The Accounting Cycle: From Journal Entry to Trial Balance
The accounting cycle is the repeating sequence every company goes through each period (month, quarter, year) to turn day-to-day transactions into final financial statements.
The core steps
- Identify the transaction — any event with a financial impact (a sale, a purchase, paying an expense…).
- Record the journal entry — log the transaction as a debit and credit in the journal, in chronological order.
- Post to the ledger — move each entry into its matching T-account, so all activity for each account lives in one place.
- Prepare the trial balance — a list of every account and its balance, to confirm total debits = total credits.
- Adjusting entries — period-end adjustments (depreciation, accrued expenses, deferred revenue…) so the numbers accurately reflect reality.
- Adjusted trial balance — the same check as step 4, but after adjustments.
- Prepare the financial statements — the income statement, balance sheet, and cash flow statement (as covered in depth in the 3-Statement Modeling course).
- Closing entries — zero out the temporary revenue and expense accounts, roll net income into retained earnings, and reset for the new period.
Why does the trial balance matter?
It’s the first real “sanity check” in the cycle. If total debits don’t equal total credits, something’s wrong somewhere — a line posted only once, a number mistyped, or an account forgotten. The trial balance doesn’t guarantee every entry is conceptually correct (you could post the wrong account with the right amount and it would still balance), but it catches most common arithmetic errors.
Next up: accrual vs. cash basis accounting, plus a hands-on interactive lab for recording journal entries yourself.