What is the accounting cycle?

The accounting cycle is the complete sequence of steps used to identify, record, classify, summarize, and report financial transactions, from analyzing source documents through closing entries and financial statement preparation. For professional service firms, the accounting cycle provides the framework for systematic bookkeeping and accurate financial reporting.

Key characteristics

• Repeating a sequence of steps

• Starts with transaction analysis

• Includes journalizing and posting

• Trial balance preparation

• Adjusting entries

• Ends with closing entries

Why it matters for professional service firms

Following a consistent accounting cycle ensures complete and accurate financial records. Skipping steps creates errors that compound over time. Professional service firms should establish clear accounting cycle procedures with defined responsibilities and timelines.

Real-world example

Amanda's bookkeeper followed the monthly accounting cycle: analyzed source documents (invoices, receipts, bank statements), recorded transactions in the journal, posted to the general ledger, prepared an unadjusted trial balance, made adjusting entries for accruals, prepared an adjusted trial balance, and generated financial statements. A consistent process ensured reliable monthly financials.