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A begineers guide to accouting cycle

Accounting plays an important role in any organization and business. Whether it is small, medium or enterprise.  It helps track all income and expenditures. It ensures that quantitative financial information can be used in decision-making. Some of the accounting examples that help companies, organizations, or businesses are:

  • Providing general business information and advice
  • Income tax planning, advising, and reporting.
  • Advising on accounting systems
  • Auditing the financial statements of organizations and companies.
  • Financial planning for individuals

Accounting is based on some steps and processes. These steps and processes are called the accounting cycle. Bookkeepers analyze business transactions and record them in the general journal with a journal entry in the general ledger. Here in this article you will learn and understand each step of the accounting cycle.

What is the accounting cycle?

The accounting cycle is the holistic process of processing and recording all the financial transactions of a business after a successful transaction occurs. It consists of a series of steps performed during the accounting period. 

Generally, the accounting period consists of 12 months. An accounting period varies from business to business or entity to entity.  A company or any business accounting period starts from January to December as an accounting year. While some entities’ accounting period starts from April to March. And the beginning of companies or business periods differs.

Accounting Cycle Steps

There are eight accounting steps; each step is important and cannot be missed. One of the main duties of an accountant or bookkeeper is to keep track of and ensure the accounting cycle. The cycle repeats itself every fiscal year as long as a company or business remains.

The accounting cycle incorporates all the accounts, journal entries, Ledger accounts, debits, credits, and adjusting entries ‌over a full accounting cycle.

  1. Recording Transaction
  2. Journal entries / Journalizing
  3. Posting to the general ledger / Posting
  4. Trial balance
  5. Adjustments /Adjusting entries
  6. Preparing Financial Statements
  7. Closing / closing entries
  8. Prepare closing trial balance / Post-closing trial balance 

The 8 steps of the accounting cycle

Identify Transaction

An accounting cycle starts when a business transaction takes place. Until and unless you have any transactions, the accounting cycle will not start.  A transaction may include a debt payoff, any purchases, sales revenue, acquisition of assets, or any expenses incurred.

Journalizing

Journalizing is the process of recording transactions. Transactions or economic events are recorded in the journal of the company in chronological order. The journal shows both the debit side and the credit side involved in transactions. Debiting one or more accounts since debit and credit balances should be the same.

Posting

After recording journal entries for transactions, the next step is to post entries to the individual ledger.  Posting is summarizing in the ledger accounts the information contained in the journal. Where one can summarize all the transactions related to that account. 

Trial Balance

At the end of the accounting period, which may be quarterly, monthly, or yearly, depending on the business or company, trial balance lists the balances of all ledger accounts, and calculates the total balance of all of the individual accounts. 

Adjustments 

Adjustments are made at the end of the accounting period. Adjusting entries are made that allocate income and expenses to their proper period. This is done for the accruals and deferrals in the accounts.

Preparing Financial Statements

An accountant or bookkeeper prepares the financial statements. The income statement, cash flow statements, and balance sheet use the correct balances.

Closing 

In the end, bookkeepers or accountants close the revenue and expense accounts and zero them out for the next accounting cycle. This enables them to compare two periods and see if a business or company has improved or declined in its financial health.

Post-Closing Trial Balance

A post-closing trial balance is a trial balance taken after closing entries. It serves as a check on the accuracy of the closing process and ensures that books are in balance at the start of the new accounting period. However, it excludes all temporary accounts since they have been closed. It updates the retained earnings accounts to their proper ending balance.

What is the purpose of the Accounting Cycle?

The accounting cycle act as a stepping point or base for developing the financial statements of any business. The main purpose of the accounting cycle is to keep a record of all the transactions systematically without missing any single transaction or entry.

 All financial records and financial statements accuracy depends on the accounting cycle. Accountants or bookkeepers rely on the accounting cycle and consider it while keeping records of accounts.

Key Takeaways

Key Terms
  • Account: it is a registry of a particular transaction. It is a record in the accounting system that is used to track financial activities, i.e. business dealings or debts or credits.
  • Debit and Credit: These are the rules of accounting in order to balance books of accounts. 
  • Debit:  Increase in assets and expenses accounts and decrease in liability, revenue or Equity accounts.
  • Credit: Increase in liability, income, and equity accounts and decrease in asset and expense accounts.

Final Thoughts

To fully understand accounting, it is important to have a solid understanding and knowledge of each and every step of an accounting cycle. Thus, it is a holistic approach beginning ‌with when a translation takes place. 

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