Accounting cycle is a procedure in which accounting event is recorded from the time the transaction starts to its reflection in the financial statements, which is also known as bookkeeping cycle. The order of the steps in the accounting cycle are:
- recording in the journal,
- posting to the ledger,
- preparing a trial balance and preparing financial statements.
Transactions of a business are entered into accounts. The minimum parts of an account are: Title, Space for debits and space for credits. A complete set of accounts for a business is referred to as a ledger. Debiting an account is often referred to as charging the account.
The first step in accounting cycle is the execution of a transaction. Information pertaining to the transaction is then placed on document. Utilizing the debit and credit scheme, the transaction is then recorded in the journal. Journalizing requires that the transaction is analyzed to determine which accounts are affected, whether the effect is an increase or decrease, and finally if this increase or decrease is represented by a debit or credit.
After a transaction is journalized, the information is posted, which means recorded in the ledger. The balance of the account is calculated by summing both sides individually and finding the difference between the totals for each side. The usual balance and effect of debits and credits on groups of accounts is shown in table below.