The accounting cycle is a collective process of identifying, analyzing, and recording the accounting events of a company. It is a standard 8-step process that begins when a transaction occurs and ends with its inclusion in the financial statements and the closing of the books. After you complete your financial statements, you can close the books. This means your books are up to date for the accounting period, and it signifies the start of the next accounting cycle. Once posted to the general ledger, you need to balance all of your business’s transactions. Do this at the end of the accounting period, which can be monthly, quarterly, or annually, depending on the company.
This trial balance should contain zero balances for all temporary accounts. The following discussion breaks the accounting cycle into the treatment of individual transactions, and then closing the books at the end of the reporting period. The first step of the accounting cycle is to analyze each transaction as it occurs in the business.
DeVry’s programmatic offerings and their accreditations are subject to change. Usually, accountants are employed to manage and conduct the accounting tasks required by the accounting cycle. If a small business or one-person shop is involved, the owner may handle the tasks, or outsource the work to an accounting firm. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.
The total credit and debit balance should be equal—if they don’t match, there’s an error somewhere. The unadjusted trial balance is the initial version of the trial balance that hasn’t been analyzed for accuracy and adjusted as needed. You need to identify all transactions that occur throughout the fiscal year. The best approach to do that is to create a system where every transaction is automatically captured because that prevents human error. Typically, companies integrate their accounting software with their payment processor and point-of-sale (POS) software to capture revenue.
There’s also a higher chance of human error—when you’re recording and transferring thousands of transactions in your books, it’s possible you’ll mistype a transaction amount or skip a transaction. For example, if the bookkeeper had debited cash by $100 and credited customer A’s account by $1,000, the credit and debit balances wouldn’t match. The bookkeeper will need to change the amount in the journal entry or pass an adjusting entry to fix the error. Accounting software can help avoid the hassle of correcting these errors because it checks the amounts and whether debits and credits are equal when you post journal entries. According to double-entry accounting, all transactions impact two or more subledger accounts, with equal debits and credits.
It’s important because it can help ensure that the financial transactions that occur throughout an accounting period are accurately and properly recorded and reported. This can provide businesses with a clear understanding of their financial health and ensure compliance with federal regulations. A worksheet is a tool that the 14 best ways to raise money for your startup or small business helps you identify specific errors in your records.
Fortunately, established processes exist to help businesses and entrepreneurs accurately record and report financial activities. This eight-step repeatable guide is a basic checklist of what to do during each accounting period. All phases are covered, from identifying and recording transactions to checking for discrepancies, making adjustments, and creating financial statements. The accounting cycle is a series of steps used to record, process, and summarize financial transactions, culminating in the preparation of financial statements. It ensures accuracy and consistency in financial reporting across accounting periods.
And without a formalized routine guiding your closing efforts, irregularities or unknown variables can creep into your reports and mislead key decision makers. Further, by conducting these efforts monthly, you’ll have access to much more current information, which is critical when making choices that affect cash flow, budgeting, and overall financial strategy. Within your accounting practice, there are many processes you can use to practice your flowcharting skills. You could start by choosing any step within an accounting cycle chart, for example, from analyzing transactions to closing entries. Accounting firms use flowcharts to define and standardize internal and external processes. While external, client-facing processes include account reconciliations, tax return creation, and month-end closings.
The three most important financial statements are the income statement, balance sheet, and cash flow statement. The income statement shows the company’s revenues, expenses, and net income or loss. The balance sheet shows the company’s assets, liabilities, and equity. Finally, the cash flow statement shows the inflows and outflows of cash. The accounting cycle also plays a vital role in maintaining internal controls, which are procedures designed to safeguard assets, ensure accurate reporting, and prevent fraud. Steps like reconciliation, trial balances, and adjusting entries are integral to these controls.
This way, you can make sure no financial information is missing or inaccurate. For example, when the bookkeeper notices that the cash account was debited by $100 instead of $1,000, the bookkeeper must pass an adjusting entry for $900 to correct the balance in the cash account. After a stint in equity research, he switched to writing for B2B brands full-time. Arjun has since written for investment firms, consultants, and SaaS brands in the Accounting and Finance space. Coursework in this master’s degree program covers topics like accounting theory and practices, decision making and ethics, technology how to write a late payment email and more.
Invoice Simple is a tool that what is budgeting planning and forecasting bpandf makes it easier than ever to invoice customers from your phone or laptop. This way, you’ll have pristine records of all your invoices next time you put your books through the accounting cycle. This way, no single person has complete control over a transaction from start to finish.
After closing the books, the accounting cycle starts over again for the next period. This loop helps you keep accurate, up-to-date financial records about where your money is going. The trial balance is a list of all the accounts and their credits and debits before correcting errors. Performing all eight steps in the accounting cycle can be time-consuming.