Bookkeeping Cycle

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 cycle will vary from business to business but the general steps to explain the cycle remain the same and can be seen in the illustration below.

Additionally for a fuller description of the procedures involved, see our accounting cycle tutorial.

Steps in the Bookkeeping Cycle

The following are the main steps involved in the bookkeeping cycle.

1. Firstly, the bookkeeping cycle starts with identifying all the day to day financial transactions arising from the trading activities of the business. This includes all sales, purchases, receipts, and payments that have been made by the business during the period.
2. These transactions are recorded into the journal either directly or from the day books. The journal is a chronological record of transactions.
3. The ledger accounts are posted from the journal. The ledger is a record of the transactions in account order.
4. The ledgers form the complete double entry bookkeeping system. The 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.
5. The adjusted trial balance is used to prepare the income statement.
6. The trial balance continues to be used to prepare the balance sheet at the end of the accounting period. This balance sheet is referred to as the closing balance sheet.
7. Finally, the bookkeeping cycle is now complete. The closing balance sheet becomes the opening balance sheet for the next accounting period. The cycle now repeats itself starting with the processing of the transactions for the next accounting period.

PDF Download

The bookkeeping and accounting cycle diagram used in this tutorial is available for download in PDF format by following the link below.