What are the steps of accounting cycle?

The accounting cycle is the accounting process of recording, summarizing and presenting business and financial information to a company’s interested parties. The accounting process consists of a sequence of steps, or stages of the accounting cycle, that serve as the logical progression of carrying out related accounting tasks. Major tasks in the accounting cycle include recording business transactions, making adjusting entries, summarizing account information, verifying information in accounts and preparing financial statements.

Transaction Journalizing

1. The accounting cycle starts with identifying business transactions and recording them in the original journal entry books. Companies record business transactions as transactions take place during an accounting period and also make adjusting recordings on accrued revenues and expenses that are not linked to specific transactions. Transaction journalizing helps collected financial information on various transaction accounts to be used as the information source in later stages of the accounting cycle.

Account Posting

1. Account posting refers to posting previously recorded transaction information from journal books to a company’s general ledger. A general ledger is a collection of all accounts organized in the order in which they will appear on future financial statements, often starting with asset, liability and owners’ equity accounts, followed by various revenue and expense accounts. Transferring account information from journal books to the general ledger helps better classify and summarize account information by individual accounts rather than by transaction dates.

Trial Balancing

1. Information recorded and posted is later checked to make sure that it’s free of errors. Companies use the so-called trial balance to prove the mathematical equality of the debits and credits from earlier recording and posting. A trial balance is a list of all accounts of the general ledger and their balances, with all debits in one column and credits in another column. Absent any recording and posting errors, the totals of the two columns should be in balance with each other.

Statement Preparing

1. The accounting cycle ends with compiling financial statements and performing necessary closing entries. Companies prepare various financial statements at the end of an accounting period, namely the balance sheet, the income statement, the statement of cash flows and the statement of shareholders’ equity. To construct these financial statements, companies use the verified information in the trial balance to fill out statement accounts with the amount of account balances found in the respective accounts in the trial balance. Any temporary accounts such as revenue and expense accounts are closed to show zero balance in the general ledger so they are ready for recording for the next accounting cycle.

   As a small business owner, you’ve likely had a crash course in accounting 101, learning everything from how to track business expenses, to learning about the different types of accounting.

   But along with the accounting process and the various accounting terms, you should also take a bit of time to learn more about the accounting cycle.

   Here are the steps in the accounting cycle:

   Overview: What is the accounting cycle?

   The accounting cycle is considered a bookkeeping basic and is a a step-by-step process performed by accountants to ensure that all financial transactions are properly recorded. Starting from the initial financial transaction, the accounting cycle makes the entire financial process simpler, and helps to ensure that you don’t overlook any of the processes.

   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.

   At the end of the month, you’ll run your financial statements, and then start all over again, hence the term ‘cycle.’

   The steps in the accounting cycle

   Depending on where you look, you can find the accounting cycle described in 4 steps, 5 steps, even 10 steps.

   However, the general consensus is that there are 8 steps in the accounting cycle, 9 if you count the beginning of the cycle. If you use accounting software, you’ll find that many of these steps, such as entering transactions and posting them to the G/L, have been consolidated into a single step.

   It’s important to note that many of the steps in the accounting cycle are for those using the accrual accounting method. If your business uses the cash accounting method, you can still follow the cycle, but you can eliminate some of the steps such as adjusting entries.

   Step 1: Transactions

   The first step in the accounting cycle begins immediately after closing your books for the previous month.

   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.

   Once this initial review has been completed, and your transactions have been coded properly, you can move on to the next step in the accounting cycle.

   Step 2: Entering transactions

   Once you’ve prepared your transactions, you can start posting them. If you’re manually entering your bookkeeping transactions, you’ll need to enter them in separate journals. Common journals used by bookkeepers and accountants include:

   • Cash receipts
   • Cash disbursements
   • Sales
   • Purchases

   The purpose of these journals is to provide the details of the balance that you will later transfer to the G/L. In other words, if you end up recording $150 in payments from your customers, your cash receipts journal will provide the details for each of those payments, while the G/L will only reflect the $150 total.

