When it comes to accounting there are 8 basic steps that are followed in an accounting-cycle. This is good to know not just for bookkeepers, but those that own and operate a business. A basic understanding of how accounting is operated will allow you to know what things should be done, a general practice for how they are done, and what to expect.
First, What Exactly is an Accounting Cycle?
The accounting cycle is a widely used 8-step process for completing bookkeeping tasks on a business level. It is a clear launching point for recording, analyzing, and final reporting of financial activities for a business.
This cycle is used broadly over one full accounting period. Keeping organized is incredibly helpful to maintain efficiency. The cycle will vary depending upon the particular reporting needs of a business. Most companies look to analyze finances monthly while some will only do so on a quarterly or annual schedule. Setting a specific cycle schedule helps to set specific dates for opening and closing a cycle and all other subsequent tasks.
Many companies and bookkeepers will rely on software to help go through an accounting cycle and be able to effectively do the 8 steps in a timely manner. Some companies will modify the cycle to better fit their specific needs to a system that keeps them running smoothly.
The 8 Basic Accounting Cycle Steps:
- Identifying Transactions: Companies will have several transactions in an accounting cycle. Each and every transaction needs to be recorded on the company books. This recordkeeping is crucial. Many companies like to utilize point of sale technology that is linked into their books and records of sales transactions. Expenses should also be recorded every time.
- Recording Transactions: Companies need to have a detailed log or journal of all sale and expense transactions. Choosing an accrual or a cash accounting will decide when transactions need to be officially recorded. Accrual accounting requires a matching of revenues with expenses, because of this both need to be recorded at the time of the sale. Cash accounting requires recording when cash is received or paid out. Double-entry requires recording two entries for every transaction to help with a balance sheet, income statement, and cash flow.
- Posting: When a transaction is logged into a journal entry it should post to a general ledger. This ledger provides the breakdown of all accounting activities in an account. This helps the bookkeeper to monitor financial standings and status in each account.
- Unadjusted Trial Balance: At the end of a period a trial balance is calculated. This tells the unadjusted balance in each account and is carried forward to the fifth step.
- Worksheet: Looking over a worksheet and making adjustments comes next. This worksheet is created to make sure things are equal with actual numbers. If discrepancies are found this is when adjustments are made.
- Adjusting Journal Entries: Any adjustments made are recorded as journal entries.
- Financial Statements: After all final adjustments have been made and recorded, the financial statements are made. This can include an income statement. balance sheet, and cash flow statement.
- Closing the Books: This closes out the accounting cycle and is done by the end of day on the specified date. Closing statements give a report for analysis of overall performance for that accounting period. When this is finished a new cycle starts again.
This 8 step general cycle makes accounting easier for bookkeepers and busy business owners. It helps to take the guesswork out of handling accounting and finances and helps to keep things consistent and organized.
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