Financial statements are a chief end product of sequential steps generally called the accounting cycle. The accounting cycle details a series of repeated procedures on different kinds of data. This stable repetition helps meet the calls for reliability, relevance, and consistency, to tick off just a few of the GAAP mandates.

We’ve already met most of the elements of the accounting transaction cycle. The cycle outlines the steps to be followed for receiving, entering, and presenting the transaction data that comes into the firm. The cycle ends with preparing for the next cycle. While different authors may assign different names and condense or expand certain areas, the accounting cycle will include the following steps:

1. Analyze business transactions.
2. Journalize transactions.
3. Post transactions to the ledger accounts.
4. Prepare a trial balance of the general ledger.
5. Analyze, prepare, and post the adjusting entries.
6. Prepare an adjusted trial balance.
7. Prepare the financial statements: income statement, balance sheet, and statement of cash flows.
8. Journalize and post the closing entries.
9. Prepare a post-closing trial balance.

There would be a flow of gozintas and gozoutas that we would visualize and fit into the accounting equation, or its corollary, the revenue proposition. Once the transaction is analyzed, the whole is recorded in the general journal. Then, the accounting system, either a computer or a Cratchit, groups each relevant piece of that transaction into individual account ledgers. These individual ledgers are then summed in the general ledger.

The process has been to record the compound elements of the transaction in the general journal. That entry is then broken down into account elements, like separating whites and colors, to push the laundry metaphor. Getting to the general ledger requires a first test of the accounting equation. All the accounts that normally carry a debit balance are summed against all the accounts that normally carry a credit balance. Remember how assets normally carry a debit balance and liabilities/ equities have a credit balance? Are the results in balance?

In a manual environment, the trial balance is often not in balance. Then, the problems must be exposed. Adjusting entries generally are made to meet the requirements of accrual accounting. The revenues are recorded when earned and expenses reported when incurred. We test the accounting equation again. There’ll be more on adjusting entries later. Look on this as the rinse phase.

When the adjusted trial balance is in balance, it’s used to prepare the financial statement(s). This might be considered the spin cycle. Then, any entries needed to close out this period and prepare for the next are posted. Closing involves zeroing out the revenue and expense accounts, while leaving the asset, liability, and equity accounts intact. A final balancing vindication of the accounting equation confirms that we’re set to face the next cycle in getting and spending.

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