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The Eight Steps Of The Accounting Cycle

November 9, 2021
Bill Kimball

accounting cycle

If we were to look at the accounting cycle through the lens of an accountant today, the process would look a little different. For example, the general ledger doesn’t exist in the same form today, so there’s no need to post transactions to it. We’ve pointed out areas where technology has pushed some aspects of the accounting cycle into the background.

Each step in the accounting cycle is equally important, but if the first step is done incorrectly, it throws off all subsequent steps. If you’re unable to track your transactions accurately, the following steps won’t be able to create a clear accounting picture. Whether your accounting period is done monthly, quarterly, or annually, timing is crucial to implementing the accounting cycle properly. Taking the time to map out plans and dates that coincide with your accounting deadlines will increase productivity and results. Failure to account for all financial transactions can result in lost revenue, or a possible discrepancy on financial statements.

The length of the accounting cycle varies from company to company. It may be monthly, quarterly, semiannually, or annually, depending on when the financial statements of the company are published. Regardless of the timing of the accounting cycle, the processes involved remain the same. The term accounting cycle refers to the specific steps that are involved in completing the accounting process. It begins at one point and revolves through specific steps, before starting again at the same point and then repeating those same steps. Some errors could exist even if debits are equal to credits, such as double posting or failure to record a transaction.

accounting cycle

Remember, the trial balance is a list of all accounts and their balances after adjustments have been made. This trial balance is prepared to check and make sure that debits and credits equal after adjusting entries are made. Your team also repeats different parts of the accounting cycle, especially the earlier collecting, analyzing, and recording stages. For example, a small business will record and analyze transactions countless times in a year. They won’t prepare an unadjusted or adjusted trial balance until after all the necessary financial information is in the ledger. This typically happens right before preparing a financial statement (step #7) at the end of the month or quarter.

Make Closing Entries

The sequence of accounting procedure is frequently referred to as accounting cycle or phases of accounting. It begins with the journalizing of transactions and ends with the post-closing trial balance. The most significant output of the accounting cycle is the income statement and balance sheet. A computerized accounting system saves a great deal of time and effort, considerably reduces mathematical errors, and allows for much more timely information than does a manual system. In a real-time environment, accounts are accessed and updated immediately to reflect activity, thus combining steps 2 and 3.

What is difference between journal and ledger?

The key difference between Journal and Ledger is that Journal is the first step of the accounting cycle where all the accounting transactions are analyzed and recorded as the journal entries, whereas, ledger is the extension of the journal where journal entries are recorded by the company in its general ledger account …

These insights allow companies to locate which processes and practices are the most profitable. The statements themselves are a good measure of performance across the period. Your business can review these statements and use them for the basis of goals in the new accounting period. This part of the process is not necessary for businesses using a single-entry account system since there is only one account being handled.

However, today these steps are occurring with electronic speed and accuracy within sophisticated yet inexpensive accounting software. The accountant can enter adjusting entries into the software and can instantaneously obtain a complete set of financial statements accounting cycle by simply selecting them from a menu. After reviewing the financial statements, the accountant is able to make additional adjustments and almost immediately obtain the revised reports. The software will also prepare, record, and post the closing entries.

Using The Accounting Cycle For Your Finances

Patriot’s online accounting software is easy-to-use and made for the non-accountant. Use your financial statements to measure performance, make improvements, and set goals. You can also use statements to talk with lenders and negotiate terms with vendors.

accounting cycle

Those transactions are noted in the appropriate financial journal, depending on what the money was spent on or originated from. Debits are used to indicate money spent and credits are used for money that is received. Depending on whom you talk to, the accounting cycle can have anywhere from seven to nine steps, based on how detailed each step is.

Why Does The Accounting Process Matter?

Receipts of payment or assets that have not been recorded, i.e., late payment for delivered work. At the end of each period, companies summarize the Journals by totaling up the Debits and Credit columns from each Journal and transferring these to the General Ledger. Journals are also called Books in many parts of the world and therefore the place where the term “bookkeeping” comes from. The Debits and Credits pertaining to each account effected are recorded in Journals. Bookkeepers are the ones who have to toil day in and day out to make sure these transactions are accurately recorded. But consider that company transactions go into thousands and even millions depending on the size of the company.

Why is accounting cycle important?

An accounting cycle enables the financial accounting that businesses need to perform to be in compliance with federal regulations and tax codes. The government requires companies of all sizes to disclose their financial results and pay taxes on their profits, which they must calculate on their own.

Inventory – in a periodic inventory system, an adjusting entry is used to determine the cost of goods sold expense. This entry is not necessary for a company using perpetual inventory. In a periodic inventory system, an adjusting entry is used to determine the cost of goods sold expense. However, an adjusting entry is not necessary for a company using perpetual inventory. The types of adjusting entries are prepayments, accrual, estimates, and inventory. Since accountants and bookkeepers often need to trace the origin of a ledger entry, they use cross-indexing. In cross-indexing a notation is made for each entry that indicates which general or special journal account the general ledger entry came from.

Accounting Topics

David Ingram has written for multiple publications since 2009, including “The Houston Chronicle” and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University. QuickBooks Online is the browser-based version of the popular desktop accounting application. It has extensive reporting functions, multi-user plans and an intuitive interface.

  • Only revenue, expense, and dividend accounts are closed—not asset, liability, Capital Stock, or Retained Earnings accounts.
  • Next, you’ll use the general ledger to record all of the financial information gathered in step one.
  • You do not need to follow the steps that require you to check entries for debits and credits.
  • When you generate an unadjusted trial balance report from the financial records, you’re checking for errors to ensure that all transactions are recorded in the general ledger.
  • Even better, your friend Solomon, a certified instructor, has just moved to town and is willing to teach at the studio.
  • It gives a report of balances but does not require multiple entries.

For example, assume a business is preparing its financial statements with a December 31st year end. If the books are properly closed, that property will not be included on the balance sheet that is being prepared for the period on December 31st. The general journal is where double entry bookkeeping entries are recorded by debiting one or more accounts and crediting another one or more accounts with the same total amount. The total amount debited and the total amount credited should always be equal, thereby ensuring the accounting equation is maintained.

Accounting Cycle The 9

Source documents are important because they are the ultimate proof a business transaction has occurred. Prepare a trial balance of the accounts and complete the worksheet . The general ledger is tested periodically by running a trial balance. Give your staff the tools they need to succeed in implementing the accounting cycle. This could mean providing quarterly training on best practices, meeting with your staff each cycle to find their pain points, or equipping them with the proper accounting tools.

accounting cycle

At the end of an accounting period, you might have incurred expenses but not paid for them yet. Use adjusting entries to recognize transactions that have occurred but not been recorded.

Ken is the author of four Dummies books, including “Cost Accounting for Dummies.” There is no one-size-fits-all solution when it comes to accounting practices.

To avoid this, consider using governance, risk and compliance software. While it seems like a ton of record keeping, adhering to an accounting cycle is crucial for businesses. Some bookkeepers choose to adjust their entries after they adjust the trial balance.

The next step in the accounting cycle is to record these financial transactions as journal entries. You need to understand the impact of the transaction—from step one—to create the journal entry. Next up, time to double check your work one last time with the help of an adjusted trial balance. This table shows your unadjusted trial balance, your adjusting entries, and your adjusted amounts. It’s the final step before creating financial statements, so it’s worth triple checking everything.