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Understanding the accounting cycle

Posted by Early Growth

August 25, 2021    |     5-minute read (831 words)

The accounting cycle is an eight-step process designed for bookkeepers to break down their responsibilities and simplify tracking the business activities of an organization. These days, it’s relatively easy to automate much of the process.
However, it’s also useful to know how to carry out each step of the accounting period cycle manually. Comprehensive manual reporting enables decision-makers to analyze the business and plan for the year ahead.

Here’s everything you need to know about what the accounting cycle is and its benefits.

What is the Accounting Cycle?

The accounting cycle definition, sometimes misspelled as accounting cucle, is a method of processing and recording all financial transactions made by an organization.
Bookkeepers are required to record what the transaction is, when it occurred, and then represent these transactions as part of the organization’s overall financial statements.
The full cycle accounting process incorporates a single fiscal year and is repeated annually for as long as the company remains active.
Full accounting cycle tracking includes all major accounts, including debits, credits, T accounts, and journal entries. Businesses large and small will follow this cycle from start to finish.

Why Do You Use the Accounting Cycle?

Accounting cycle tracking comes with numerous benefits for a business. The purpose of this process is to ensure every dollar is actually accounted for.
In addition to consistency, accuracy, and compliance, full cycle accounting offers valuable insights for businesses, including:
Financial Health – Evaluate the financial health of the business at a glance. Future Planning – Understand where improvements can be made to enhance efficiency and overall profitability. Prevent Fraud – If a company is losing money due to fraud, the bookkeeping cycle summary can prove to be an invaluable piece of evidence. Organization – An organized set of books enables leaders to access the numbers they need without hassle. Comparison – Easily compare your reported figures with those of your competitors to see how your business matches up.

The 8 Steps of the Accounting Cycle

Part of answering the “what is accounting cycle bookkeeping” question is understanding the different steps in the process.
In other words, what are the accounting cycle steps?

Step One – Identify Transactions

Identifying transactions is the first step in any accounting cycle. Every transaction must be properly recorded and then categorized into different types. To make this easier, many companies connect their point of sale systems directly with their books.

Step Two – Journalize Transactions

All transactions must have a journal entry associated with them. Again, point of sale technology can automate this process on your behalf.
Officially recorded transactions will differ between companies, depending on whether cash or accrual accounting is involved.
Accrual accounting involves matching revenues with expenses at the time of sale, whereas cash accounting requires transactions to be recorded when cash is either paid or received.

Step Three – Posting

After a journal entry has been created for a transaction, it will then be posted to the general ledger. The general ledger includes a readout of accounting activities for each account.
There are many different types of accounts, but the most common is the cash account. The cash account details how much cash is available to the business, helping entrepreneurs determine their cashflow.

Step Four – Unadjusted Trial Balance

Following the conclusion of an accounting period cycle, bookkeepers must create a trial balance. This details the unadjusted balances for each account. It’s the basis for the end-of-fiscal-year accounting process.

Step Five – Worksheet Analysis

The fifth step involves analyzing adjusted entries via a created worksheet. Bookkeepers are required to make sure that debits and credits are equal in accordance with the standards of double-entry bookkeeping. Adjustments must be made if there are any discrepancies. In particular, if using accrual accounting, adjustments may need to be made to revenue matching and expense matching.

Step Six – Adjusting Journal Entries

Bookkeepers will make adjustments during the sixth step of the full cycle accounting process. All adjustments will typically be made as journal entries. These are the types of entries examined during audits.

Step Seven – Generate Financial Statements

Once all adjustments have been made, the numbers will be converted into various financial statements. The majority of companies will use their accounts to generate three major financial statements:

  • Income statement
  • Balance sheet
  • Cash flow statement
These are the financial statements that leadership teams not only report but utilize in making future business decisions.

Step Eight – Closing the Books

The eighth and final step of the accounting cycle is closing the books. This has a strict deadline and bookkeepers are required to produce closing statements enabling the business to analyze how the company performed. Once the books are closed, the entire cycle begins again.

Conclusion

The accounting cycle is the foundation of how companies record, process, and report their financial figures. It’s the cornerstone of any bookkeeping role.
From accounting for startups to major corporations, you may need support. Contact Early Growth for professional help in managing your accounts and making your finances more accurate, consistent and efficient.

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