Beginners Guide to Accounting Cycle

Successful business owners are aware that sound financial management is one of the most important variables that determines the fate of their companies. One of the most effective methods for monitoring the financial state of your company is to use an accounting cycle. It generates financial information that is straightforward and well-organized, making it simple for third parties like investors to comprehend.

The accounting cycle is a process that starts when a transaction occurs and continues until it is recorded on a financial statement. It starts with the date of the purchase. This eight-step process, which is typically conducted through accounting software, is an excellent approach to get more time in your day to focus on expanding your business while also protecting your assets from theft. This is because the process can be accomplished in eight steps. By ensuring that the accounting cycle is maintained consistently, you will be able to spot differences in the balance at a glance.

The accounting cycle is defined as what exactly?

The accounting cycle is a well-organized process that consists of a series of procedures that are carried out in order to identify and keep records of transactions that take place within a firm. The purpose of this procedure is to record, classify, and summarise the details of each transaction that your company completes within a specified time frame. A transaction marks the beginning of the process, which continues until an accurate financial statement has been generated.

Accounting software allows you to automate the processes of the accounting cycle, which helps to reduce the number of frequent mistakes that occur when financial data is processed manually. A bookkeeper will often take care of all aspects of the accounting procedure on your behalf.

The length of time that an accounting cycle lasts might change depending on the specifics of a given company, but the majority of business owners opt to begin a new accounting cycle on a yearly basis.

Explain the process of going through the accounting cycle.

The first step in the accounting cycle is for a bookkeeper or accountant to record all of the financial transactions that occur within your company. After the end of the accounting period, the books are closed, and a set of financial statements that summarise the information that was captured is compiled. After that, the company's stakeholders and the relevant government agencies are given access to these financial statements.

In most cases, the procedure will consist of anything from eight to eleven distinct steps. The cycle is broken down into its eight individual steps as follows.

The accounting process broken down into 8 steps

The precise steps of the accounting cycle may change according to the specific requirements of a company. The following procedure for recording activities and producing financial statements will not, however, be subject to any modifications.

1. Recognize the various transactions.

The process of accounting begins with the identification of each transaction that results in a bookkeeping event as the first stage. In terms of bookkeeping, events include things like sales and refunds, as well as payments to vendors and any other kind of financial dealings that occur in your company.

The three sorts of transactions that can occur in accounting are cash, noncash, and credit events. Invoices, receipts, and any other documents that keep a record of activity within your company can be used to help you identify transactions.

2. Keep a record of the financial dealings.

The following step is to create a journal entry for each individual transaction. This is the book, or spreadsheet, where the first entry of each transaction is made. It is also sometimes referred to as a "book of original entry."

Each record should contain, in chronological order, specifics about every transaction that has taken place. If the accounting system that your company employs is double-entry, then the details of each transaction will include both a debit and a credit entry. Because of this, it is much simpler to monitor how certain occurrences effect your finances.

3. Publish the transactions in question.

Following the completion of the entry of transactions in the journal, they must next be submitted to the general ledger. When the preliminary entries are entered to the general ledger, posting will have taken place. The general ledger is a type of accounting record that acts as a summary of all corporate activities and maintains a balance through the use of debits and credits.

The following five categories should be used to classify transactions that are recorded in the general ledger:

• Assets
• Liabilities
• Capital
• Expenses
• Income

Utilizing these categories makes it simple to locate transactions in a hurry. On the other hand, an indication that your financial statements are not true is the fact that their debits and credits are not balanced.

4. Prepare a trial balance.

When all of the journal entries have been entered into the appropriate accounts in the general ledger, it is time to create an unadjusted trial balance. When performing an analysis of account balances, the unadjusted balance is the one that is used. This ensures that the sums of debits and credits in the ledger accounts are accurate.

Before making any adjustments to the entries for your financial statement, you should first make a list of the balances of all of the accounts in your general ledger. This will allow you to construct an unadjusted trial balance. Without having to sift through the general ledger, you can generate basic financial statements with the help of the trial balance. Although a manual listing of these balances is possible, the process of creating a trial balance is already incorporated into the majority of accounting software packages.

5. Fix any mistakes.

When you see that the total of your debits and credits on your trial balance is not equal, this is a very important step to do. Compare the information in question to prior journal entries that have been made on the spreadsheet in order to discover the error.

One mistake that frequently occurs is posting to the wrong account. If this occurs, the total amount of debits and credits on the account will be the same, but the activity on the account may seem strange. Now is the moment to make any necessary changes or modifications.

6. Add the entries for making adjustments.

You will need to add adjusting entries, also known as end-of-period adjustments, to your journal as the end of the accounting period draws closer. Because of these entries, your accounts will accurately reflect the expenditures and income that occurred during the accounting period.

Include non-cash expenses like as prepayments and accruals when you make these entries. When you are listing transactions that have an effect on more than one accounting period, this step is extremely crucial.

7. Compile your statements of financial position.

After your adjusting entries have been posted, you can move on to creating an adjusted trial balance and finishing your financial statements. The trial balance that has been changed should contain a listing of all the ending balances for the accounts in your general ledger.

After you have finished creating the adjusted trial balance, it is time to start working on your financial statement or annual report. In your financial statement, list the information in a format that is easy to understand and well-organized. The information contained in your financial statement will be examined by tax authorities, employees, and any other parties interested in gaining a better understanding of the financial status of your company.

The balance sheet, the income statement, and the cash flow statement are the three most important types of financial statements, also known as accounting reports. These statements act as an indicator of a company's operational performance and provide an explanation of the company's financial status.

8. Put the book back on the shelf.

Following the completion of the financial statement preparation, it is time to close off the accounting period. When the end of each period arrives, you will utilise closing entries to complete the records of both your expenses and your revenues.

During the closing entry procedure, you will move any net income that you have earned over to retained earnings. When earnings are transferred, it is best practise to cancel any and all temporary accounts.

Before commencing the following accounting period, you must complete the final stage, which is to document the post-closing trial balance so that you can analyse the debits and credits. Because this step causes your revenue to be reset to zero, the post-closing trial balance will only consist of accounts from the balance sheet.