The accounting cycle refers to the systematic collection of accounting information during each accounting period, as well as the orderly flow of this information from one accounting period to the next. Each step plays a role in supporting business decision-making and good record keeping. Four major financial statements—the income statement, statement of owner's equity, balance sheet, and statement of cash flows—are the most recognizable outputs of the accounting cycle. The cycle begins with journalizing daily transactions and posting these journal entries to the general ledger. At month end, the ending balances of each account in the general ledger are brought to an unadjusted trial balance. Then adjusting journal entries are made to the trial balance to produce the adjusted trial balance used to prepare financial statements. Temporary accounts on the adjusted trial balance are closed to the general journal. Only permanent accounts remain for a post-closing trial balance.
At A Glance
- The events of each accounting period are recorded in a company's books and presented in the financial statements using the same process from period to period.
- The flow of accounting information begins with actual economic events and allows for the capture, compilation, and movement of economic data from one period to the next. A consistent process enables stakeholders to understand and rely on an organization's financial status.
Financial statements are one of the most important products of the accounting cycle. The financial statements that companies produce are known as the income statement, statement of owner's equity, balance sheet, and statement of cash flows.
Closing entries signal the end of an accounting period. Once these entries are journalized and posted, the accounting cycle ends with the preparation of a post-closing trial balance.
- The end-of-period spreadsheet summarizes the movement of transactions throughout an accounting period.