Accounting Cycle Definition, Steps, Process, Diagram & Examples

Accounting Cycle Steps Explained

Many companies have these steps automated through accounting software and the use of technology. Depending on the system capabilities, a bookkeeper might be needed to intervene at some stages. Therefore, it is important for them to understand the steps involved in the overall process to better tackle any situation they might be faced with. Thanks to accounting software, much of this cycle is automated, so you no longer have to post in separate journals, or wait to post to the general ledger (G/L). But even though the cycle is automated, it’s important to understand each of the steps, and why each is necessary.

Accruals have to do with revenues you weren’t immediately paid for and expenses you didn’t immediately pay. Think of the unpaid bill that you sent to the customer two weeks ago, or the invoice from your supplier you haven’t sent money for. Next, you’ll use the general ledger to record all of the financial information gathered in step one. Recording entails noting the date, amount, and location of every transaction. It also ensures that all the money passing through the business is properly documented and “accounted” for.

Learn the eight steps in the accounting cycle process to complete your company’s bookkeeping tasks accurately.

A budget cycle is a cycle to plan for transactions that may happen in the future, while an accounting cycle is used to record transactions that already happened. General LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations. The accounting cycle is used by businesses and organizations to record transactions and prepare financial statements. The standardized accounting cycle process is important because it helps business owners, small businesses, and established companies close their books for the accounting period.

What are the 12 steps of the accounting cycle?

  • Identify transactions.
  • Record transactions.
  • Post journal entries to ledger accounts.
  • Prepare unadjusted trial balance.
  • Prepare adjusting entries.
  • Prepare an adjusted trial balance.
  • Prepare financial statements.
  • Prepare closing entries.

One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business. Primarily a trial balance is prepared to prove the arithmetical accuracy of debits and credits after posting and facilitate preparing financial statements.

Step 1: Transactions

Balance sheet accounts are not temporary and therefore they are carried forward in the next accounting cycle. At the end of the accounting period, adjusting entries must be posted to account for accruals and deferrals. Their main objective is to match incomes and expenses to the relevant accounting periods. The bookkeeper will have a choice between cash accounting and accrual accounting depending on his company’s requirements. This choice will determine when the transactions are officially recorded. The accounting cycle is a set of steps that are repeated in the same order every period.

Accounting Cycle Steps Explained

Essentially, this multistep process ensures that all of the money that passes through the business is accounted for correctly. After accountants and management analyze the balances on the unadjusted trial balance, they can then make end of period adjustments like depreciation expense and expense accruals. These adjusted journal entries are posted to the trial balance turning it into an adjusted trial balance. When cash is received or paid, transactions must be recorded in cash accounting.

Modifying the accounting cycle

Through the accounting cycle (sometimes called the “bookkeeping cycle” or “accounting process”). Public companies must take the extra step and obtain an auditor’s opinion on the financial statements before publishing the information to avoid misleading the public and other stakeholders. This opinion doesn’t explain the company’s financial position but rather whether the financial statements meet all requirements, such as following generally accepted accounting principles. A company ends the accounting cycle by closing its books on a specified closing date. Since the revenue and expense accounts are temporary accounts that show position for a certain period, therefore they are closed and zeroed out at the end of the accounting cycle.

  • Use worksheets to analyze, reconcile, and identify adjusting entries and consolidation entries.
  • The accounting cycle is a simple eight-step procedure for finishing a business’ bookkeeping duties.
  • Perform the process monthly, quarterly or annually based on how often your company needs financial reports.
  • Journalizing and posting closing entries is a required step in the accounting cycle.
  • But depending on how you do your accounting, you might be able to modify, skip, or even add steps.
  • There are several different amounts of time that a company may choose to report on.

Bench assumes no liability for actions taken in reliance upon the information contained herein. Tax adjustments help you account for things like depreciation Accounting Cycle Steps Explained and other tax deductions. For example, you may have paid big money for a new piece of equipment, but you’d be able to write off part of the cost this year.

What Is the Accounting Cycle? Definition, Steps, and Example Guide

In addition to sales, there are costs, which can take many different forms. 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. An accounting cycle is an integral part of all firms’ lives but is it really as simple as it sounds?

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