📘 Accounting Cycle: Notes + Solved Example
1. What is the Accounting Cycle?
The accounting cycle is a step-by-step process of recording, classifying, summarizing, and
reporting financial transactions of a business for a specific accounting period.
It ensures that the financial statements are accurate, reliable, and prepared according to
accounting principles.
📘 Accounting Cycle (Step by Step)
1⃣ Identifying Transactions
Business transactions are identified from source documents (invoice, receipt, cheque,
etc.).
Example: Purchased goods for $5,000 cash.
2️⃣ Journal Entries (Book of Original Entry)
Each transaction is recorded in the Journal using double-entry (debit/credit).
Format: Date | Particulars | Debit ($) | Credit ($).
Example:
Purchased goods for cash $5,000 →
Purchases A/C Dr 5,000
Cash A/C 5,000
3️⃣ Posting to Ledger (Book of Final Entry)
Transfer each journal entry into the Ledger (T-accounts).
Debit side of Purchases A/C = $5,000
Credit side of Cash A/C = $5,000
,4️⃣ Trial Balance Preparation
A list of all ledger account balances at the end of the period.
Ensures Debit = Credit (mathematical accuracy).
Example Trial Balance:
Account Debit ($) Credit ($)
Purchases 5,000 –
Cash – 5,000
Totals 5,000 5,000
5⃣ Adjusting Entries
Record accrued, prepaid, depreciation, etc.
Ensures revenues/expenses are matched to correct period.
Example: Rent prepaid $1,000 →
Prepaid Rent A/C Dr 1,000
Rent Expense A/C 1,000
6️⃣ Adjusted Trial Balance
A new trial balance prepared after adjustments.
Basis for preparing final accounts.
7️⃣ Financial Statements Preparation
a) Income Statement (Profit & Loss A/C)
Shows revenues – expenses = Net profit/loss.
b) Balance Sheet (Statement of Financial Position)
Assets = Liabilities + Equity.
,c) Cash Flow Statement
Operating, Investing, and Financing cash flows.
8️⃣ Closing Entries
Close revenue & expense accounts to Profit & Loss/Retained Earnings.
Example:
Sales A/C Dr
Profit & Loss A/C
9️⃣ Post-Closing Trial Balance
Only permanent accounts (Assets, Liabilities, Equity) remain.
Used as the opening balance for the next period.
✅ Flow Summary (Simple Diagram):
Transactions → Journal → Ledger → Trial Balance → Adjustments → Financial Statements →
Closing → Post-Closing Trial Balance
2️. Steps in the Accounting Cycle
1. Identifying Transactions – Recognizing financial events through source documents
(invoices, receipts).
2. Journalizing – Recording transactions in the journal using double-entry.
3. Posting to Ledger – Transferring journal entries into ledger accounts (T-accounts).
4. Preparing Trial Balance – Listing all ledger balances to check Debit = Credit.
5. Adjusting Entries – Recording accruals, prepayments, depreciation.
6. Adjusted Trial Balance – Prepared after adjustments for accuracy.
7. Financial Statements – Income Statement, Balance Sheet, Cash Flow.
8. Closing Entries – Closing temporary accounts (revenues & expenses).
, 9. Post-Closing Trial Balance – Prepared to ensure balances carry forward to next year.
3️. Solved Example of the Accounting Cycle
📌 Transactions of “ABC Traders” for Jan 2️02️5:
1. Owner invested $50,000 cash into business.
2. Purchased goods for $20,000 cash.
3. Sold goods for $30,000 cash (cost $18,000).
4. Paid rent $2,000.
5. Received $500 interest income.
Step 1: Journal Entries
Date Particulars Debit ($) Credit ($)
Jan 1 Cash A/C Dr 50,000 To Capital A/C 50,000 50,000
Jan 2️ Purchases A/C Dr 2️0,000 To Cash A/C 2️0,000 2️0,000
Jan 3️ Cash A/C Dr 3️0,000 To Sales A/C 3️0,000 3️0,000
Jan 3️ Cost of Goods Sold A/C Dr 18️,000 To Purchases A/C 18️,000 18️,000
Jan 4️ Rent Expense A/C Dr 2️,000 To Cash A/C 2️,000 2️,000
Jan 5 Cash A/C Dr 500 To Interest Income A/C 500 500
Step 2️: Posting to Ledger (T-Accounts)
Cash A/C
Debit: 50,000, 3️0,000, 500 = 8️0,500
Credit: 2️0,000, 2️,000 = 2️2️,000
Balance = 58️,500 (Dr)
1. What is the Accounting Cycle?
The accounting cycle is a step-by-step process of recording, classifying, summarizing, and
reporting financial transactions of a business for a specific accounting period.
