Financial Bookkeeping Cycle
The bookkeeping cycle is a series of outline steps setting out the process required for a typical small business to record its financial transactions.
The bookkeeping cycle will vary from business to business but the general steps to explain the bookkeeping cycle remain the same and can be seen in the illustration.
For a fuller description of the procedures involved, see our accounting cycle tutorial.
Steps in the Bookkeeping Cycle
- The bookkeeping cycle starts with the day to day transactions arising from the trading activities of the business for the period.
- These transactions are recorded into the journal either directly or from the day books.
- The ledgers are posted from the journal.
- The ledgers form the complete double entry bookkeeping system, and a trial balance is extracted from them to verify the accuracy and correctness of the postings. If the total debits are equal to the total credits, then the books (ledgers) are said to balance.
- The trial balance is used to prepare the income statement.
- Following the income statement, the trial balance continues to be used to prepare the balance sheet at the end of the accounting period (closing balance sheet).
- The closing balance sheet becomes the opening balance sheet for the next accounting period, and the bookkeeping cycle is now complete.
The bookkeeping cycle now repeats itself starting with the processing of the transactions for the next accounting period.
The bookkeeping and accounting cycle diagram used in this tutorial is available for download in PDF format by following the link below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.