One of the most essential steps in any business is going through a series of financial activities that aims to record or keep track of the cash flow within the year.
As a business owner, it is highly important to keep track of these finances so that you can determine whether your business is profitable or which areas you need to improve in order to move your business forward.
This is where the accounting process is useful, as it helps business owners like you streamline your financial recording process.
An accounting cycle is a series of various steps that start with recording your current transactions in order to prepare financial statements.
This is a process that showcases the value of financial accounting in any business and that is to create insightful information as financial statements.
Simply put, the purpose of recording transactions and turning them into different presentations as balance sheets, income statements, and owner's equity is to give owners a financial aspect and outlook of their business. Continue reading to know what are the 8 steps in the accounting cycle.
Accounting Cycle's 8 Steps
An accounting cycle involves key eight steps that include not only recording journal entries but ensuring the data annually.
This means that when a company does this annually, it completes only one accounting cycle per year, whereas preparing quarterly means completing one accounting cycle every three months.
So what are the accounting cycle's 8 steps that need to be taken into consideration? Let’s do a thorough analysis of what each step is.
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Identifying your business transactions
Sorting and looking into your business transactions is the first step in the accounting cycle.
Your accountant or the business owner would begin the accounting process by identifying business transactions made within a certain period.
This would usually involve sales, refunds, bills payments, supplier payments, and so on. This step is a vital one as it organizes your business expenses according to a specific category or event.
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Adding journal entries of business expenses and transactions
The next step in the accounting cycle process involves recording each transaction as journal entries.
This is a process in accounting where businesses keep track of each sale or expense record by basing it on the receipt of an invoice, recognition of a sale, or completion of any other business transaction.
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Posting your expenses and transactions into a General Ledger
The next step in your accounting cycle after the transaction has been recorded as a journal entry is that it should be posted to an account in the general ledger.
A general ledger keeps track of the breakdown of the accounting activities within a specific account.
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Preparing the unadjusted trial balance
The trial balance usually ensures that the total debits are equivalent to the total credits in your financial records.
This accounting cycle process is done after the business posts journal entries into the individual general ledger books.
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Analyzing the Worksheet
The next step, in the accounting cycle, is analyzing and identifying which journal entries should be adjusted.
The worksheet helps avoid any discrepancies and ensures that the debits and credits are always equal.
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Adjusting the Journal Entries
This step is when the worksheet finds any correction that needs to be made within a certain period, adjusting entries made is a vital step to ensure the accuracy of your business’s financial records.
Adjusting a journal entry may accrue interest within a certain period, this can be in payables and other expenses that may have passed a certain period.
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Preparing the Financial Statements
This accounting process happens once all entries have been adjusted.
The company now goes into the preparation of a trial balance and then followed by the actual formalized financial statements that are presented to key decision-makers of the business.
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Closing the Books
The final step in the accounting process is to close the books.
This entails completing temporary accounting, revenues, and expenses within the accounting cycle period.
This process involves transferring net income into kept earnings.
The company or the accountant usually prepares a post-closing trial balance to ensure that all debits and credits match and that the business can start a new accounting cycle.
Optimize Your Accounting with the Help of Experts and Technology
The 8 steps in accounting cycle are very consistent in almost any kind of business and it is a time-consuming task that also requires the right amount of precision and accuracy as it determines the general health of the business.
The accounting cycle's 8 steps usually involve a lot of tasks that involve data entry and financial expertise.
Therefore, many companies and even small businesses today rely on technology in order to speed up the processor to find the right solutions and software that provide the company's additional help in ensuring that their accounting process is done in a timely manner.
Examples of these solutions involve electronic journals and ledgers, as well as automated software that can reconcile transactions to your business bank account.
However, sometimes the business not only requires the technology but experts in the accounting and bookkeeping process who can help strategize the best accounting cycle steps that can be useful for the business as it grows.
This is why businesses and even small companies look into acquiring additional help from accounting services firms with a pool of excellent bookkeepers and accountants, as it is more cost-efficient to have these onboard compared to having them in-house.
The flexibility of an outsourced accounting team is that your business will have a dedicated team to guide you through the accounting cycle process.
This will allow you to focus on other aspects of your business while ensuring that your finances are always on track.