Lesson 4: The Steps in the

Accounting Cycle
Learning Objectives:

1. List and explain in brief the sequential steps in the accounting cycle

2. Identify the general journal as the book of original entry

3. Journalize transactions in proper form.

4. Describe a general ledger and understand its purpose.

5. Prepare and explain the use of a trial balance.

STEPS IN THE ACCOUNTING CYCLE

1. Identification of Events to be recorded.

Aim: To gather information about transactions or events generally through the source
documents

2. Transactions are recorded in the Journal

Aim: To record the economic impact of transactions on the firm in a journal, this is a form that
facilitates transfer to the accounts.

3. Journal Entries are posted to the Ledger

Aim: To transfer the information from the journal to the ledger for classification.

4. Preparation of a Trial Balance

Aim: To provide a listing to verify the equality of debits and credits in the ledger.

5. Preparation of the Worksheet including Adjusting Entries

Aim: To aid in the preparation of financial statements.

6. Preparation of the Financial Statements

Aim: To provide useful information to decision-makers.

7. Adjusting Journal Entries are Journalized and Posted

Aim: To record the accruals, expiration of deferrals, estimations and other events from the
worksheet.
8. Closing Journal Entries are Journalized and Posted

Aim: To close temporary accounts and transfer profit to owner's equity.

9. Preparation of a Post-Closing Trial Balance

Aim: To check the equality of debits and credits after the closing entries.

10. Reversing Journal Entries are Journalized and Posted

Aim: To simplify the recording of certain regular transactions in the next accounting period.

This cycle is repeated each accounting period. The first three steps in the accounting cycle are
accomplished during the period. The fourth to the ninth steps generally occur the end of the
period. The last step is optional and occurs at the beginning of the next accounting period.

TRANSACTION ANALYSIS (STEP 1)

As discussed in Lesson 3, the analysis of transactions should follow these four basic steps:

1. Identify the transactions from source documents.

2. Indicate the accounts – either assets, liabilities, equity, income or expenses – affected
by the transaction.

3. Ascertain whether each account is increased or decreased by the transaction.

4. Using the rules of debit and credit, determine whether to debit or credit the account to
record its increase or decrease.

TRANSACTIONS ARE JOURNALIZED (STEP 2)

The General Journal

• It is a chronological record of the entity’s transactions.

• The standard contents of the general journal follows:

- Date – the year and month are not rewritten for every entry unless the year or
month changes or a new page is needed.

- Account Titles and Explanation

◦ The account debited is entered at the extreme left of the first line

◦ The account credited is entered slightly indented on the next line

 ◦ A brief description is usually made below the credit

◦ Generally, a line is skipped after each entry.

- P.R. (posting reference) - this will be used when entries are posted and amounts
are transferred to the related ledger accounts.

- Debit – the debit amount for each account is entered in this column.

- Credit – the credit amount for each account is entered in this column.

1 - Example: KC Manalo established her own wedding consultancy with an initial investment of P250,000 on
May 1.

POSTING TO THE GENERAL LEDGER (STEP 3)

The General Ledger
• The reference book of the accounting system

• It is used to classify, summarize transactions, and to prepare data for basic financial
statements.

• The accounts in the ledger are classified into two general groups:

- Balance sheet or permanent accounts (assets, liabilities, and owner’s equity)

- Income statement or temporary accounts (income and expenses)

• Each account has its own record in the ledger.

• It has the basic format of the T-account but offers more information.

• Posting refers to the transferring of amounts from the journal to the ledger.

• The following steps are:

- Transfer the date of the transaction from the journal to the ledger.

- Transfer the page number of the journal to the journal reference (JR) column of
the ledger.
 - Post the debit figure from the journal as a debit figure in the ledger and the credit
figure from the journal as a credit figure in the ledger.

- Enter the account number in the posting reference column of the journal once the
figure has been posted to the ledger.

The Journal Page 1

The Ledger

Account: Cash Account No. 110

Account: Manalo, Capital Account No. 310

Ledger accounts after posting

• At the end of an accounting period, the debit or credit balance of each account must be
determined to enable us to prepare the trial balance.

• Each account balance is determined by footing (adding) all debits and all credits.

• If the sum of an account’s debits is greater than the sum of its credits, that account has a
debit balance.

• If the sum of its credits is greater, that account has a credit balance.

PREPARING THE TRIAL BALANCE (STEP 4)

• The trial balance is a list of all accounts with their respective debit or credit balances.

• It is prepared to verify the equality of debits and credits in the ledger at the end of each
accounting period.
• The procedures to prepare follow:

- List the account title in numerical order following the chart of accounts

- Obtain the account balance of each account from the ledger and enter the debit
balances in the debit column and the credit in the credit column.

- Add the debit and credit columns.

- Compare the totals.

2 - Example of a Trial balance