Accounting Basic - What is the Accounting Cycle?
The accounting cycle is the series of steps that take place in order for financial statements to be accurately and uniformly produced at the end of an accounting period which is typically the length of one month, quarter of a year, or a whole year. Below is a list of the steps you would take to complete the accounting cycle, listed in the order that you would perform them, and with a brief summary of each step.
1. Identify the transaction. This transaction could be the revenue from the sale of a product or a payment to another business for services.
2. Analyze the transaction and how it related to the accounting balance sheet. For example, determine which accounts are affected by the transaction and how they are affected.
3. Record the transaction to a journal such as a sales journal. Journals are kept in chronological order and may be updated continuously, daily, or however often it is necessary.
4. Record the transaction to the general ledger. Take all of your entries and categorize them by the account.
5. Perform a trial balance. Debits and credits need to be equal at the end of an accounting cycle, so calculate the entries to ensure they match.
6. Prepare adjustments. Just because entries are recognized, does not mean the work has been performed. Revenue can only be recognized when the work has been completed, so adjust the entries accordingly.
7. Perform trial balance with adjustments. Take the adjustments from Step 6 and prepare a trial balance. If the debits and credits do not match, then you need to adjust them to make sure they do match.
8. Prepare financial statements. From the adjusted trial balance, these corrected balances are used to prepare the financial statements.
9. Close the accounts in preparation of the next accounting cycle. Revenues and expenses need to be closed out, which means they need to have zero balances. Balances are moved to the next cycle.
While the actual terminology, timeline, and other factors of the accounting cycle vary, the above steps represent the general steps included universally in the accounting cycle. In realistic scenarios, a streamlined process, aided by computer programs and other devices, allows an accountant to combine some of these steps and complete the process in less time and with less effort. For example, often, a computer program allows steps one and two to be combined and allows the steps to accurately appear on the journal or general ledger almost instantaneously. Also, calculations performed by a computer or calculator work to eliminate human errors.
