What is The Accounting Cycle?

The accounting cycle is a descriptive term for the entire process of accepting, recording, categorizing, and crediting all the financial transactions of a company. However, this is never a one-time operation but instead a repetitive one – after every fiscal year, it reoccurs. It is the holistic duty of a bookkeeper to keep all details of these financial statements through the full accounting cycle steps. Let’s draw our focus on these steps of the accounting cycle.

What is The Accounting Cycle?

In a full cycle accounting, matters considered include the accounts, T accounts, journal entries, debits, and credits. However, all these come in stages. Below are the eight accounting cycle steps you should know.

The Accounting Cycle Steps

1. Transactions

In any business anywhere, the accounting cycle begins with transactions. It is until enterprises make transactions that financial tract records can commence. Various ways through which transactions occur include the following;

  • Debt payoff,
  • Purchases/ acquisition of assets,
  • Sales revenue
  • Expenses incurred

From the transaction, journal entries follow. Here, there is a chronological order recording of all the transaction details in the company’s journal. However, in this entry, books must balance, credits’ total must match debits.

2. Posting to General Ledger (GL)

This third accounting cycle step involves posting the journal entries to the general ledger. The GL summarises all the transaction details of the individual accounts for easier interpretation.

3. Unadjusted Trial Balance

The total account balance that remains at the end of each accounting period stands to be the trial balance. Accounting periods vary according to specific companies. It could, therefore, be quarterly, monthly, or yearly.

Prepare an Unadjusted Trail Balance is Third Step the Accounting Cycle

The worksheet is the fifth among the accounting cycle steps When debits are not matching credits, the bookkeeper must find the error and correct it. The worksheet helps track discrepancies in balancing.

4. Adjusting Entries

This step involves adjusting the entries and posting them to the accounts for accumulations and deferrals. Bookkeepers need t do this at the elapse of the company’s accounting period.

5. Adjusting Trial Balance

The fifth step in the accounting cycle is adjusted trial balance. Where we will prepare our new trial balance after completing the adjusting entries. When this step will be completed. An adjusted trial balance, we will verify that our adjusting entries are done correctly if our Debit side and credit side of our adjusted trial balance should be balanced.

6. Closing With Financial Statements

At the end of each accounting cycle, all books are closed – both the revenue and expense account waiting for the next period.  Only after having the correct balance details that the Bookkeeping Services can prepare the balance sheet, income statement, and cash flow statement. These two accounts show the details of incoming finances and expenses. Once balanced and close, they indicate the company’s level of financial strength.

Each of the above steps of the accounting cycle is very important. They form a spiral relationship with each other and therefore need to draw lots of the bookkeepers’ attention while working on them.

General Ledger In Accounting Cycle

A General Ledger is a crucial business recording asset that paints a clear picture of business financial transactions. Most business nowadays has it installed as a program within their software. Otherwise, initially, it involved loads of paperwork. This document is highly essential in showing alterations in cash levels throughout the cycle. Plus, it gives all the detailed information on cash debits and credits.

Fundamentals of the Accounting Cycle

The full comprehension of this cycle, what it is how it works, and the nitty-grits between it, learning its principles would be crucial. First on the list of policies is revenue recognition. On this, you must learn when possibilities exist for a company to make sales and so revenue. Secondly, is the matching principle. Here, you need to be an excellent bookkeeper to ensure the balancing of expenses and income.  Lastly is the accrual principle.

These three fundamental concepts will facilitate you in constructing a proper income statement, balance sheet, and also cash flow statement. Remember, these three play a significant role as steps in this cycle.

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