The Accounting Cycle
Businesses follow the eight-step accounting cycle in order to record transactions and produce accurate financial documents. Most businesses use a calendar tax year or a 12-month fiscal year, and double-entry accounting is strongly recommended, except for the income statement. There are several different methods of accounting; each one can be customized to the business’s specific needs. Here are some examples of each step of the cycle:
The first step is identifying the transactions and selected other events. Many different types of events occur within an organization on a daily basis, but not all are transactions. Many of them don’t involve cash and should not be recorded as such. Only those events that change the company’s financial position and accounting equation are considered transactions, and they should be recorded accordingly. Once the transactions are recorded, they are posted to the general ledger, a list of all financial accounts in the business.
After the accounts are reconciled, the company prepares a trial balance. This allows the accountant to identify any imbalances in the company’s accounts. In the seventh step, the company generates financial statements, including an income statement, a balance sheet, and a cash flow statement. After completing the process, the company closes its books and provides a report for analysis. Accounting cycle processes are critical to the success of a business.
The final step in the accounting cycle involves the development of financial statements. This is the time for the accountant to review all business transactions and report their findings to management and stakeholders. These financial statements serve as a key tool for management and stakeholders to evaluate the performance of the business. Closing entries are the final steps of the cycle. These entries signal that a firm has completed the entire process of accounting, including the preparation of financial statements and analyzing and summarizing business transactions.
The preparation of financial statements generally takes place at the end of the year. Many public entities are required to submit their financial statements by specific dates. Additionally, all public companies in the U.S. must file periodic reports, registration statements, and other forms to the Securities and Exchange Commission (SEC). The reporting process is the central focus of the accounting cycle. The preparation of financial statements can help business owners assess the health of their business and make informed decisions.
The fourth step of the accounting cycle involves the calculation of a trial balance. This statement tells the company’s unadjusted balances of the ledger accounts. It is then carried forward to the fifth step for testing. The next step involves analyzing the worksheet. This worksheet can determine if the balances of the accounts are equal or not. If they are, adjusting entries must be made to rectify the error. During this step, the audit team will make sure there are no mistakes that may affect the final balance of the financial statements.
During this phase, the general ledger is where all financial transactions are recorded. In this section, business transactions are recorded in various accounts, such as purchases, sales revenue, and expenses. The transactions are then recorded in journal entries. Journal entries must be in chronological order, and the debits and credits must balance each other. After this step, the journal entries are posted to the general ledger, which is a huge compilation of the various financial transactions.