What Is the Accounting Cycle?
The accounting cycle is a collective course of recognizing, breaking down, and recording the accounting events of a company. It is a standard 8-step process that starts when a transaction happens and finishes with its inclusion in the financial statements.
The key steps in the eight-step accounting cycle incorporate recording journal passages, posting to the overall ledger, working out trial balances, making adjusting sections, and making financial statements.
How the Accounting Cycle Works
The accounting cycle is a deliberate set of rules to guarantee the exactness and conformity of financial statements. Electronic accounting systems and the uniform course of the accounting cycle have assisted with diminishing mathematical errors. Today, most software completely mechanizes the accounting cycle, which brings about less human exertion and errors associated with manual processing.
Steps of the Accounting Cycle
There are eight steps to the accounting cycle.
- Identify Transactions: An organization starts its accounting cycle with the identification of those transactions that contain a bookkeeping event. This could be a sale, refund, payment to a vendor, etc.
- Record Transactions in a Journal: Next come recording of transactions utilizing journal entries. The passages depend on the receipt of an invoice, recognition of a sale, or completion of other economic events.
- Posting: Once a transaction is recorded as a journal entry, it ought to post to an account in the general ledger. The overall ledger gives a breakdown of all accounting activities by account.
- Unadjusted Trial Balance: After the company posts journal sections to individual general ledger accounts, an unadjusted trial balance is prepared. The trial balance guarantees that total debits equivalent the total credits in the financial records.
- Worksheet: Analyzing a worksheet and distinguishing adjusting sections make up the fifth step in the cycle. A worksheet is made and used to guarantee that debits and credits are equivalent. On the off chance that there are errors, changes should be made.
- Adjusting Journal Entries: At the finish of the period, adjusting entries are made. These are the aftereffect of revisions made on the worksheet and the outcomes from the progression of time. For instance, an adjusting entry might accrue interest revenue that has been earned in view of the progression of time.
- Financial Statements: Upon the posting of adjusting sections, a company prepares an adjusted trial balance followed by the genuine formalized financial statements.
- Closing the Books: An entity finishes brief accounts, revenues, and expenses, toward the finish of the period utilizing closing entries. These closing passages incorporate transferring net income into retained earnings. Finally, a company prepares the post-closing trial balance to guarantee debits and credits match and the cycle can start once more.
Timing of the Accounting Cycle
The accounting cycle is begun and completed inside a accounting period, the time wherein financial statements are prepared. Accounting periods change and rely upon various variables; nonetheless, the most common type of accounting period is the annual period. During the accounting cycle, numerous transactions happen and are recorded.
Toward the year's end, financial statements are generally prepared, which are many times required by regulation. Public elements are required to submit financial statements by certain dates. All public companies that carry on with work in the U.S. are required to file registration statements, periodic reports, and different forms to the U.S. Securities and Exchange Commission. Thusly, their accounting cycle rotates around reporting requirement dates.
The Accounting Cycle Vs. Budget Cycle
The accounting cycle is unique in relation to the budget cycle. The accounting cycle centers around historical events and guarantees incurred financial transactions are reported accurately. On the other hand, the budget cycle connects with future operating performance and planning for future transactions. The accounting cycle helps with delivering data for outer users, while the budget cycle is fundamentally utilized for internal management purposes.
- The most important phase in the eight-step accounting cycle is to record transactions utilizing journal passages, ending with the eighth step of closing the books in the wake of getting ready financial statements.
- The accounting cycle is an interaction intended to make financial accounting of business activities more straightforward for business owners.
- The accounting cycle generally involves a year or other accounting period.
- Accounting software today generally mechanizes the accounting cycle.