   DateFromAmountAccounts ReceivableSalesOtherTotal12-10-19ABC Plumbing50.0050.0050.0012-22-19Jim’s Coffee75.0075.0075.0012-31-19Zebra Print Toys25.0025.0025.00Total for December150.0075.0075.00150.00

   This sample cash receipts journal shows detailed entries.

   If you’re using accounting software, this process is automated, which will save you a tremendous amount of time and significantly reduce the chance of errors.

   Step 3: Posting to the general ledger

   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. This step is unnecessary if you’re using accounting software, which I highly recommend. However, if you’re not, or if your accounting software does not automatically post to the G/L, you would post your entries to the G/L at this point.

   DateAccountDebitCredit12-31-19Cash150.0012-31-19Accounts Receivable75.0012-31-19Sales75.00

   Posting cash receipts to the general ledger is straightforward.

   Step 4: Preparing an unadjusted trial balance

   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.

   If they’re not, you will have to return to your subsidiary ledgers to find the error.

   Step 5: Make adjusting entries

   Once you’ve reconciled your bank statement, you will likely have a few adjusting entries to make. This is the point where you would also make any depreciation entries and enter payroll or other expense accruals.

   Step 6: Run an adjusted trial balance

   After you’ve fixed any out-of-balance issues and entered any late entries or accrual entries, you’ll want to run an adjusted trial balance. This will give you the most up-to-date balances for all of your general ledger accounts.

   Step 7: Prepare financial statements

   Your adjusted trial balance plays a large role in creating your month-end financial statements. At a minimum you should run three reports:

   You can run as many supplementary reports as you wish, but these three are a necessity.

   Step 8: Closing the books

   When you close your books for the current accounting cycle, you zero out both the revenue and expense account balances.

   This zero balance will carry over to the start of the next accounting period, and is done in order to show both revenue and expenses for a set period of time, which can only be done if you start with a zero balance for each accounting period.

   Step 9: Begin the next cycle

   Congratulations, you’ve completed your first accounting cycle. While much of this detail is completely automated if you’re using accounting software, you now understand the accounting cycle from beginning to end.

   Using the accounting cycle for your finances

   Even if you’re a small business, and even if you use cash accounting, it can be beneficial to use the accounting cycle.

   The accounting cycle helps to ensure that your balances are accurate, that you haven’t skipped over one of the processes, and that your financial statements represent the true financial health of your business.

   Like everything else about bookkeeping and accounting, the accounting cycle is a process that can help you categorize and enter your transactions properly. Using the accounting cycle also helps to ensure that you and your accountant both have a complete and accurate overview of the financial health of your business.

   Even small businesses would benefit from using the accounting cycle in their business, and if you are using accrual accounting, it’s an absolute must.

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   What are the 10 steps in accounting cycle?

   The 10 Steps of the Accounting Cycle in Order.

   Analyze Transactions. ... .

   Journalize Transactions. ... .

   Post Transactions. ... .

   Prepare an Unadjusted Trial Balance. ... .

   Prepare Adjusting Entries. ... .

   Prepare the Adjusted Trial Balance. ... .

   Prepare Financial Statements. ... .

   Prepare Closing Entries..

   What are the 5 steps of the accounting cycle?

   Contents.

   What's the purpose of the accounting cycle?.

   Steps of the accounting cycle..

   Step 1: Analyze and record transactions..

   Step 2: Post transactions to the ledger..

   Step 3: Prepare an unadjusted trial balance..

   Step 4: Prepare adjusting entries at the end of the period..

   Step 5: Prepare an adjusted trial balance..

   What are the 7 steps of accounting cycle?

   The seven steps in the accounting cycle are as follows:.

   Identifying and Analysing Business Transactions..

   Posting Transactions in Journals..

   Posting from Journal to Ledger..

   Recording adjusting entries..

   Preparing the adjusted trial balance..

   Preparing financial statements..

   Post-Closing Trial Balance..

   What is the 4 step accounting cycle?

   The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance. We begin by introducing the steps and their related documentation.