The accounting cycle, step by step

The accounting cycle is the routine that turns a period of business activity into financial statements you can rely on. Every transaction goes through the same stages: it's recorded, posted, checked, adjusted, reported and finally closed. Done in order, the numbers at the end hold up. Skip a stage, and the problem surfaces later, usually during the close.

This guide explains what the accounting cycle is, walks through its eight steps, and follows one illustrative purchase through the whole cycle, so you can see how each step builds on the one before.

What is the accounting cycle?

The accounting cycle is the sequence of steps a business follows in each accounting period to record its transactions and produce its financial statements. It starts when a transaction happens and ends when the period is closed and the books are ready for the next one. Because the same steps repeat every period, usually every month, with a fuller version at year-end, it's called a cycle.

The 8 steps of the accounting cycle

1. 1Identify transactions. Collect every event that changes the business's finances in the period: invoices sent, bills received, payments made and received, along with the documents that prove them.
2. 2Record journal entries. Write each transaction into the journal as debits and credits that balance, in date order.
3. 3Post to the general ledger. Move each entry into the accounts it affects, so every account shows its running balance.
4. 4Prepare an unadjusted trial balance. List every account balance and check that total debits equal total credits before any adjustments.
5. 5Make adjusting entries. Record what the documents alone don't capture, such as depreciation, accruals, prepaid expenses and foreign-currency revaluations, so revenue and expenses land in the right period.
6. 6Prepare an adjusted trial balance. Run the trial balance again with the adjustments included, and confirm it still balances.
7. 7Produce the financial statements. Build the income statement, balance sheet and cash flow statement from the adjusted balances, and review them before anyone relies on them.
8. 8Close the books. Lock the period so its numbers can't change. At year-end, closing entries also move revenue and expenses into retained earnings and reset them to zero.

Steps one to three happen throughout the period, as the business runs; steps four to eight are the period-end close. If debits and credits are new to you, our guide to journal entry examples covers step two in detail.

A worked example: one purchase through the accounting cycle

Take the illustrative purchase used across this site. A company buys 6 laptops from Alder Tech GmbH on purchase order PO-2087, and bill #A-311 arrives for €9,000.

Steps 1 to 3: identify, record and post

The bill is the transaction, and the order and receipt are its evidence. At 1 EUR = 1.0800 USD, journal entry JE-5520 records $9,720 of computer equipment and the same amount owed to the supplier. When the bill is paid at 1.0850, journal entry JE-5521 clears accounts payable, records a $45 exchange loss and a $15 fee, and takes $9,780 out of cash.

Posted to the ledger, the result shows account by account: accounts payable was credited $9,720 and debited $9,720, so the supplier balance is $0, and the cash account is down $9,780, matching the bank statement.

Step 4: the unadjusted trial balance

A trial balance of the accounts this purchase touched lists computer equipment, the exchange loss and the fee as debits, and cash as a credit. Both columns total $9,780, so the entries posted correctly.

Step 5: adjusting entries

No document arrives at month-end to say the laptops are a month older, so an adjusting entry records it. They cost $9,720 and are expected to last 36 months, so journal entry JE-5545 records $270 of depreciation:

Step 6: the adjusted trial balance

With the adjustment included, the same accounts total $10,050 on each side. The trial balance still balances, and it now reflects the cost of using the laptops this month:

Steps 7 and 8: report and close

On the balance sheet, the laptops appear at $9,450: their $9,720 cost less $270 of accumulated depreciation. On the income statement, this purchase adds $330 of expenses this month: $270 of depreciation, the $45 exchange loss and the $15 fee. Once the statements are reviewed, the month is locked.

At year-end, a closing entry moves the year's revenue and expenses into retained earnings. Our guide to closing entries shows it with the same company's full-year figures.

The accounting cycle and the month-end close

The month-end close is the second half of the accounting cycle: the trial balances, adjustments, statements and lock in steps four to eight. The first half decides how hard the close will be. Every transaction recorded late, in the wrong account or without its evidence becomes a question at month-end. Our month-end close checklist breaks the close into stages, each with an owner.

Where the accounting cycle breaks down

• Transactions recorded weeks after they happen, so the ledger is never quite current.
• Bills, invoices and payments kept in separate systems and re-keyed into the ledger, with errors at every handoff.
• Foreign-currency payments posted at the bill's rate, so exchange differences and fees appear as unexplained gaps.
• Adjusting entries prepared in spreadsheets, with no record of who approved them.
• A trial balance that balances but hides an amount in the wrong account, which only a review against the evidence will catch.
• Periods left open, so last month's numbers change after the statements have gone out.

What changes on one system

In most businesses, the first three steps of the cycle are where the time goes: documents from purchasing, billing and the bank are collected and re-entered into the ledger. When purchasing, bills, payments and the books run as one system, from plan to close, each transaction is recorded once, as it happens, and posts with its evidence, exchange rate and fee attached. The trial balance is current every day, and the close becomes a review rather than a rebuild. See how it works on the Accounting and Procurement pages.