Mastering the Accounting Cycle: A Step-by-Step Guide

While the income statement shows revenue and expenses that don’t cost literal money (like depreciation), the cash flow statement covers all transactions where funds enter or leave your accounts. In the first step of the accounting cycle, you’ll gather records of your business transactions—receipts, invoices, bank statements, things like that—for the current accounting period. These records are raw financial information that needs to be entered into your accounting system to be translated into something useful. 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.

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). Once your transactions have been entered for the month, you will then need to post the totals from your subsidiary journals to your general ledger.

While much of this detail is completely automated if you’re using accounting software, you now understand the accounting cycle from beginning to end. If you need a bookkeeper to take care of all of this for you, check out Bench. We’ll do your bookkeeping each month, producing simple financial statements that show you the health of your business. That being said, accrual accounting offers a more accurate picture of the financial state of any given business, which is why in some cases, companies are obligated by law to use this method. Meanwhile, the remaining five steps are the bookkeeping tasks you do at the end of the fiscal year. Fortunately, nowadays, you can automate these tasks with accounting software, so doing all this isn’t as time-consuming as it might seem at first glance.

Make adjusting entries

For example, if a receipt is from Walmart, was it office supplies? Without them, you wouldn’t be able to do things like plan expenses, secure loans, or sell your business. Moreover, if you have inaccurate information, you might inadvertently mislead your lenders, creditors and investors, which can have serious legal consequences. Finally, if your books are disorganized, you might provide inaccurate information when filing taxes. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

1. This will give you the most up-to-date balances for all of your general ledger accounts.
2. After the company makes all adjusting entries, it then generates its financial statements in the seventh step.
3. Once an accounting cycle closes, a new cycle begins, starting the eight-step accounting process all over again.
4. Next, you’ll use the general ledger to record all of the financial information gathered in step one.
5. Once you’ve made the necessary correcting entries, it’s time to make adjusting entries.

Are bookkeeping and accounting different?

Once you’ve made the necessary correcting entries, it’s time to make adjusting entries. You post an entry to the general ledger by adding it to the how to prepare a master budget for your business in 2021 relevant account. At the core of HighRadius’s R2R solution lies an AI-powered platform catering to diverse accounting roles. An outstanding feature is its ability to automate nearly 50% of manual repetitive tasks, achieved through a No Code platform, LiveCube.

This will give you the most up-to-date balances for all of your general ledger accounts. First, an income statement can be prepared using information from the revenue and expense account sections of the trial balance. 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.

Importance of the Accounting Cycle

Thanks to accounting software, much of this cycle is automated, so you no longer have to post in separate journals, or wait to post to the general ledger (G/L). But even though the cycle is automated, it’s important to understand each of the steps, and why each is necessary. Missing transaction adjustments help you account for the financial transactions you forgot about while bookkeeping—things like business purchases on your personal credit. Accruals make sure that the financial statements you’re preparing now take those future payments and expenses into account. There are lots of variations of the accounting cycle—especially between cash and accrual accounting types.

What is the accounting cycle?

The first step in the accounting cycle is identifying transactions. Companies will have many transactions throughout the accounting cycle. The new cycle starts as you begin to organize all of your financial transactions. This can include coding your accounts payable to the correct account, writing an invoice, reviewing receipts, creating an expense report, and paying your employees.

The accounts receivable turnover ratio is a simple formula to calculate how quickly your clients pay. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Throughout this section, we’ll be looking at the business events and transactions that happen to Paul’s Guitar Shop, Inc. over the course of its first year in business. Some textbooks list more steps than this, but I like to simplify them and combine as many steps as possible. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market.

This innovative tool replaces Excel, automating data fetching, modeling, analysis, and journal entry proposals. Sole proprietorships, other small businesses, and entrepreneurs may not follow it. Some advantages of accounting are that it provides help in decision making, business valuation, and tax matters, and can also provide information to important parties like investors and law enforcement.

You need to identify all transactions that occur throughout the fiscal year. The best approach to do that is to create a system where every transaction is automatically captured because that prevents human error. Typically, companies integrate their accounting software with their payment processor and point-of-sale (POS) software to capture revenue. To fully understand the accounting cycle, it’s important to have a solid understanding of the basic accounting principles. You need to know about revenue recognition (when a company can record sales revenue), the matching principle (matching expenses to revenues), and the accrual principle. For organizations seeking to optimize their financial closing freshbooks review processes, HighRadius’s Financial Close Management is an indispensable tool.

Finally, you need to post closing entries that transfer balances from your temporary accounts to your permanent accounts. Disorganized books can lead to bad decisions, failure to fulfill various obligations and sometimes even legal problems. That’s why today we will discuss the eight accounting cycle steps you can follow to ensure accuracy.