# The Accounting Cycle

Business I · Accounting I · https://tryals.app/learn/business-i/the-accounting-cycle

## From Receipt to Report

The **accounting cycle** is the fixed sequence that turns raw business events into usable financial statements. Every firm, every period, it follows a strict path:

1. **Identify transactions** from source documents like invoices and receipts.
2. **Journalize** each event chronologically.
3. **Post to the ledger**, grouping data by account.
4. **Prepare a trial balance** to prove debits equal credits.
5. **Adjust** for accruals and deferrals.
6. **Prepare financial statements** from the adjusted totals.
7. **Close** temporary accounts to reset the clock.
8. **Post-closing trial balance** to verify permanent accounts.

The cycle's genius is separation of concerns: the journal captures **when**, the ledger sorts **what**, and the trial balance checks **arithmetic**.

## Two Indexes & Pitfalls

The journal and ledger hold the exact same data indexed two different ways:

| Record | Organized by | Question it answers |
| --- | --- | --- |
| **Journal** | Chronology | What happened on this date? |
| **Ledger** | Account | What happened to Cash all period? |

> **Common pitfall:** Treating a balanced trial balance as proof the books are right. It only proves debits equal credits. A transaction posted to the wrong account, recorded twice, or omitted entirely will still balance perfectly while remaining entirely wrong.

## Practice questions

8 of this lesson's 13 practice questions, with answers. The full set is in the app.

### 1. The trial balance balances perfectly. Can we be sure there are no errors?

A. Yes, provided the journal was typed, not handwritten
B. Yes, if debits equal credits, the books are correct
C. Only if the amounts are small
D. No; several kinds of error still balance

**Answer:** D. No; several kinds of error still balance

**Why:** A balanced trial balance proves arithmetic, not accuracy. A purchase posted to the wrong account, a transaction omitted entirely, or two opposite errors of equal size all leave debits equaling credits, the balance is necessary but not sufficient.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/the-trial-balance-balances-perfectly-can-we-be-sure-there-are-no

### 2. Which accounts are zeroed out during the closing process?

A. Cost of Goods Sold
B. Cash
C. Interest Expense
D. Sales Revenue

**Answer:** A. Cost of Goods Sold; C. Interest Expense; D. Sales Revenue

**Why:** Revenue and expense accounts are temporary, they reset each period. Cash is permanent: it carries forward because the firm still has it.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/which-accounts-are-zeroed-out-during-the-closing-process

### 3. The closing entry transfers the net profit or loss into the retained earnings account.

**Answer:** True

**Why:** Closing sweeps all temporary balances into retained earnings, the permanent equity account that accumulates the firm's lifetime profit history. Next period starts from zero revenue and zero expense.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/the-closing-entry-transfers-the-net-profit-or-loss-into-the-retained

### 4. At period end, revenue and expense accounts are closed to zero while assets and liabilities carry forward. Why are only some accounts reset?

A. Because revenues measure a period and must start each one empty
B. Because tax law requires income accounts to be zeroed annually
C. Because permanent accounts are audited and temporary ones are not
D. Because temporary accounts are more prone to error and are cleared as a precaution

**Answer:** A. Because revenues measure a period and must start each one empty

**Why:** The income statement reports a period and the balance sheet a moment, so their accounts behave differently. Closing is what makes "this year’s profit" a meaningful phrase.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/at-period-end-revenue-and-expense-accounts-are-closed-to-zero-while

### 5. Order the accounting cycle.

**Answer:**

1. Identify transactions from source documents
2. Record journal entries
3. Post entries to the ledger
4. Prepare the trial balance
5. Make adjusting entries and prepare statements
6. Close temporary accounts

**Why:** Source document, journal, ledger, trial balance, adjust, close, a pipeline where each step's output feeds the next.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/order-the-accounting-cycle

### 6. Temporary or permanent? Sort each account.

**Answer:**

- Temporary (closed each period): Sales Revenue, Rent Expense
- Permanent (carried forward): Cash, Accounts Payable, Retained Earnings

**Why:** Revenue and expense accounts are period-specific, they must reset so next year starts fresh. Asset, liability, and equity accounts carry forward: the balance sheet is a running total.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/temporary-or-permanent-sort-each-account

### 7. Match each source document to the transaction it evidences.

**Answer:**

- Sales invoice → Revenue earned from a customer
- Bank statement → Cash movements during the month
- Purchase order → Goods ordered from a supplier
- Payroll register → Wages owed to employees

**Why:** No document, no entry, the paper trail is the evidence that makes every subsequent step auditable.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/match-each-source-document-to-the-transaction-it-evidences

### 8. A trial balance balances perfectly and the accounts still contain errors. Which class of error does it structurally miss?

A. Errors of arithmetic, which the totals would reveal
B. None; a balanced trial balance guarantees correct accounts
C. Any error that keeps debits equal to credits
D. Errors in the closing entries, which come after the trial balance

**Answer:** C. Any error that keeps debits equal to credits

**Why:** The test is 'do the two columns sum equally', so anything symmetric slips through, wrong account, wrong amount on both sides, omitted entirely. It catches one-sided slips and transpositions in a single entry, which is worth having and is a much narrower guarantee than 'the books are right'.

Page: https://tryals.app/practice/business-i/the-accounting-cycle/a-trial-balance-balances-perfectly-and-the-accounts-still-contain