Track 1 · The profession and the cycle
The accounting cycle
From source document to closing entries: the steps of the accounting cycle and what each one produces.
You will be able to
- Order the steps of the accounting cycle.
- Describe what each step produces.
- See which steps happen during the period and which at the end.
- Explain what a trial balance can and can't prove.
Builds on
The accounting cycle is the sequence of steps that turns transactions into financial statements. It repeats every period — every month for management reporting, and every year for the annual financial statements.
During the period 1. Analyse each transaction from its source document: which accounts change, and by how much? 2. Journalise — record it as a journal entry, in date order. 3. Post — copy each journal line to its ledger account, updating the account's running balance.
At the end of the period 4. Prepare the unadjusted trial balance — a list of every account balance, checking that total debits equal total credits. 5. Record adjusting entries — accruals, deferrals, depreciation and estimates, so the period shows everything it earned and used, not just what was invoiced or paid. 6. Prepare the adjusted trial balance. 7. Prepare the financial statements from the adjusted balances. 8. Record closing entries — transfer income, expenses and dividends to retained earnings so those accounts start the next period at zero. 9. Prepare the post-closing trial balance — only balance sheet accounts remain, and they carry forward.
Why the order matters
Each step needs the one before it. You can't post an entry you haven't journalised, and you can't prepare statements from a trial balance that is missing the adjustments — April would show a whole year's insurance as an asset with none of it used, and no wages for the last days of the month. Close too early and the income statement would show zeros.
What a trial balance does — and doesn't — prove
A trial balance that balances proves only that debits equal credits. It doesn't prove the entries are right. An invoice posted to the wrong expense account, a transaction never recorded at all, or an entry with both sides at the wrong amount will all leave the trial balance in balance. That's why the adjusting and review steps matter.
In accounting software, posting and the trial balance happen automatically the moment an entry is saved, but every step still happens — and the judgment steps (analysing, adjusting, reviewing) are still yours. You'll practise the whole cycle in the Northstar Trading case.
| Step | When | Produces |
|---|---|---|
| 1. Analyse | During the period | The accounts and amounts affected |
| 2. Journalise | During the period | Journal entries in date order |
| 3. Post | During the period | Updated ledger (T-account) balances |
| 4. Unadjusted trial balance | Period end | A check that debits equal credits |
| 5. Adjusting entries | Period end | Accruals, deferrals, depreciation |
| 6. Adjusted trial balance | Period end | Final balances for the statements |
| 7. Financial statements | Period end | Income statement, statement of financial position, cash flows, changes in equity |
| 8. Closing entries | Period end | Income, expense and dividend accounts at zero; profit in retained earnings |
| 9. Post-closing trial balance | Period end | Opening balances for the next period |
Interactive
Try steps 2 and 3: journalise and post
Post entries one at a time and follow each account's balance.
Last posted: Opening cash
Balance: 6,000 Dr
Balance: 2,400 Dr
Balance: 0
Balance: 0
Balance: 0
Balance: 2,400 Cr
Practice
Practising as a guest — attempts aren't saved.
Exercise 1 · Sequence
Put the steps of the accounting cycle in order.
Exercise 2 · Classify
Which step of the cycle is each task part of?
Exercise 3 · Concept check
Lumen's bookkeeper first posted the 260 April electricity on Brightline's invoice to Repairs and maintenance instead of Utilities. The trial balance still balanced. Why didn't it catch the error?
Exercise 4 · Concept check
Why are revenue and expense accounts closed at the end of each period?
Exercise 5 · Concept check
Which accounts appear on a post-closing trial balance?
Exercise 6 · Calculate
Lumen closes its books every month. After closing June, its retained earnings were 9,110. From July to December its revenue was 83,800 and its expenses 53,758, and on 18 December it declared a dividend of 3,000. After the December closing entry, what is the balance of retained earnings at 31 December?
Exercise 7 · Calculate
Challenge: it's 30 April, the end of Lumen's first month. Every April transaction has been journalised and posted, and the unadjusted trial balance shows a profit of 7,070. Maya wants to send April's income statement to Northgate Bank today. You find four things still to adjust. What is April's adjusted profit?
Key points
- Analyse, journalise and post during the period.
- At period end: trial balance, adjustments, adjusted trial balance, statements, closing, post-closing trial balance.
- A balanced trial balance proves debits equal credits — not that the entries are right.
- Closing resets income, expense and dividend accounts; balance sheet accounts carry forward.
Content review: answers and figures are checked by automated tests against the accounting engine, and the text has had an internal review against the standards; independent review by a qualified accountant is pending.