What is the Accounting Cycle?

Accounting Cycle or Accounting Trail

The accounting cycle is a chronological order in which an accounting process flows. It is a step by step process followed to achieve the ultimate goals of accounting.

Firstly, the information is recorded in a book or accounting software (in the modern scenario) called a Journal. Then it is adjusted and moved to a ledger. Ledger balances are then summarized to make a trial balance. Finally, from trial balance financial statements such as an income statement, a trading account, and a balance sheet are prepared.

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Example of Accounting Cycle

Unreal Corp bought a building for 10 Million, which was shown on the balance sheet as an asset. We will study the possible accounting trail related to this transaction.

Step 1Transaction for buying the building is identified.
Step 2Evidence such as a legal ownership document is prepared.
Step 3Journal entry for buying the building is recorded in books.
Step 4A ledger account such as a “building account” is created.
Step 5Ledger account for the building is then balanced.
Step 6All adjustments, if any, are incorporated.
Step 7The amount is treated as an asset and moved to trial balance.
Step 8The amount is then shown on the asset side of the balance sheet.


Short Quiz for Self-Evaluation



>Read What is Journal Posting?