The 8 Steps in the Accounting Cycle A Step-by-Step Example Guide

Meanwhile, the remaining five steps are the bookkeeping tasks you do at the end of the fiscal year. Fortunately, nowadays, you can automate these tasks with accounting software, so doing all this isn’t as time-consuming as it might seem at first glance. You need to perform these bookkeeping tasks throughout the entire fiscal year.

After analyzing transactions, now is the time to record these transactions in the general journal. A general journal records all financial transactions in chronological order. The general journal format includes the date, accounts affected, amounts, and a brief description of the transaction. Remember that you don’t have to implement the accounting cycle as-is. You can modify it to fit your company’s business model and accounting processes. With that foundation set, let’s talk about the eight accounting cycle steps in detail.

Performing all eight steps in the accounting cycle can be time-consuming. According to double-entry accounting, all transactions impact two or more subledger accounts, with equal debits and credits. When you record transactions in the journal depends on whether you use cash or accrual accounting. If you use accrual accounting, you’ll need to match revenue and expenses. The primary purpose of the accounting cycle is to provide a systematic framework to record a company’s financial transactions. It is important to note that recording the entire process requires a strong attention to detail.

The second step in the cycle is the creation of journal entries for each transaction. Point of sale technology can help to combine steps one and two, but companies must also track their expenses. The choice between accrual and cash accounting will dictate when transactions are officially recorded. Keep in mind that accrual accounting requires the matching of revenues with expenses so both must be booked at the time of sale. The eight-step accounting cycle starts with recording every company transaction individually and ends with a comprehensive report of the company’s activities for the designated cycle timeframe. Many companies use accounting software to automate the accounting cycle.

Even small businesses would benefit from using the accounting cycle in their business, and if you are using accrual accounting, it’s an absolute must. While much of this detail is completely automated if you’re using accounting software, you now understand the accounting cycle from beginning to end. If you’re using accounting software, this process is automated, which will save you a tremendous amount of time and significantly reduce the chance of errors. When a bookkeeper identifies adjustments that need to be made, they have to create new journal entries.

The accounting cycle includes eight steps required to record transactions during an accounting period. In this guide, I explain the in detail, with examples. Apart from identifying errors, this step helps match revenue and expenses when accrual accounting is used.

  1. A trial balance doesn’t guarantee that your finances are completely free of mistakes.
  2. These journal entries have to be made in reference to the original transactions.
  3. Usually, accountants are employed to manage and conduct the accounting tasks required by the accounting cycle.

Companies also modify the accounting cycle’s steps to fit their business models and accounting procedures. One of the major modifications is made according to the type of accounting method a business uses. Companies may follow cash accounting or accrual accounting, or choose between single-entry and double-entry accounting. The accounting cycle is started and completed within an accounting period, the time in which financial statements are prepared. However, the most common type of accounting period is the annual period.

Step-by-Step Example of Accounting Cycle

These statements are helpful and show the company’s current financial position and performance. The last step in the accounting cycle is to make closing entries by finalizing expenses, revenues and temporary accounts at the end of the accounting period. This involves closing out temporary accounts, such as expenses and revenue, and transferring the net income to permanent accounts like retained earnings. When the accounting period ends, you’ll adjust journal entries to fix any mistakes and anomalies found during the worksheet analysis.

However, businesses with internal accounting cycles also follow the external accounting cycle of the fiscal year. First, an income statement can be prepared using information from the revenue and expense account sections of the trial balance. This new trial balance is called an adjusted trial balance, and one of its purposes is to prove that all of your ledger’s credits and debits balance after all adjustments. Simply put, the credit is where your money is coming from, and the debit is what it’s going towards. If you buy some new business cards, for example, your marketing expense account is debited, and your bank account is credited.

Accounting cycle vs. the budget cycle

We begin by introducing the steps and their related documentation. A business starts its accounting cycle by identifying and gathering details about the transactions during the accounting form 720 preparation period. When identifying a transaction, you’ll need to determine its impact. Transactions include expenses, asset acquisition, borrowing, debt payments, debts acquired and sales revenues.

Step 6: Prepare financial statements

He also needs to ensure his debits and credits are balanced at the culmination of this step. The third step in the process is posting journal information to a ledger. Posting takes all transactions from the journal during a period and moves the information to a general ledger, or ledger.

A transaction is a business activity or event that has an effect on financial information presented on financial statements. The information to record a transaction comes from an original source. A journal (also known as the book of original entry or general journal) is a record of all transactions. Identifying and analyzing transactions is the first step in the process. This takes information from original sources or activities and translates that information into usable financial data.

However, if you’re not, or if your accounting software does not automatically post to the G/L, you would post your entries to the G/L at this point. It’s important to note that many of the steps in the accounting cycle are for those using the accrual accounting method. If your business uses the cash accounting method, you can still follow the cycle, but you can eliminate some of the steps such as adjusting entries. At the end of any accounting period, a trial balance is calculated for all accounts on the general ledger. This trial balance tells the company the amount of cash each unadjusted account is worth.

The eight-step accounting cycle process makes accounting easier for bookkeepers and busy entrepreneurs. It can help to take the guesswork out of how to handle accounting activities. It also helps to ensure consistency, accuracy, and efficient financial performance analysis. Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle.

Recordkeeping is essential for recording all types of transactions. Many companies will use point of sale technology linked with their books to record sales transactions. Beyond sales, there are also expenses that can come in many varieties.

When transitioning over to the next accounting period, it’s time to close the books. Once you’ve created an adjusted trial balance, assembling financial statements is a fairly straightforward task. Missing transaction adjustments help you account for the financial transactions you forgot about while bookkeeping—things like business purchases on your personal credit. Accruals make sure that the financial statements you’re preparing now take those future payments and expenses into account.

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