An accounting cycle is an integral part of all firms’ lives but is it really as simple as it sounds? In this article, we narrowed the accounting cycle’s steps down to only eight main points that everyone should know and practice—read on to find out all of them with simple explanations.
An Overview Of The Accounting Cycle
All varieties of bookkeepers ought to be familiar with the eight-step accounting cycle. It divides the whole process of a bookkeeper's duties into eight fundamental phases.
Many of these tasks are frequently automated through accounting software, such as Wafeq, and other technological tools. However, for small business accountants working on accounts with little technological help, being aware of and using manual processes might be crucial.
- The accounting cycle is a procedure created to make it simpler for business owners to account for the financial aspects of their operations.
- An accounting cycle normally has eight phases to be completed.
- Business owners receive thorough financial performance reports at the end of the accounting cycle, which are used to evaluate the company.
- The eight processes of the accounting cycle are:
- Identifying transactions
- Documenting transactions in a journal
- Posting transactions
- Getting the unadjusted trial balance
- Creating a worksheet
- Revising journal entries
- Preparing financial statements
- Closing the books
- Although practically all accounting is done electronically, it must still be carefully reviewed.
The Accounting Cycle: What Is It?
The accounting cycle is a simple eight-step procedure for finishing a business' bookkeeping duties. It offers a precise roadmap for the documentation, evaluation, and final reporting of a company's financial operations.
A full reporting period uses the accounting cycle in its entirety. Thus, maintaining organization throughout the process can be a crucial component contributing to overall efficiency.
Depending on the necessity for reporting, accounting cycle times will change. Though some businesses may emphasize quarterly or yearly outcomes, most try to examine their performance every month.
In any case, the majority of bookkeepers are aware of the business's daily financial situation. In general, figuring out the length of each accounting cycle is crucial since it establishes precise dates for opening and shutting.
A new cycle starts once an accounting cycle ends, continuing the eight-step accounting procedure.
The 8 Crucial Accounting Cycle Steps
The accounting cycle consists of the following eight steps:
1st Step: Identify Transactions
The accounting cycle's initial stage is to identify transactions. Business transactions will be numerous throughout the accounting cycle. Each one must be accurately recorded in the business's books.
To log all kinds of transactions, recordkeeping is necessary. For example, many businesses will record sales transactions using point-of-sale software that is connected to their books. In addition to sales, there are costs, which can take many different forms.
2nd Step: Journal The Transactions
The cycle's second phase is producing journal entries for each transaction. Steps one and two can be combined with the aid of point-of-sale technology, but businesses must also keep track of their costs.
When transactions are formally recorded will depend on whether you use accrual or cash accounting. Remember that accrual accounting mandates that revenues and costs be matched, meaning that both must be recorded at the moment of sale.
When cash is received or paid, transactions must be recorded in cash accounting. In order to handle a fully developed balance sheet, together with an income statement and cash flow statement, double-entry bookkeeping requires that two entries be recorded with each transaction.
Each transaction in double-entry accounting has a debit and a credit that are equal to one another. Keeping a checkbook is similar to single-entry bookkeeping. It does not call for additional entries and provides a summary of balances.
Read more in detail about Double-entry Accounting.
3rd Step: Post Transactions
A transaction should post to an account in the general ledger after it has been entered as a journal entry. All accounting actions are broken down by account in the general ledger.
This enables a bookkeeper to keep track of account-by-account financial conditions and statuses. The cash account, which provides information on available cash, is one of the general ledger accounts that are most frequently referred to.
Because practically all accounting is now done electronically, the ledger is no longer as important as it once was because all transactions are now automatically registered.
4th Step: Get The Unadjusted Trial Balance
The fourth stage of the accounting cycle involves calculating a trial balance after the accounting period. The firm may learn the unadjusted amounts in each account from a trial balance. After testing and analysis in the fourth stage, the unadjusted trial balance is taken on to the fifth step.
Once the accounting period has concluded, and all transactions have been discovered, documented, and posted to the ledger, this is the initial action that is taken (this is usually done electronically and automatically, but not always).
Ensuring the overall credit balance and total debit balance are equal is the goal of this phase. If those figures are off, this step can catch many errors.
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5th Step: Create A Worksheet
The fifth phase in the cycle involves reviewing a worksheet and locating modifying entries. A worksheet is made to check if the debits and credits are equivalent. Again, there will need to be modifications made if there are inconsistencies.
When utilizing accrual accounting, adjusting entries could be required for revenue and cost matching in addition to identifying any problems.
6th Step: Adjust Journal Entries
A bookkeeper makes corrections in the sixth phase. When required, adjustments are documented in journal entries.
7th Step: Create Financial Statements
The seventh phase is when the firm prepares its financial statements after completing all adjustment inputs. These statements typically consist of an income statement, balance sheet, and cash flow statement for businesses.
8th Step: Finish The books
In the eighth phase, a business finally completes the accounting cycle by shutting its books at the end of the day on the designated closure date. The concluding remarks offer a report for analyzing performance throughout the course of the time. After closure, a new reporting period is used to restart the accounting cycle all over again.
Closing is typically an excellent time to submit documentation, make plans for the following reporting period, and go through a schedule of upcoming activities.
Accounting is made simpler for busy business owners and bookkeepers because of the eight-step accounting cycle method. It might be beneficial to remove any uncertainty on how to manage accounting tasks. Additionally, it supports reliable, accurate, and effective financial performance analysis.