Accounting Cycle
Candlefocus EditorThe accounting cycle starts with the recording of a business’s financial transactions, such as purchases of inventory, sales, and payments on invoices. Transactions are recorded in chronological order in the company’s journal. Following spreadsheets that contain columns for the date, type of transaction, amount, description, and amount debited or credited.
The next step of the accounting cycle is to post transaction data from the journal to the company’s general ledger accounts. The ledger is the central repository of all financial records, organized by account type (such as cash, accounts receivable, inventory, and accounts payable). When all transactions have been posted, the total of all debits and credits in each account should be equal
The third step is reconciling bank accounts, which involve ensuring that the balance shown in the business’s bank accounts is equal to the balance shown in the company’s records. Any discrepancies should be investigated to determine the cause.
The fourth step is adjusting entries, which include adjusting data for any items that have not yet been recorded in the books. These may include accruing interest, prepayments, depreciation, inventory additions, and unrecorded expenses or revenues. All adjusting entries must be made before closing the books.
The fifth step is the closing process, which involves transferring the balances of revenue and expense accounts to the income statement and transferring the changes of asset, liabilities and equity accounts to the balance sheet. This step is critical in order to present the company’s financial position on the balance sheet.
The sixth step is preparing financial statements such as the income statement, balance sheet, statement of cash flows and statement of changes in owner’s equity. These statements are used to communicate the company’s financial position and performance to internal and external stakeholders.
The seventh step is to analyze the various financial statements to identify trends or problems that need to be addressed. The comparison of budgeted amounts to actual results can provide valuable insight into the company’s current financial health.
The eighth step in the cycle is to document decisions or any changes to the accounting system in the form of accounting memorandums. This helps ensure consistency and provides evidence of accounting treatments in the event of financial disputes.
In conclusion, the accounting cycle is an essential process that provides businesses with insight into their financial health and performance. Automating the accounting cycle through accounting software can save businesses time and reduce errors. Understanding the steps of the accounting cycle is essential for anybody interested in accounting, finance and business management.