It ensures that the financial statements are accurate, reliable, and prepared according to
accounting principles.
📘 Accounting Cycle (Step by Step)
1⃣ Identifying Transactions
Business transactions are identified from source documents (invoice, receipt, cheque,
etc.).
Example: Purchased goods for $5,000 cash.
2️⃣ Journal Entries (Book of Original Entry)
Each transaction is recorded in the Journal using double-entry (debit/credit).
Format: Date | Particulars | Debit ($) | Credit ($).
Example:
Purchased goods for cash $5,000 →
Purchases A/C Dr 5,000
Cash A/C 5,000
3️⃣ Posting to Ledger (Book of Final Entry)
Transfer each journal entry into the Ledger (T-accounts).
Debit side of Purchases A/C = $5,000
Credit side of Cash A/C = $5,000
,4️⃣ Trial Balance Preparation
A list of all ledger account balances at the end of the period.
Ensures Debit = Credit (mathematical accuracy).
Example Trial Balance:
Account Debit ($) Credit ($)
Purchases 5,000 –
Cash – 5,000
Totals 5,000 5,000
5⃣ Adjusting Entries
Record accrued, prepaid, depreciation, etc.
Ensures revenues/expenses are matched to correct period.
Example: Rent prepaid $1,000 →
Prepaid Rent A/C Dr 1,000
Rent Expense A/C 1,000
6️⃣ Adjusted Trial Balance
A new trial balance prepared after adjustments.
Basis for preparing final accounts.
7️⃣ Financial Statements Preparation
a) Income Statement (Profit & Loss A/C)
Shows revenues – expenses = Net profit/loss.
b) Balance Sheet (Statement of Financial Position)
Assets = Liabilities + Equity.
,c) Cash Flow Statement
Operating, Investing, and Financing cash flows.
8️⃣ Closing Entries
Close revenue & expense accounts to Profit & Loss/Retained Earnings.
Example:
Sales A/C Dr
Profit & Loss A/C
9️⃣ Post-Closing Trial Balance
Only permanent accounts (Assets, Liabilities, Equity) remain.
Used as the opening balance for the next period.
✅ Flow Summary (Simple Diagram):
Transactions → Journal → Ledger → Trial Balance → Adjustments → Financial Statements →
Closing → Post-Closing Trial Balance
2️. Steps in the Accounting Cycle
1. Identifying Transactions – Recognizing financial events through source documents
(invoices, receipts).
2. Journalizing – Recording transactions in the journal using double-entry.
3. Posting to Ledger – Transferring journal entries into ledger accounts (T-accounts).
4. Preparing Trial Balance – Listing all ledger balances to check Debit = Credit.
5. Adjusting Entries – Recording accruals, prepayments, depreciation.
6. Adjusted Trial Balance – Prepared after adjustments for accuracy.
7. Financial Statements – Income Statement, Balance Sheet, Cash Flow.
8. Closing Entries – Closing temporary accounts (revenues & expenses).
, 9. Post-Closing Trial Balance – Prepared to ensure balances carry forward to next year.
3️. Solved Example of the Accounting Cycle
📌 Transactions of “ABC Traders” for Jan 2️02️5:
1. Owner invested $50,000 cash into business.
2. Purchased goods for $20,000 cash.
3. Sold goods for $30,000 cash (cost $18,000).
4. Paid rent $2,000.
5. Received $500 interest income.
Step 1: Journal Entries
Date Particulars Debit ($) Credit ($)
Jan 1 Cash A/C Dr 50,000 To Capital A/C 50,000 50,000
Jan 2️ Purchases A/C Dr 2️0,000 To Cash A/C 2️0,000 2️0,000
Jan 3️ Cash A/C Dr 3️0,000 To Sales A/C 3️0,000 3️0,000
Jan 3️ Cost of Goods Sold A/C Dr 18️,000 To Purchases A/C 18️,000 18️,000
Jan 4️ Rent Expense A/C Dr 2️,000 To Cash A/C 2️,000 2️,000
Jan 5 Cash A/C Dr 500 To Interest Income A/C 500 500
Step 2️: Posting to Ledger (T-Accounts)
Cash A/C
Debit: 50,000, 3️0,000, 500 = 8️0,500
Credit: 2️0,000, 2️,000 = 2️2️,000
Balance = 58️,500 (Dr)
