The Accounting Cycle Explained

What OpenStax says the accounting cycle is
The steps

The accounting cycle is the set of steps a business follows each period to turn its transactions into financial statements. It starts with identifying and recording transactions, moves through the ledger, a trial balance and adjusting entries, produces the financial statements, and ends by closing the period's revenue and expense accounts so the next period starts fresh.

Billed publishes this page. Definitions and steps are quoted from the open textbook OpenStax Principles of Accounting, Volume 1, opened on October 29, 2026. How your business applies them is a question for your accountant.

What OpenStax says the accounting cycle is

OpenStax defines it as "a step-by-step process to record business activities and events to keep financial records up to date." It adds: "The process occurs over one accounting period and will begin the cycle again in the following period. A period is one operating cycle of a business, which could be a month, quarter, or year" (OpenStax 3.3).

The steps

OpenStax numbers the steps across three chapters.

Steps 1 to 4: "The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance."

Step 1 "takes information from original sources or activities and translates that information into usable financial data." OpenStax gives an example: "a sales invoice is considered an original source."
Step 2: "A journal (also known as the book of original entry or general journal) is a record of all transactions." See what a journal entry is.
Step 3: "Posting takes all transactions from the journal during a period and moves the information to a general ledger, or ledger."
Step 4 "takes information from the general ledger and transfers it onto a document showing all account balances, and ensuring that debits and credits for the period balance (debit and credit totals are equal)." See what a trial balance is.

Steps 5 to 7: "record adjusting entries, prepare an adjusted trial balance, and prepare financial statements." OpenStax explains that "Adjusting entries update accounting records at the end of a period for any transactions that have not yet been recorded." The statements include the balance sheet.

Steps 8 and 9: "closing entries and prepare a post-closing trial balance." A post-closing trial balance "is a trial balance that is prepared after all of the closing entries have been recorded" (OpenStax 5.1).

Step 10, reversing entries: OpenStax calls this "an optional step in the accounting cycle" and doesn't cover it.

What closing does

OpenStax separates two kinds of account:

"Permanent (real) accounts are accounts that transfer balances to the next period and include balance sheet accounts, such as assets, liabilities, and stockholders' equity."
"Temporary (nominal) accounts are accounts that are closed at the end of each accounting period, and include income statement, dividends, and income summary accounts."

It describes four closing entries: "The first entry closes revenue accounts to the Income Summary account. The second entry closes expense accounts to the Income Summary account. The third entry closes the Income Summary account to Retained Earnings. The fourth entry closes the Dividends account to Retained Earnings."

A related end-of-period check is reconciling your bank accounts to the ledger. See bank reconciliation.

Worked example (sample figures)

A sample consulting company, invented for this example, starts June with $5,000 in cash and $5,000 in common stock. It pays no dividends.

Steps 1 to 3: identify, journalize and post June's transactions.

June 5: invoices a client $3,000 for work completed. Debit Accounts Receivable $3,000; credit Service Revenue $3,000.
June 12: pays $800 rent. Debit Rent Expense $800; credit Cash $800.
June 20: the client pays the invoice. Debit Cash $3,000; credit Accounts Receivable $3,000.

Step 4: unadjusted trial balance at June 30.

Debits: Cash $7,200 ($5,000 − $800 + $3,000) and Rent Expense $800. Total $8,000.
Credits: Common Stock $5,000 and Service Revenue $3,000. Total $8,000.

Step 5: adjusting entry. The company finished $500 of work in June that it hasn't invoiced yet, an accrued revenue. OpenStax defines accrued revenues as "revenues earned in a period but have yet to be recorded, and no money has been collected." Debit Accounts Receivable $500; credit Service Revenue $500.

Step 6: adjusted trial balance.

Debits: Cash $7,200, Accounts Receivable $500 and Rent Expense $800. Total $8,500.
Credits: Common Stock $5,000 and Service Revenue $3,500. Total $8,500.

Step 7: financial statements.

Income statement: revenue $3,500 − rent $800 = net income $2,700.
Balance sheet: assets of $7,700 (cash $7,200 + receivables $500) = common stock $5,000 + retained earnings $2,700.

Step 8: closing entries.

Debit Service Revenue $3,500; credit Income Summary $3,500.
Debit Income Summary $800; credit Rent Expense $800.
Debit Income Summary $2,700; credit Retained Earnings $2,700. The Income Summary balance, $3,500 − $800 = $2,700, equals net income.
No dividends, so there's no fourth entry.

Step 9: post-closing trial balance.

Debits: Cash $7,200 and Accounts Receivable $500. Total $7,700.
Credits: Common Stock $5,000 and Retained Earnings $2,700. Total $7,700.

Revenue, expense and income summary accounts are back to zero, and July starts at step 1.

Where Billed fits

Billed's pages describe some of the original sources that step 1 starts from. The invoice software page says: "When the invoice is ready, send it to your client by email." It adds that "Invoice reports show which invoices are paid, partially paid or past due". The expense tracking page says: "Attach the receipt when you record the expense". The financial reporting page says: "All reports in Billed can be exported for use with your accountant, bookkeeper, or tax software." The invoice software, features and financial reporting pages don't describe journals, ledgers, trial balances or closing entries.

When this guide isn't for you

This page explains the cycle as an introductory textbook sets it out. Adjusting entries, closing for an owner's equity account instead of retained earnings, and reversing entries depend on your business and your accountant's approach.

Frequently Asked Questions

What are the steps of the accounting cycle?

OpenStax Principles of Accounting numbers nine steps: identify and analyze transactions, record them in a journal, post to the ledger, prepare an unadjusted trial balance, record adjusting entries, then prepare the adjusted trial balance, prepare financial statements, record closing entries, and finish with a post-closing trial balance. It describes a tenth step, reversing entries, as optional.

What is the difference between the accounting cycle and an accounting period?

The accounting cycle is the sequence of steps. The accounting period is the time it covers, which OpenStax says "could be a month, quarter, or year". The cycle runs once per period and starts again in the next.

Why are adjusting entries needed?

OpenStax says "Adjusting entries update accounting records at the end of a period for any transactions that have not yet been recorded," such as revenue earned but not yet billed. In this page's sample, $500 of unbilled June work is added before the statements are prepared.

What accounts are closed at the end of the cycle?

Temporary accounts: revenue, expense, dividends and income summary accounts. Permanent accounts, which include assets, liabilities and stockholders' equity, carry their balances into the next period.

What is a post-closing trial balance?

A trial balance prepared once every closing entry is recorded. In this page's sample, it lists only cash, accounts receivable, common stock and retained earnings, and both sides total $7,700.

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