6 min readPathway sheetOften a 5- or 10-mark answer with a diagram

The accounting cycle

The accounting cycle runs from transaction to financial statements and closing, then repeats every period. Nine steps; the first three happen throughout the period.

Starts withSource documents (invoices, receipts, cheques)

Ends withPost-closing trial balance

Temporary accountsIncome, expenses, drawings: closed each period

Permanent accountsAssets, liabilities, capital: carried forward

The accounting cycle

back to 1 Analyse transactions from source documents

Steps 1-3 happen every day through the period; steps 4-9 happen at the end of each period.

Temporary and permanent accounts

Temporary (nominal)Income, expenses and drawings. They measure one period only, so they are closed to zero at the end of each period.

Permanent (real)Assets, liabilities and capital. Their balances are carried forward into the next period.

Worked example: closing entries

Problem

At 31 March 2026, Sunil's Repair Service has service revenue of Rs. 340,000, salaries of Rs. 150,000, rent of Rs. 60,000, drawings of Rs. 50,000 and opening capital of Rs. 500,000. Write the closing entries and find the closing capital.

Working

Close income: Dr Service revenue 340,000; Cr Income summary 340,000.
Close expenses: Dr Income summary 210,000; Cr Salaries 150,000; Cr Rent 60,000 (150,000 + 60,000 = 210,000).
Close the profit: income summary balance 340,000 − 210,000 = 130,000; Dr Income summary 130,000; Cr Capital 130,000.
Close drawings: Dr Capital 50,000; Cr Drawings 50,000.
Closing capital: 500,000 + 130,000 − 50,000 = 580,000.

Answer

Profit Rs. 130,000; closing capital Rs. 580,000. Revenue, expense and drawings accounts are now zero.

Why the cycle matters

Every transaction is captured once, in the right period.
Adjustments apply the accrual concept before the statements are prepared.
Closing entries reset income and expenses, so each year's profit is measured separately.
Three trial balances act as arithmetic checks along the way.

In Sri Lankan business

Many Sri Lankan companies, including John Keells Holdings PLC, end their financial year on 31 March, the end of the tax year. In the weeks after, their accounts teams run the adjust, report and close steps of the cycle before the auditors arrive.

Exam angle

Short answer: “What are closing entries?” Period-end entries that transfer income, expense and drawings balances to capital (through the income summary), leaving them at zero.

Essay: “Explain the accounting cycle with a diagram.” Draw the nine-step cycle, explain each step in one or two lines, separate temporary and permanent accounts, and show why it repeats.

Remember it

A-J-P-T, A-A-F-C-P: Analyse, Journalise, Post, Trial balance; Adjust, Adjusted trial balance, Financial statements, Close, Post-closing trial balance.