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Accounting Cycle

The accounting cycle is a series of steps that businesses follow to record, analyze, and report financial transactions. These steps include:

  1. Analyzing transactions: In this step, the business identifies the financial transactions that have occurred during the accounting period.
  2. Recording transactions: After analyzing the transactions, the business records them in a journal or a general ledger.
  3. Posting to the general ledger: In this step, the business takes the information recorded in the journal and posts it to the appropriate accounts in the general ledger.
  4. Preparing a trial balance: A trial balance is a list of all the accounts in the general ledger with their balances. The purpose of a trial balance is to ensure that the total debits equal the total credits.
  5. Making adjusting entries: Adjusting entries are made at the end of the accounting period to record any transactions that have not yet been recorded and to adjust accounts for items such as accrued expenses or depreciation.
  6. Preparing an adjusted trial balance: After making adjusting entries, a new trial balance is prepared to ensure that the accounts are now correctly balanced.
  7. Preparing financial statements: Financial statements such as the income statement, balance sheet, and cash flow statement are prepared using the information from the adjusted trial balance.
  8. Closing the books: At the end of the accounting period, the temporary accounts (revenues, expenses, gains, and losses) are closed to the permanent accounts (assets, liabilities, and equity) in the general ledger.
  9. Post-closing trial balance: After closing the books, a post-closing trial balance is prepared to ensure that all the temporary accounts have been closed and that the permanent accounts are correctly balanced.

These steps are followed in sequence to ensure that the financial statements accurately reflect the financial position of the business.

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