The accounting cycle is a series of steps repeated every period in the same order. Follow the order and your statements hold up; skip a step and you pay for it at year end.
1 The steps of the cycle
Source document
An invoice or voucher evidencing the event
Journal
Recording the entry with its date
Ledger
Posting the entry to the accounts
Trial balance
Confirming the balances agree
Adjustments
Depreciation, accruals and prepayments
Financial statements
Producing the period’s result and position
Closing
Clearing revenue and expense accounts
Seven steps repeated every period — this lesson stops at step four
2 The document: no entry without evidence
The source document is the paper that proves the transaction occurred: a sales invoice, a purchase invoice, a receipt voucher, a payment voucher, a bank advice, a contract. It is the first safeguard of integrity and the first thing an auditor asks for. An entry without a supporting document is a claim, not proof.
3 The journal: recording in date order
Transactions are recorded in the journal in the order they occurred. Each entry has a date, a debit side, a credit side, the amount, and a short narration explaining the reason and the document number.
| Date | Narration | Debit | Credit |
|---|---|---|---|
| 5 Jan | Cash | 100,000 | — |
| Capital — formation deposit | — | 100,000 | |
| 8 Jan | Equipment | 40,000 | — |
| Cash — invoice no. 102 | — | 40,000 |
4 The ledger: gathering by account
The journal orders transactions by time, but it does not answer the question: what is the cash balance now? So entries are posted to the ledger, where each account has its own page gathering all its movements — showing its balance at any moment.
Balance = 60,000 debit — and this is what will appear in the trial balance
5 The trial balance
A trial balance is a listing of the balances of all accounts at a given date, in two columns: debit and credit. Its first purpose is to confirm that total debit balances equal total credit balances.
| Account | Debit | Credit |
|---|---|---|
| Cash | 60,000 | — |
| Equipment | 40,000 | — |
| Accounts receivable | 9,000 | — |
| Accounts payable | — | 4,000 |
| Capital | — | 100,000 |
| Revenue | — | 9,000 |
| Salaries expense | 4,000 | — |
| Total | 113,000 | 113,000 |
6 What a trial balance does not reveal
A balanced trial balance does not mean the books are sound. Some errors pass through it unnoticed:
- Error of complete omission: a transaction never recorded at all, so neither side is affected.
- Error of duplication: an entry recorded twice in full.
- Error of commission: the amount posted to the wrong account of the same type — electricity expense booked to water expense.
- Compensating errors: an error on the debit side matched by an equal error on the credit side.
An important distinction
If the trial balance does not balance, you are certainly facing an error. If it does balance, that does not prove the books are clean — it only means that any errors present are of the kind balancing cannot reveal.
Lesson summary
- The accounting cycle is seven steps repeated every period in the same order.
- No entry without a document supporting it.
- The journal orders by time; the ledger gathers by account.
- The trial balance checks that debit and credit balances agree.
- A balanced trial balance does not prove the books are free of errors.
7 Test yourself
Three quick questions
Choose the answer you think is correct — the result appears immediately.
1. What is the correct order of steps?
The document comes before everything, then the chronological record in the journal, then posting to the ledger, then extracting the trial balance.
2. A purchase invoice was forgotten and never recorded. Will the trial balance reveal it?
A complete omission does not disturb the balance, because the transaction is absent on both sides. It is found by matching documents, not by the trial balance.
3. What does the ledger do that the journal does not?
The ledger gathers every movement of an account in one place, giving you its balance directly.