The Accounting Cycle Explained: The Full 8-Step Process

Commonly, Trial Balance is presented on both sides, Debit and Credit. Thus, each accountant or bookkeeper shall investigate and correct it. This example demonstrates the steps in completingthe accounting cycle to achieve successful financial reporting foryour enterprise. These steps may vary based on your business processesand enterprise structure.

And we’ll break down the eight essential steps and give practical tips for optimizing your bookkeeping. After the financials are prepared, the next period opens and the cycle starts over again. Once you close the accounts, you’re ready to restart the accounting cycle for the next fiscal year. CRM (Customer Relationship Management), ERP (Enterprise Resource Planning), and other technological systems can help identify transactions related to sales, expenses, loans, withdrawals, the accounts payable and more.

If you use accrual accounting, you’ll need to match revenue and expenses.
Once you identify your business’s financial accounting transactions, it’s important to create a record of them.
The timing for recording transactions depends on whether the company uses accrual or cash accounting.
For example, reconciling bank statements with the Cash account can uncover discrepancies, such as unauthorized withdrawals or errors in recording transactions.
A worksheet is where you adjust the “unadjusted” trial balance if needed.
Commonly, Trial Balance is presented on both sides, Debit and Credit.

Step 3: Identify Impacted Accounts

Accounting process flowcharts use standardized symbols to depict common actions and steps. Properly using these symbols ensures a broad audience can read and understand your flowchart. In addition to using accounting software, look for other opportunities for automation. For example, setting up automatic bill payments means you’ll never miss a due date.

Bookkeepers analyze the transaction and record it in the general journal with a journal entry. The debits and credits from the journal are then posted to the general ledger where an unadjusted trial balance can be prepared. The key steps in the eight-step accounting cycle include recording journal entries, posting to the general ledger, calculating trial balances, making adjusting entries, and creating financial statements. In an accounting context, the month-end close process refers to the measures taken to create and verify the accuracy of financial reports covering business standard deduction definition activities from the preceding month.

Step 10: Reversing Entries

Think of the general ledger as a summary sheet where all transactions are divided into accounts. It lets you track your business’s finances and understand how much cash you have available. Bookkeeping focuses on recording and organizing financial data, including tasks, such as invoicing, billing, payroll and reconciling transactions.

It displays the assets owned by the entity, liabilities owed to creditors, and owner’s capital/equity at the date of its preparation. The first step of the accounting cycle is to analyze each transaction as it occurs in the business. This step involves determining the titles and nature of accounts that the transaction will affect. Each business transaction must be properly analyzed so that it can be correctly recorded in the journal. The accounting cycle focuses on historical events and ensures that incurred financial transactions are reported correctly. Identifying and solving problems early in the accounting cycle leads to greater efficiency.

This means resetting temporary accounts like revenue, expenses, and dividends.
Throughout this section, we’ll be looking at the business events and transactions that happen to Paul’s Guitar Shop, Inc. over the course of its first year in business.
If they don’t and there are more debits than credits or vice versa, there’s an error.
It supports compliance with accounting standards and aids in decision-making.
After making or journalizing relevant adjustments, the next step is to prepare the Adjusted Trial Balance.
The accounting cycle is an 8-step process used to manage a company’s bookkeeping throughout an accounting period.

For instance, failing to adjust for accrued expenses can overstate profitability, leading to misleading financial statements. Once the T-accounts have been adjusted, a new trial balance called the adjusted trial balance can be created to reflect the new changes. This trial balance represents the accounts with their corrected balances at the end of the accounting period.

Post Journal Entries to General Ledger

As such, we recommend that you draft an internal plan outlining specific actions and then repeat those steps every month without variance. This flowchart for the accounting process of accounts payable outlines detailed steps for receiving and paying vendor invoices. Lastly, select an online charting tool to begin building editable flowcharts. CPA Practice Advisor recommends “mapping out” processes as a first step to identifying business inefficiencies. Once a process is defined, a close review of the resources required at each step can reveal bottlenecks and risks.

With accrual accounting, journal entries are made when a good or service is provided rather than when it is paid for. The information produced by the accounting cycle allows businesses to measure their financial performance and conduct internal analyses at regular intervals corresponding with accounting periods. Accurate financial statement data enables a company’s senior management to make a broad range of decisions relative to financial strategies and budget forecasting. The accounting cycle records and analyzes transactions that have already occurred, using actual amounts for revenues and expenses. The closing financial statements generated provide a concise report for the company’s leadership to analyze and compare its performance with that of other accounting periods.

Why is a financial close system important?

This was a time-consuming process, and it was easy to make mistakes. With modern technology, accounting software automates the procedure for most businesses. Following each of the accounting cycle steps is often referred to as full cycle accounting. For example, the cycle ensures that all revenue earned during a period is matched with the related expenses, adhering to the matching principle.

The Accounting Cycle’s Purpose

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. At NorthStar Bookkeeping, we specialize in helping businesses navigate the complexities of the accounting cycle.

Step 6: Prepare Post-Closing Trial Balance

The accounting cycle ensures that all financial transactions are accurately recorded and reported, providing stakeholders with reliable information. It supports compliance with accounting standards and aids in decision-making. The accounting cycle provides a framework for recording transactions and checking them for accuracy before they make it to the financial statements. On the other hand, the budget cycle uses the financial information compiled by the accounting cycle process to forecast revenue, expenses, cash position, and more over the next accounting period. Performing all eight steps in the accounting cycle can how much will it cost to hire an accountant to do my taxes be time-consuming.

We recommend that you routinely bring together any stakeholders or participants and have them discuss what is and isn’t working. By crowdsourcing their experiences, you can often identify process dependencies or cross-departmental inefficiencies that would otherwise go unnoticed. You’ll need to research the cause for any variance you discover thoroughly and then amend relevant records to explain the discrepancy. For example, an invoicing error might force you to amend that file with credit notes or create a whole new, this time accurate, payment request.

This may include adjusting balance sheets, reviewing bank records, reconciling transactions, auditing accounts, investigating fraud, and preparing documentation, among other efforts. The core elements of the financial statements are the balance sheet, income statement, statement of cash flows, statement of retained earnings, and accompanying disclosures (also known as footnotes). The accounting cycle is a comprehensive accounting process that begins and ends in an accounting period. It involves eight steps that ensure the proper recording and reporting of financial transactions. Once a company’s books are closed and the accounting cycle for a period ends, it begins anew with the next accounting period and financial transactions.