The 8 Important Steps in the Accounting Cycle

Many accounting platforms come equipped with analytical features that allow swift calculation of ratios, identification of trends, and forecasting. The management can leverage these perspectives to identify growth opportunities, tackle challenges, streamline operations, and execute effective fiscal strategies.

It facilitates the early detection and rectification of fiscal discrepancies, offering businesses a competitive advantage by enabling immediate responses to financial fluctuations. Technological integration in the accounting cycle significantly lowers the probability of human-related mistakes. This process enhances financial transparency, aids in tax preparation, facilitates statutory compliance, and enables the management to make informed business decisions. The accounts receivable turnover ratio is a simple formula to calculate how quickly your clients pay. This allows businesses to continue using the same system throughout their growth phase, ensuring consistency and minimizing the necessity for frequent software upgrades.

Components of the Period-End Accounting Cycle

Starting from the initial financial transaction, the accounting cycle makes the entire financial process simpler, and helps to ensure that you don’t overlook any of the processes. Cash accounting requires transactions to be recorded when cash is either received or paid. Double-entry bookkeeping calls for recording two entries with each transaction in order to manage a thoroughly developed balance sheet along with an income statement and cash flow statement. The first step to preparing an unadjusted trial balance is to sum up the total credits and debits in each of your company’s accounts. The budget cycle is the planning process that a business goes through in order to derive a budget for the upcoming fiscal year. Thus, a key difference between the accounting cycle and the budget cycle is that the accounting cycle deals with transactions that have already occurred, while the budget cycle is forward-looking.

Step 3: Posting to the general ledger

To fully understand the accounting cycle, it’s important to have a solid understanding of the basic accounting principles. You need to know about revenue recognition (when a company can record sales revenue), the matching principle (matching expenses to revenues), and the accrual principle. It is useful to print out the key documents supporting the completed financial statements and store them in a binder. This can include all journals, as well as source documents for major journal entries, such as the depreciation calculations. This information provides backup information for the financial statements, and accounting for convertible preferred stock is of particular use when providing evidentiary matter to auditors.

General Ledger

The accounting process’s importance extends beyond basic bookkeeping. An effective accounting process can identify inefficiencies or inconsistencies in business operations. A systematic series of steps how to handle 3 critical stages of business growth companies use to keep accurate and consistent accounting records.

Assistance in Tax Filing

Modern accounting solutions often provide integration with other business software, ensuring a smooth and uniform data flow across diverse operations. Depending on where you look, you can find the accounting cycle described in 4 steps, 5 steps, even 10 steps. As a small business owner, you’ve likely had a crash course in accounting 101, learning everything from how to track business expenses, to learning about the different types of accounting. What’s left at the end of the process is called a post-closing trial balance. If you use accounting software, this usually means you’ve made a mistake inputting information into the system.

Finally, a company ends the accounting cycle in the eighth step by closing its books at the end of the day on the specified closing date. The closing statements provide a report for analysis of performance over the period. With double-entry accounting, common in business-to-business transactions, each transaction has a debit and a credit equal to each other. Closing entries offset all of the balances in your revenue and expense accounts.

Historical fiscal data helps set feasible fiscal objectives, anticipate future expenses, and plan capital investments. It allows businesses to be better prepared for the future and fosters lasting growth. A trial balance is an accounting document that shows the closing balances of all general ledger accounts. You need to calculate the trial balance at the end of the fiscal year. The objective of the trial balance is to help you catch mistakes in your accounting.

1. Depending on where you look, you can find the accounting cycle described in 4 steps, 5 steps, even 10 steps.
2. You need to identify all transactions that occur throughout the fiscal year.
3. The cycle repeats itself every fiscal year as long as a company remains in business.
4. Our secure bank connections automatically import all of your transactions for up-to-date financial reporting without lifting a finger.
5. Therefore, their accounting cycles are tied to reporting requirement dates.

However, the most common type of accounting period is the annual period. Like everything else about bookkeeping and accounting, the accounting cycle is a process that can help you categorize and enter your transactions properly. Using the accounting cycle also helps to ensure that you and your accountant both have a complete and accurate overview of the financial health of your business. Regardless, most bookkeepers will have an awareness of the company’s financial position from day to day.

Generally accepted accounting principles (GAAP) require public companies to use accrual accounting for their financial statements, with rare exceptions. When transitioning over to the next accounting period, it’s time to close the books. This new trial balance is called an adjusted trial balance, and one of its purposes is to prove that all of your ledger’s credits and debits balance after all adjustments. Journal entries are usually posted to the ledger as soon as business transactions occur to ensure that the company’s books are always up to date.

It breaks down the entire process of a bookkeeper’s responsibilities into eight basic steps. Many of these steps can be automated through accounting software and other technology, including artificial intelligence. However, knowing the steps and how to complete them manually can be essential for small business accountants working on the books with minimal technical support. Is keeping up with the accounting cycle taking up too much of your time? With Bench, you get access to your own expert bookkeeper to collaborate with as you grow your business. Our secure bank connections automatically import all of your transactions for up-to-date financial reporting without lifting a finger.

This transparency allows internal and external parties to grasp the corporation’s fiscal status, performance, and cash flow, which are critical for enlightened decision-making. Retained earnings are like a running tally of how profitable your business has been since it first started up. Follow the journey of one of history’s most influential figures in accounting, Luca Pacioli, the father of accounting. Searching for and fixing these errors is called making correcting entries. Incorporating technology has strengthened this procedure, creating a robust synergy that drives business expansion and sustainability. These features unlock valuable insights from data, offering a comprehensive understanding of an organization’s financial stability and aiding in strategic planning.