However, understanding how the process works is critical so you can intervene when needed. The purpose of this step is to ensure that the total credit balance and total debit balance are equal. This stage can catch a lot of mistakes if those numbers do not match up.
Step 8: Close the Books
In some cases, we earn commissions when sales are made through our referrals. These financial relationships support our content but do not dictate our recommendations. Our editorial team independently evaluates products based on thousands of hours of research. Learn more about our full process and see who our partners are here. In other words, deferrals remove transactions that do not belong to the period you’re creating a financial statement for. Once you’ve made the necessary correcting entries, it’s time to make adjusting entries.
Step 1: Analyze and record transactions
Bookkeeping events are sales, refunds, xero integration bill payments from accounts payable, and any other financial transactions in your business. These financial statements are the most significant outcome of the accounting cycle and are crucial for anybody interested in comparing your business’s performance with others. Interpreting financial statements helps you stay on top of your company’s finances and devise growth strategies. A business starts its accounting cycle by identifying and gathering details about the transactions made during the accounting period. When identifying a transaction, you’ll need to determine its impact.
Step 4: Prepare the Unadjusted Trial Balance
During the accounting cycle, many transactions occur and are recorded. At the end of the fiscal year, financial statements are prepared (and are often required by government regulation). After you enter transactions into the journal, post them to your general ledger. Posting occurs when the initial entries are added to the general ledger, which summarizes all business transactions balanced using debits and credits. The exact steps of the accounting cycle may vary according to a company’s unique needs.
- Financial accounting software can execute many of the steps in the accounting cycle automatically.
- At the end of the accounting period, you’ll prepare an unadjusted trial balance.
- We research and recommend products and services suitable for various business types, investing thousands of hours each year in this process.
- 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.
That’s why today we will discuss the eight accounting cycle steps you can follow to ensure accuracy. This new trial balance is called an adjusted trial balance, and one of its purposes is to prove that all of your ledger’s credits and debits balance after all adjustments. Once you’ve posted all of your adjusting entries, it’s time to create another trial balance, this time taking into account all of the adjusting entries you’ve made. Journal entries are usually posted to the ledger as soon as business transactions occur to ensure that the company’s books are always up to date.
The eight-step accounting cycle process makes accounting easier for bookkeepers and busy entrepreneurs. It can help to take the guesswork out of how to handle accounting activities. It also helps to ensure consistency, accuracy, and efficient financial performance analysis. The main difference between the accounting cycle and the budget cycle is that the accounting cycle compiles and evaluates transactions after they have occurred. The budget cycle is an estimation of revenue and expenses over a specified period of time in the future and has not yet occurred. A budget cycle can use past accounting statements to help forecast revenues and expenses.
One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle debit and credit examples repeats itself every fiscal year as long as a company remains in business. Once the company has adjusted all the entries as necessary, you can create financial statements. Most businesses generate balance sheets, income statements and cash flow statements. Creating an unadjusted trial balance is vital for a business as it helps ensure that total debits equal total credits in your financial records. This step generally identifies anomalies, such as payments you may have thought were collected and invoices you thought were cleared but weren’t.
The general ledger (GL) is a master record of all transactions categorized into specific categories such as cost of goods sold (COGS), accounts payable, accounts receivable, cash, and more. Depending on each company’s system, more or less technical automation may be utilized. Typically, bookkeeping will involve some technical support, but a bookkeeper may be required to intervene in the accounting cycle at various points. Usually, accountants are employed to manage and conduct the accounting tasks required by the accounting cycle. If a small business or one-person shop is involved, the owner may handle the tasks, or outsource the work to an accounting firm.
You can modify it to fit your company’s business model and accounting processes. With that foundation set, let’s talk about the eight accounting cycle steps in detail. After closing, the accounting cycle starts over again from the beginning with a new reporting period. Closing is usually a good time to file paperwork, plan for the next reporting period, and review a calendar of future events and tasks. Companies will have many transactions throughout the accounting cycle. Every individual company will usually need to modify the eight-step accounting cycle in certain ways in order to fit with their company’s business model and accounting procedures.
Balance sheet accounts (such as bank accounts, credit cards, etc.) do not need closing entries as their balances carry over. The last step in the accounting cycle is preparing financial statements—they’ll tell you where your money is and how it got there. It’s probably the biggest reason we go through all the trouble of the first five accounting cycle steps. The accounting cycle serves as the backbone of financial management, providing a systematic approach to track, analyze, and communicate a company’s financial health and performance. The accounting cycle provides a framework for recording transactions and checking them for accuracy before they make it to the financial statements.