Accounting Cycle: Step-by-Step Guide for Students

Accounting Cycle: Step-by-Step Guide for Students

The Accounting Cycle is a structured process that accountants follow to record, process, and report a business's financial transactions. It ensures that financial statements are accurate, complete, and useful for decision-making. Understanding this cycle is essential for ICAB exams and practical accounting.

Step 1: Identifying Transactions

The first step is to identify financial transactions from source documents such as invoices, receipts, bank statements, and purchase orders. Only transactions that impact assets, liabilities, equity, revenue, or expenses are recorded.

  • Example: Buying machinery, receiving cash from customers, paying salaries.
  • Exam Tip: ICAB may ask what constitutes a transaction and what doesn’t.

Step 2: Recording in Journal

Transactions are recorded in the journal (books of original entry) in chronological order using double-entry accounting.

Date Account Debited Account Credited Amount Narration
01-Sep-2025 Cash Capital 50,000 Owner invested cash in business

Exam Tip: Practice journal entries carefully; they form the foundation for ledger and financial statements.

Step 3: Posting to Ledger

Each journal entry is transferred to the ledger, which organizes transactions by account. This helps in summarizing balances for trial balance preparation.

  • Example: Cash account, Capital account, Expenses account, Revenue account.

Step 4: Preparing Trial Balance

After posting, a trial balance is prepared to ensure total debits equal total credits.

Account Debit (CU) Credit (CU)
Cash 50,000 -
Capital - 50,000

Exam Tip: Errors can exist even if trial balance balances; always check for missing transactions, double postings, or incorrect amounts.

Step 5: Adjusting Entries

Adjusting entries are made at the end of the period for accruals, prepayments, depreciation, and other necessary adjustments.

  • Example: Accrued salaries, prepaid rent, depreciation on machinery.

Step 6: Adjusted Trial Balance

After adjustments, a new adjusted trial balance is prepared to verify total debits and credits again before preparing financial statements.

Step 7: Financial Statements

Financial statements are prepared using the adjusted trial balance. Main statements include:

  • Income Statement: Shows profit or loss for the period.
  • Balance Sheet: Shows assets, liabilities, and equity at period-end.
  • Cash Flow Statement: Shows cash inflows and outflows.

Exam Tip: Ensure correct classification of accounts—revenues, expenses, assets, liabilities, and equity.

Step 8: Closing Entries

Temporary accounts (revenues, expenses, and drawings) are closed to prepare the books for the next period. The balance is transferred to retained earnings or capital account.

  • Example: Debit revenues, credit expenses, balance transferred to capital.

Step 9: Post-Closing Trial Balance

After closing entries, a post-closing trial balance is prepared. It contains only permanent accounts (assets, liabilities, equity) and ensures books are ready for the next accounting period.

Conclusion & Exam Tips

The accounting cycle is a continuous process that guarantees accurate and complete financial reporting. Following each step meticulously ensures correct financial statements.

  • Understand each step with examples for ICAB exams.
  • Practice journal entries, ledger posting, and trial balances regularly.
  • Always check debits and credits match at each stage.
  • Be able to explain the purpose of each step in exams.