Accounting Cycle

What is the Accounting Cycle?

The accounting cycle is a step-by-step process that businesses use to create a reliable record of their financial status, which they show on their financial statements. In this cycle, companies first record their money-related transactions in a journal and then move this information into a general ledger. Afterward, they analyze these entries, making sure everything is in order and free from mistakes before they prepare financial statements and close the books for the specific period.

The time it takes for a company to go through the accounting cycle can vary based on different factors. These factors include how many transactions occur, whether they use automated accounting software and the type of financial closing they aim for. There are two main types of closes: a "hard close" and a "soft close." A hard close is thorough and ensures that all information is accurate, signifying the end of financial activity for a specific period. On the other hand, a soft close is more like a well-educated guess, often used for internal management reporting and not for the public or investors. Ideally, businesses should aim for a "continuous close" by spreading the work across the accounting period rather than waiting until the period's end. This approach leads to a faster close, whether it's a weekly soft close or a hard close at the end of a quarter.

What is the purpose of the Accounting Cycle?

The primary aim of the accounting cycle is to monitor all the financial actions happening within a particular accounting period, whether it's a month, a quarter, or a year. Essentially, the accounting cycle ensures that every dollar entering or leaving the different general ledger accounts gets properly recorded.

Certain stages within the accounting cycle might feel more laborious than others, but each step is designed to allow bookkeepers or accountants to carefully review their work before moving forward. This becomes particularly critical during the last phases of the accounting cycle when financial statements are prepared and the books are reset.

What are the 8 steps of Accounting Cycle?

Here are the 8 important steps of the accounting cycle:

1. Identify transactions.

2. Record transactions in a journal

3. Posting

4. Unadjusted Trial Balance

5. Worksheet

6. Adjusting journal entries

7. Financial Statements

8. Closing the books