The Accounting Cycle

5. Preparing a trial balance

A trial balance proves and authenticates the equality of debit and credit entries in the ledger. The purpose of this procedure is to verify the accuracy of posting process and the computation of the ledger account balances. In the nut shell debit and credits sides are balanced at the end in the trial balance.

6.Adjusting entries

Prepare the adjusting entries to record inventory,deferred, accrued and estimated accounts.

7.Post adjusting entries

Post adjusting entries to ledger to develop adjusted trial balance.

8.Preparation of financial statements

The final step of accounting cycle is to extract figures from trial balance which are then summarized up to prepare the financial statements. These financial statements demonstrate the position of the business at the specific date i.e. Balance sheet or the position of business for specific period

For Example,

Income statement. The preparation of financial statements concludes the effects of business transactions occurring through the date of the statements and completes the accounting cycle.

Balance Sheet. This statement include assets (current assets and fixed assets), liabilities (short term liabilities and long term liabilities) and equity accounts. These accounts are used to develop the balance sheet of the company.

Statement of retained earning. This statement is developed from income statement and dividend information.

Cash flow Statement. Cash flow statement developed from other financial statement using direct or indirect method.

9.Prepare closing journal entries

Prepare the closing journal entries to close the temporary account include gain, revenues, expense and losses.