The accounting cycle

Nine steps, still true

• Identify the transaction and grab the source document.
• Record it (invoice, bill, spend/receive money, or journal).
• Post to the ledger (automatic in Xero and QBO).
• Unadjusted trial balance — every account, debit or credit column, columns equal.
• Adjusting entries — accruals, prepayments, depreciation, inventory, payroll true-up.
• Adjusted trial balance.
• Financial statements — P&L, Balance Sheet, Cash Flow, plus aged A/R and A/P.
• Closing entries — zero income and expense into equity (QBO does this at year-end automatically; Xero shows Current Year Earnings as a calculated line until the year rolls, then it sits with retained earnings unless you allocate it).
• Post-closing trial balance — balance sheet accounts only.

What changes in the cloud

Steps 2–4 happen every time you reconcile a bank line or approve a bill. Month-end is steps 5–7, plus reconciling every bank, card, loan, and clearing account, plus locking the period. Year-end adds tax journals, depreciation true-up, 1099 review (federal threshold $2,000 for 2026 payments), and a lock date that includes the year.

Cash vs accrual sits here

The cycle above is accrual: you record revenue when earned and expenses when incurred. Cash basis records them when money moves. US small businesses often keep accrual books (especially if they want AR/AP discipline) and may file tax returns on cash. Inventory no longer forces accrual for small-business taxpayers — see the next lesson. Xero and QBO can produce both views from the same ledger if invoices and bills are used properly. They cannot invent invoices you never raised.