Understanding the Accounting cycle
Running a business is a lot of work. So much has to be done to ensure customer satisfaction, which will facilitate the growth of your business. On the other hand, you also want to stay on top of your accounting. The last thing you need is minor errors that can cost your business a lot. I suggest working with Dean Roupas to eliminate any likelihood of accounting errors. They have been in business for over 20 years, and they can handle any business, despite the size.
This article will help you get a clear grasp of the holistic accounting cycle, from the time a transaction occurs to when it is represented in the financial statements. Your accountant or bookkeeper keeps track of the process, but it is something everyone, especially a business owner, should know.
What is an accounting cycle?
The accounting cycle is an eight-step method for performing bookkeeping activities in a business. It gives a step-by-step procedure for documenting, analyzing, and reporting a company’s financial activity.
Through this 8-step process, accountants will use the accounting cycle as a checklist to run through a set of well-planned procedures to determine which step to perform next to complete the cycle. When completed correctly, the accounting cycle ultimately delivers an accurate set of financial statements.
Eight steps of the accounting cycle
The process begins with financial transactions. There would be nothing to keep track of if there were no financial transactions. A debt payoff, any asset purchases or acquisitions, sales revenue, or any expenses incurred are all examples of transactions. Identifying transactions is the first stage in the accounting cycle. Throughout the accounting cycle, businesses will engage in several transactions. You must correctly record each one in the company’s accounting records.
All forms of transactions require the use of recordkeeping. To record sales transactions, many businesses will employ point-of-sale equipment linked to their accounting software. Aside from sales, there are a variety of expenses to consider as well.
- Journal entries
The transaction is recorded in the relevant journal, with the transaction’s chronological order preserved. The journal, often called the “book of first entry,” is where a transaction is first recorded. This can happen at the point of sale/transaction, or it can be a step on its own. While POS technology can assist in combining steps one and two, businesses must also keep track of their spending. When transactions are officially recorded, the option between accrual and cash accounting will be made. Keep in mind that accrual accounting requires revenue and expense matching. Thus both must be recorded at the moment of sale.
Journal entries should be in chronological order. When cash is received or paid, cash accounting requires transactions to be recorded. In order to manage a well-developed balance sheet, income statement, and cash flow statement, double-entry bookkeeping requires recording two entries for each transaction. When debiting and crediting one or more accounts, the debits and credits must always balance.
- Posting to the ledger
Once a transaction has been recorded as a journal entry, it should be posted to a general ledger account. All accounting actions are broken down by account in the general ledger. This helps a bookkeeper to keep track of account financial situations and statuses. The cash account, which shows how much money is accessible, is one of the most regularly referenced accounts in the general ledger.
Consider the general ledger to be a summary page where all transactions are recorded and sorted. The general ledger is a master list of all transaction data from journals and sub-ledgers.
- Trial balance
The fourth step is to create a trial balance for the accounting period. Depending on the business, this can be quarterly, monthly, or yearly. A trial balance reveals the company’s unadjusted account balances. After that, the unadjusted trial balance is taken to the fifth phase for testing and analysis.
In some cases, the trial balance does not balance and fixing that brings us to the fifth phase in the cycle, which is to analyze a worksheet and find modifying entries. To guarantee that debits and credits are equal and balanced, a worksheet is prepared and used. Adjustments will need to be made if there are any inconsistencies.
Adjustments are also made to account for asset depreciation and one-time payments (such as insurance) that should be allocated on a monthly basis to match monthly expenses with monthly income more accurately. You make another trial balance once you’ve made and recorded the adjustments to ensure that the accounts are in balance.
When using accrual accounting, adjusting entries may be required for revenue and expense matching in addition to identifying any problems.
- Adjusting journal entries
Once your trial balance demonstrates that the accounts will be balanced once the necessary adjustments are made, you post any corrections required to the impacted accounts.
Making any modifications necessary to account for any accrual or deferral corrections is the final step before creating your financial statements. A salary or bill that is paid later in the accounting period is an example of an adjustment. It requires an adjustment to remove the charge because it was recorded as an account payable when the cost happened. Adjusting entries aren’t required until the trial balance process is complete and all necessary corrections and adjustments have been discovered.
- Financial Statements
In the seventh phase, the corporation generates its financial statements after making all adjusting inputs. An income statement, a balance sheet, and a cash flow statement will be included in most companies’ financial statements.
- Closing the books
Finally, in the eighth phase, a corporation completes the accounting cycle by closing its books at the end of the day on the stated closing date. The closing statements provide a report that can be used to analyze performance over time.
After the accounting cycle closes, a new reporting period begins, and the accounting cycle starts all over again. It’s usually a good idea to file paperwork at the end of the day, plan for the following reporting period, and go over a calendar of upcoming activities and duties. Get in touch with Dean Roupas and Associates. They will help you stay on top of your accounting game!