The Accounting Cycle

Definition

The accounting cycle is the repeating set of procedures that produces reliable financial information each period. For a Canadian corporation, the cycle runs at least once per fiscal year and typically once per month as a close-lite. The output is a set of financial statements that form the starting point for the T2 corporate return and for management decisions.

Key rules

The standard cycle has ten steps:

1. Identify and analyze a transaction from a source document.
2. Record the journal entry in the general journal.
3. Post the entry to the general ledger.
4. Prepare an unadjusted trial balance.
5. Record adjusting entries for accruals, deferrals, depreciation, and estimates.
6. Prepare an adjusted trial balance.
7. Prepare the financial statements: income statement, statement of retained earnings, balance sheet, and cash flow statement.
8. Record closing entries (close revenue, expense, and dividends to retained earnings).
9. Prepare a post-closing trial balance.
10. Record reversing entries on the first day of the new period, where useful.

Example

A December 31 year-end sequence for a BC consulting corporation:

Dec 30: Invoice client $5,000 + GST. JE to A/R and revenue.
Dec 31: Record one month of rent incurred but not yet billed, adjusting entry.
Dec 31: Record CCA / depreciation on computer equipment, adjusting entry.
Dec 31: Accrue corporate tax estimate, adjusting entry.
Dec 31: Run adjusted trial balance, prepare statements.
Jan 2:  Book closing entries to move revenue and expenses to retained earnings.
Jan 3:  Run post-closing trial balance, all temporary accounts should be zero.
Jan 3:  Record reversing entries for accrued rent so January's payment posts cleanly.

Common mistakes

• Skipping the adjusting step. Books prepared directly from the bank feed are on a cash basis and will not match ASPE accrual requirements.
• Closing the books before reconciling bank, GST, and payroll accounts to external records.
• Forgetting to close dividends declared to retained earnings, leaving a dangling debit balance in equity.
• Letting a late invoice or receipt from the closed period push into the next period instead of recording it as a prior-period correction.
• Running the cycle only once per year. Annual-only bookkeeping produces surprises at tax time and delays CRA-related decisions such as GST remittances and payroll.

Related concepts

The cycle is the practical framework that ties together every other foundation topic. The accounting equation holds at each step, debits and credits drive every entry, and the final output is governed by the matching principle and the accrual basis required of corporations.