The eight-step accounting cycle is important to know for all types of bookkeepers. It breaks down the entire process of a bookkeeper’s responsibilities into eight basic steps. Many of these steps are often automated https://accounting-services.net/the-usual-sequence-of-steps-in-the-recording/ through accounting software and technology programs. However, knowing and using the steps manually can be essential for small business accountants working on the books with minimal technical support.

As such, most assets start with “1”, liabilities with “2”, capital and withdrawals/dividends as “3”, revenues as “4” and sometimes “5”, and expenses are normally “6” through “9”. Since each business uses different numbers, you don’t need to worry about memorizing the numbers given here. Accounting is the recording, analysis and reporting of events that are materially significant to a company. Accounts contain records of changes to assets, liabilities, shareholders’ equity, revenues and expenses.

Step 7: Financial Statements

It is also important to note that how you increase an account is also known as the normal balance of the account. Therefore, the normal balance of assets, withdrawals/dividend, and expenses are DEBITS and the normal balance of liabilities, capital, and revenues are CREDITS. The eight-step accounting cycle process makes accounting easier for bookkeepers and busy entrepreneurs. It can help to take the guesswork out of how to handle accounting activities. It also helps to ensure consistency, accuracy, and efficient financial performance analysis.

  • A prime entry record (or book of prime entry) is where a transaction is first recorded.
  • Thus, staying organized throughout the process’s time frame can be a key element that helps to maintain overall efficiency.
  • When money is taken out of the business to pay to owners as withdrawals or dividends, the claim that the owners have to the business of course will be less.
  • And, crediting common stock is increasing common stock as common stock is an owner’s equity account.
  • After the transactions have been entered in the journal, the next step in the accounting cycle is posting.

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Step 4: Unadjusted Trial Balance

For each of the above event, note the accounts that need to be debited and credited. In summary, Assets, Withdrawals/dividends, and Expenses – increase with debit, decrease with credit. And, Liabilities, Revenues, and Capital – increase with credit, decrease with debit.

It gives a report of balances but does not require multiple entries. Companies will have many transactions throughout the accounting cycle. To fully understand the accounting cycle, it’s important to have a solid understanding of the basic accounting principles. You need to know about revenue recognition (when a company can record sales revenue), the matching principle (matching expenses to revenues), and the accrual principle.

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Thus, capital and revenues behave just as OE – debit to decrease, credit to increase. Compared to analyzing transactions, creating journal entries, and posting to the ledger, the trial balance is easy. At the end of an accounting period, often at the end of a month, but certainly at the end of the year, all the ledger accounts are listed in order with ending balances. On this list, the total of all the debit balances must equal the total of all the credit balances.

Journal Entries

Again, posting is simply transferring the information from the journal to the ledger. And, the ledger is a list of all your accounts in a certain order – A, L, C, W, R, E. By the way, this is also the order the accounts appear on a trial balance (next step of the accounting cycle) and  the balance sheet. In posting you are taking the information piece by piece and place them in each account in the ledger. The accounts in the ledger follows the order of what is called a “chart of accounts”.

So, in this case, we complete the analysis of the transaction by debiting cash $8,000, crediting common stock $8,000. As you are practicing all these examples, you will also begin to learn more accounts, their names, their type (A, W, E, L, R, C). You will not use OE as much as you are now splitting OE in to Withdrawals/Dividends (W), Expenses (E), Revenues (R), and Capital or Common Stock (C). Cash accounting requires transactions to be recorded when cash is either received or paid.

Therefore, for liabilities and owner’s equity accounts, debit means decrease and credit means increase. At the end of the accounting period, a trial balance is calculated as the fourth step in the accounting cycle. A trial balance tells the company its unadjusted balances in each account.

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