The Bookkeeping Cycle: From Financial Transactions To Closing Your Books

At the beginning of an accounting period, the bookkeeping (or accounting) cycle begins with financial transactions. Examples of financial transactions are:

  • Sales/returns
  • Owner's contribution or draw
  • Purchase of supplies
  • Bill payment

When these transactions are made, they are recorded in journals, of which there are two types--the General Journal and Special Journals.  Special journals are reserved for repetitive transactions like cash receipts, cash disbursements, sales and purchases.  These journals receive numerous transactions so it is far easier in terms of organization and efficiency to group these transactions in their respective journals.  Special journals reduce clutter and the amount of posting from journal to ledger. Generally speaking, all other transactions are recorded in the General Journal.

  • Cash disbursement journal: used to record transactions that were made with cash (not made on account), and payments for previous purchases that were made on account
  • Cash receipts journal: used to record all receipts, including cash, check, and credit card
  • Sales journal: used when sales are made on account (no cash is received)
  • Purchases journal: used for recording all purchases made with credit, including business supplies, equipment, merchandise for resale, etc.

Next, all of these journal entries are posted to the general ledger, which is a summary of all of your business's accounts.  Just as there are special journals to "clean up" and simplify your general journal, so too there are subsidiary ledgers to simplify your general ledger.  The two most common subsidiary ledgers are Accounts Payable and Accounts Receivable.  These two ledgers reduce the need to post individual transactions to the general ledger, assist with internal controls, and track activity by customer or vendor.

At the end of the accounting period, a trial balance is calculated.  The trial balance is a two column summary of all of the debits and credits in your chart of accounts.  Debits are on the left side, credits are on the right, with assets listed first, followed by expenses.  Your debits should match your credits.  If not, adjusting journal entries will need to be made.  Once adjustments are made, you can generate your financial statements and close your books so that the cycle can begin again.