The Accounting Cycle: 8 Steps You Need To Know

Think of the unpaid bill that you sent to the customer two weeks ago, or the invoice from your supplier you haven’t sent money for. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . Incorporating technology has strengthened this procedure, creating a robust synergy that drives business expansion and sustainability. This allows businesses to continue using the same system throughout their growth phase, ensuring consistency and minimizing the necessity for frequent software upgrades.

Record, Report, Repeat

Next, you’ll break down (or analyze) the purpose of each transaction. In short, an accounting cycle makes sure that all of the money passing through your business is actually “accounted” for. A worksheet is where you adjust the “unadjusted” trial balance if needed. If the trial balance reveals errors, the worksheet can help identify the reason for it.

No, there is an entire market for selling gift cards on Craigslist, just go look and see how easy it is to buy discounted gift cards on Craigslist. Also, there are companies such as cardcash.com and cardhub.com that buy and resell gift cards. The fraudster just sells the gift cards, and the retailer has no idea it is redeeming fraudulently acquired gift cards. Through the implementation of proper internal controls, the accountant can help limit this fraud and protect his or her employer’s reputation. Technology has led to breakthroughs in securing sensitive financial data.

Step 2: Post transactions to the ledger

For businesses seeking external investment, an effective accounting process is crucial. Precise and current fiscal statements can attract potential investors, clearly showing the corporation’s profitability and fiscal stability. Corporations are bound to comply with a variety of fiscal and tax rules. The accounting process aids enterprises in adhering to these regulatory requirements by enabling accurate and timely fiscal reporting. The accounting process, through its precise recording and classification of transactions, aids in enhancing fiscal clarity. The accounting cycle is a structured procedure intended to simplify and enhance the precision of a company’s financial accounting.

Step 2: Record Transactions

Accuracy is critical because you’ll use the financial information generated by the accounting cycle to analyze transactions and financial performance. It’s even more important for companies that need to report financial information to the SEC (Securities and Exchange Commission). On the other hand, the budget cycle uses the financial information compiled by the accounting cycle process to forecast revenue, expenses, cash position, and more over the next accounting period.

1. Typically, bookkeeping will involve some technical support, but a bookkeeper may be required to intervene in the accounting cycle at various points.
2. For example, you may have paid big money for a new piece of equipment, but you’d be able to write off part of the cost this year.
3. It also helps to ensure consistency, accuracy, and efficient financial performance analysis.
4. We’ll do your bookkeeping each month, producing simple financial statements that show you the health of your business.

When transitioning over to the next accounting period, it’s time to close the books. For example, if the bookkeeper had debited cash by $100 and credited customer A’s account by $1,000, the credit and debit balances wouldn’t match. The bookkeeper will need to change the amount in the journal entry or pass an adjusting entry to fix the error. But if you use accounting software, you won’t need to prepare the trial balance manually. Almost all companies use accounting software, so posting transactions to GL is less of a concern now than in the past.

How to Calculate (and Use) the Accounts Receivable Turnover Ratio

Alternatively, the budget cycle relates to future operating performance and planning for future transactions. The accounting cycle assists in producing information for external users, while the budget cycle is mainly used for internal management purposes. The accounting cycle is important because it gives sick pay from day one for those affected by coronavirus companies a set of well-planned steps to organize the bookkeeping process to avoid falling into the pitfalls of poor accounting practices.

Assistance in Tax Filing

Accruals make sure that the financial statements you’re preparing now take those future payments and expenses into account. Simply put, the credit is where your money is coming from, and the debit is what it’s going towards. If you buy some new business cards, for example, your marketing expense account is debited, and your bank account is credited. Or, if you receive a payment, your sales revenue is credited while your bank account is debited. If you need a bookkeeper callable preferred stock to take care of all of this for you, check out Bench.

Many of these steps can be automated through accounting software and other technology, including artificial intelligence. However, knowing the steps and how to complete them manually can be essential for small business accountants working on the books with minimal technical support. A trial balance provides you with a list of all of your general ledger account balances, with each account displaying a debit or a credit balance. The reason you run a trial balance at this point is to ensure that your debits and credits are in balance. It’s important to note that many of the steps in the accounting cycle are for those using the accrual accounting method.

This can provide businesses with a clear understanding of their financial health and ensure compliance with federal regulations. A tool that can be helpful to businesses looking for an easier way to view their accounting processes is to have drillable financial statements. This feature can be found in several software systems, allowing companies to go through the accounting cycle from transaction entry to financial statement construction.

The automation of data input and calculations eradicates potential misjudgments or inaccuracies, which increases the trust and reliability of a company’s financial data. This is a key component in making strategic decisions and remaining compliant with regulations. Let’s dive deeper into the impact of technology on the accounting cycle. This process enhances financial transparency, aids in tax preparation, facilitates statutory compliance, and enables the management to make informed business decisions.

A fraudster can hack into autoloading gift cards and drain a customer’s bank account by buying new, physical gift cards through the autoloading gift card account. This is a real problem, and an internal control to reduce this type of fraud is to use a double verification system for the transfer of money from a bank account to reloadable gift card account. Accountants can help their organization limit gift card fraud by reviewing their company’s internal controls over the gift card process. The accounting cycle is an eight-step process that accountants and business owners use to manage the company’s books throughout a specific accounting period, such as the fiscal year. The federal government’s fiscal year spans 12 months, beginning on October 1 of one calendar year and ending on September 30 of the next.