The accounting cycle is the complete process from recording transactions to closing the books. It repeats every accounting period — monthly, quarterly, or annually. Every concept from the previous 6 lessons comes together here.
Think of this as a loop. At the end of each period, you close the books and start fresh for the next period. Software like Laabam.One automates most of these steps — but understanding the process helps you catch errors and make better decisions.
Recognize business events that have a financial impact. A sale, purchase, payment, receipt, salary — anything involving money or value exchange.
Example: You sell ₹50,000 worth of products to a customer on credit on April 5.
Create journal entries for each transaction. Apply double-entry rules — debit and credit the correct accounts with the correct amounts.
Example: Dr. Accounts Receivable ₹59,000 | Cr. Sales Revenue ₹50,000 | Cr. GST Payable ₹9,000
Transfer each journal entry to the appropriate ledger accounts. The ledger groups all transactions by account — Cash ledger, Sales ledger, Rent ledger, etc.
Example: The ₹50,000 credit goes into the Sales Revenue ledger. The ₹59,000 debit goes into Accounts Receivable ledger.
At period end, list all ledger account balances. Verify that total debits equal total credits. If they don't balance — find and fix the error before proceeding.
Example: Sum of all debit balances = ₹21,72,000. Sum of all credit balances = ₹21,72,000. ✓ Balanced!
Record accruals, deferrals, depreciation, and provisions that haven't been captured yet. These ensure revenue and expenses are in the correct period (matching principle).
Example: Depreciation of ₹5,000/month on equipment. Accrued salary for March (paid in April). Prepaid insurance allocation.
Re-run the trial balance after adjusting entries. This is the final verified list of all account balances used to prepare financial statements.
Example: Original TB + adjusting entries = Adjusted TB. Debits still = Credits.
Generate the three core reports: Profit & Loss (income - expenses = net profit), Balance Sheet (assets = liabilities + equity), and Cash Flow Statement.
Example: Revenue ₹6,50,000 - Expenses ₹5,02,000 = Net Profit ₹1,48,000. Balance Sheet balances at ₹15,10,000.
Close temporary accounts (revenue, expenses, dividends) by transferring their balances to Retained Earnings. This resets them to zero for the next period.
Example: Sales Revenue ₹6,50,000 → transferred to Retained Earnings. Salary Expense ₹2,40,000 → transferred to Retained Earnings. Both accounts now show ₹0.
| Frequency | Steps Run | Who Does This |
|---|---|---|
| Daily / As Transactions Occur | Steps 1–3 (Identify, Record, Post) | Bookkeeper or automated by software |
| Monthly | Steps 4–7 (Trial Balance → Financial Statements) | Accountant / month-end close team |
| Quarterly | Steps 4–7 + GST filing, advance tax | Accountant + tax preparer |
| Annually | Steps 4–8 (Full cycle including closing entries) | Accountant + auditor |
The accounting cycle has 8 steps — from identifying transactions to closing the books.
Steps 1–3 happen daily (record transactions). Steps 4–8 happen at period end (verify, adjust, report, close).
Adjusting entries (step 5) ensure revenue and expenses are in the correct period.
Closing entries (step 8) reset temporary accounts to zero for the next period.
Accounting software automates most of the cycle — you focus on reviewing and decision-making.
This lesson completes the Accounting Basics module. You now understand the complete flow of accounting!
You've learned the complete foundation of accounting — from what it is, through double-entry, journal entries, trial balance, accrual concepts, all the way to the full accounting cycle. Now put this knowledge into practice.