- 📝 Transaction Recording (The Daily Work)
This is the non-stop, daily part of bookkeeping. It begins the moment a business activity happens.
Action: Identifying and documenting every financial event, from sales and invoices to paying bills and receiving cash.
Documentation: Gathering source documents (receipts, invoices, bank statements) that prove the transaction occurred.
Initial Entry: Recording the transaction chronologically into a Journal (often called the book of original entry), adhering to the Double-Entry System (Debit = Credit). Bookkeeping Services in Cincinnati.
- 🗄️ Posting to the Ledger (The Categorizing)
Once transactions are recorded, they need to be sorted into buckets to see the total activity for each type of account.
Action: Transferring (or “posting”) the journal entries to the General Ledger.
Categorization: The General Ledger is a master record where transactions are grouped by account type (e.g., all cash transactions go into the “Cash Account,” all utility bills go into the “Utilities Expense Account,” etc.).
Result: This step converts the chronological list of events into a summary of each account’s current balance.
- ⚖️ Trial Balance (The Checkpoint)
This is the first major quality-control checkpoint in the cycle.
Action: Preparing a Trial Balance, which is simply a list of every account in the General Ledger and its current balance.
Verification: The purpose is to check if the total sum of all Debit balances perfectly equals the total sum of all Credit balances.
Goal: If Debits $\neq$ Credits, there’s an error that must be found and corrected before moving on. This confirms the mathematical accuracy of your entries up to this point.
- ✍️ Adjusting Entries (The True-Up)
This stage ensures your accounts accurately reflect activity that may not involve a cash transaction. It aligns with the Accrual Principle of accounting.
Action: Making special entries at the end of the period to account for things like: Depreciation (the expense of an asset losing value over time).
Accruals (expenses incurred but not yet paid, or revenue earned but not yet collected).
Prepaids (adjusting expenses paid in advance, like insurance or rent, to reflect only the portion used during the period).
Goal: To ensure revenues are matched with the expenses used to generate them in the correct reporting period.
- 📈 Financial Statements (The Reporting)
This is the ultimate deliverable—the whole point of the cycle.
Action: Using the fully adjusted account balances to generate the Financial Statements.
Reports: Income Statement (P&L): Shows profitability (Revenue – Expenses) for the period.
Balance Sheet: Shows the financial position ($\text{Assets} = \text{Liabilities} + \text{Equity}$) at a specific point in time.
Statement of Cash Flows: Shows the flow of cash in and out from operating, investing, and financing activities.
Final Step: After statements are prepared, Closing Entries are made to reset temporary accounts (like Revenue and Expenses) for the next period, and the cycle begins again!
