with PDF]

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November 1, 2019

In this article, we will learn in-depth about the 10 steps of the accounting cycle including
its definition, steps, and much more.

Table of Contents
What is the Accounting Cycle?
10 Steps of Accounting Cycle:
1. Identification of Transaction
2. Journalizing
3. Posting to Ledger
4. Preparation of Trial Balance
5. Adjusting Entry
6. Adjusted Trial Balance
7. Preparation of Financial Statement
8. Closing Entry
9. Post-Closing Trial balance
10. Reversing Entry:

What is the Accounting Cycle?

According to the going concern concept, it is expected that business will continue on
forever. The accounting process starts through the identification of transactions and ends
with preparing financial statements.

Accounting Cycle: Everything Explai...

Accounting Cycle: Everything Explained| 10 steps of Accounting Cycle

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These processes are rotated continuously in every accounting period. So, it is said that
the accounting cycle is the continuous process of recording and processing all
transactions of an organization.

10 Steps of Accounting Cycle:

Ten (10) steps of the accounting cycle are as follows:

1. Identification of Transaction
2. Journalizing
3. Posting to Ledger
4. Preparation of Trial Balance
5. Adjusting Entry
6. Adjusted Trial Balance
7. Preparation of Financial Statements
8. Closing Entry
9. Post-Closing Trial Balance
10. Reversing Entry

1. Identification of Transaction

The 1st step of the accounting cycle is the identification of transactions. Transactions are
identified after analyzing all events. The only financial transaction would be considered a
transaction.

The transaction may include the Purchase of Goods, Sales of Goods, any operating
expenses, any payment, etc.

2. Journalizing

The 2nd step of the accounting cycle is Journalizing. Here analyzed transactions are
recorded in the primary book of accounts as debit and credit in chronological order.

Purchase Book, Sales Book, Purchase Return Book, Sales Return Book, Note
Receivable Book, Note Payable Book are the primary book of Transaction recording.

For example

Purchase of goods from OYO international $ 3,000 on credit

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 Date Accounts Title and Ref. Debit Credit
Explanation (Amount) (Amount)

2019 Purchase A/c——————Dr 237 $3,000

June,28 OYO International A/C—–Cr 321 $3,000

(Since Goods purchased on

Credit)

Journal

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3. Posting to Ledger

The 3rd step of the accounting Cycle is Ledger. Ledger is the main book of accounts.
Here transactions are transferred into the Ledger as a separate head of accounts.

Different Ledger is prepared for each head of accounts. Such as Purchase A/c, Sales A/c,
Salary A/c, Advertisement A/C, Capital A/c, Building A/c, etc.

For Example

Purchase A/C

Date Particulars Ref Debit Credit  Balance

(Amount) (Amount) (Amount)

2019 OYO International     $3,000     $3,000

June,28 A/c  

OYO International A/C

Date Particulars Ref Debit Credit  Balance

2019 June,28   Purchase A/c         $3,000   $3,000  

4. Preparation of Trial Balance

The 4th step of the Accounting Cycle is the Preparation of the Trial Balance. It is prepared
to testify the mathematical accuracy of the recorded transactions.

The trial balance is prepared with the concerned accounts head along with the debit and
credit balances of the ledger. It is prepared at a certain time period.

For Example:

Trial Balance

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 SL. NO. Accounts Title Ref. Debit (Amount) Credit (Amount)

1 Purchase A/C $3,000

2 OYO International A/C   $3,000

Total   $3,000   $3,000

5. Adjusting Entry
The 5th step of the accounting cycle is adjusting entry. The journal entry which is given for
adjusting accrued and prepaid income and expenses to identify the actual financial
condition of a business of a particular accounting period is called adjusting entries.

Such as, adjusting entries for Accrued Salaries, Prepaid insurance premium, unrealized
income, and expenses, etc.

For example:

Accrued salary for the month of June 2019 is $4,000

Date Accounts Title and Ref. Debit Credit

Explanation (Amount) (Amount)

2019 Salary A/c—————Dr 321 $4,000

June,31 Salary Payable A/c—–Cr 543 $4,000

(To record accrued Salary)

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6. Adjusted Trial Balance

The 6th step of the accounting cycle is the preparation of the adjusted Trial balance.

Here again, the adjusted transaction is transferred to Ledger as a separate head of

accounts then the adjusted trial balance is prepared with the balances of debit and credit
of Ledger.

For Example:

Adjusted Trial Balance

June 30, 2019

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 SL NO Accounts Title Ref. Debit (Amount) Credit (Amount)

1 Purchase A/C $3,000

2 OYO International A/C $3,000

3 Salary A/C $4,000

4 Salary Payable A/C   $4,000

Total $7,000 $7,000

7. Preparation of Financial Statement

The 7th step of the accounting cycle is the preparation of Financial Statements. The
financial statement is prepared to identify the profit and Loss, Assets, Liabilities, and
owner’s equity of a business at the end of the accounting period.

The financial condition of a business is determined through financial statements.

For Example:

Income Statement

For the Year Ended June 30, 2019

Particulars Amount Amount

Revenues:

Service Revenue ****

Expenses:

Salaries Expenses ***

Advertisement Expenses ***

Rent Expenses ***

Depreciation ***

Total Expenses ****

Net Income ****

Balance sheet

June 30, 2019

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 Particulars Amount Amount

Assets

Trade Receivable ***

Closing Inventory ***

Land ***

Building ***

Less: Acc. Depreciation (***) ***

Total Assets ****

Liabilities and Owner’s Equity

Liabilities:

Trade Payable ***

Bank Overdraft ***

Long Term Loan ***

Total Liabilities ****

Owner’s Equity

Owner’s Capital ****

Total Liabilities and Owner’s Equity ****

8. Closing Entry
The 8th step of the accounting cycle is a closing entry. There are two types of accounts in
the business. One is income and expense related A/c another one is Asset and liability
related accounts.

The necessity of income and expenditure-related accounts are finished in the accounting
period. So, Closing entries are given to close the balance of revenues, expenses, and
drawings account at the end of the year.

For Example

Date Accounts Title and Explanation Ref Debit (Amount) Credit (Amount)

2019 Service Revenue A/c——-Dr    $4,000  

Jun-30 Income Summary A/c—–Cr $4,000

(To close Revenue Account)

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9. Post-Closing Trial balance

The 9th step of the accounting cycle is the preparation of the post-closing Trial Balance.
After closing entries ledger balance of income and Expenses become Zero.

The next accounting period will start with the remaining balance of asset, liability, and
owner’s equity account. Post-closing Trial Balance is prepared with these assets,
liabilities, and owner’s equity balances of Ledger.

For Example

Post Closing Trial Balance

SL NO Accounts Title Ref. Debit Credit

1 Cash       $3,000    

2 Equipment $2000

3 Prepaid Rent $1000  

4 Salary Payable $2,500

5 Owner’s Capital $3,500

  Total   $6,000 $6,000

10. Reversing Entry:

The 10th and final step of the accounting cycle are Reversing Entry. Reversing entry is
the opposite of the adjusting entry made in the last accounting period.

Adjusting entries are made at the beginning of the next accounting period.

For Example

Date Accounts Title and Explanation Ref. Debit (Amount) Credit (Amount)

2019 Salary Payable A/c——–Dr 543   $4,000  

Jul-01 Salary A/c——————–Cr 321     $4,000

(To reverse Payable  Account)

Summary

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 Accounting Cycle

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