The accounting cycle refers to the overall process of taking recordings of transactions and using those recordings to create various financial statements and a formalized record of the business's transactions over a particular recording period.
The beginning of the accounting cycle involves transferring transaction recordings into journal entries. This requires listing sales and purchases -- among other transactions -- as debits and credits.
Once transactions are recorded as journal entries, they can be posted to the general ledger. It is important that all entries are recorded in the general ledger so a complete and accurate accounting can be made.
The unadjusted trial balance is the recording that is made before any adjusting entries have been made. With debits in the left column and credits in the right, an accountant will add up all debits and credits and make sure the sums equal. If they do not equal, an error has been made.
Adjusting the accounts refers to making adjusting entries in the ledger to account for expenses or revenues that are applicable to a particular period. There are two general types of adjustments. Accruals record expenses or revenues before the transaction has actually taken place, and deferrals delay the recording of a transaction.
Once the adjustments have been made, an adjusted trial balance can be prepared in the same way the unadjusted trial balance is prepared, making sure total debits equal total credits.
Using the adjusted trial balance, the accountant will next prepare the financial statements. These financial statements include the income statement, balance sheet, statement of retained earnings and cash flow statement.
Temporary accounts include revenues, expenses, gains and losses. These should be closed after the financial statements have been prepared. The balances are transferred to retained earnings on the financial statements.
At this point, the accountant will prepare a post-closing trial balance. This is prepared in the same way as the other trial balances except that all the temporary accounts have been closed, leaving only permanent accounts.