The accounting cycle starts when a transaction is made and ends when the company closes their books at the end of a period.
- Analyse and identify transactions
The first step of the accounting cycle involves identifying and analysing all transactions that occurred during the accounting period. This includes expenses, debt repayments, sales revenue, and cash received by customers. In this first stage, businesses examine every transaction that impacts their finances. However, this is a continuous process for those companies who are constantly creating invoices for customers, purchasing inventory, paying bills and making payroll.
- Record transactions
Next, you will need to enter all the financial transactions in chronological order in a journal, either in a book or an accounting programme. Double-entry accounting records each transaction as a credit and debit in at least two subledger accounts.
- Posting transactions to the general ledger
General ledger (GL) is the master record and summary of all financial transactions, broken down by account. The GL contains a master record of all financial transactions and a summary, broken down into accounts.
- Calculate the unadjusted balance of your trial balance
The closing balances for all accounts in the GL are reflected on a trial balance at the end of an accounting period. The trial balance does not reflect any corrections that may be needed if there are errors, such as unbalanced credits and debits. This is why it is considered “unadjusted.”
- Analyse worksheet
In this step, you will identify any errors or anomalies that have occurred by aligning debits and credits from different accounts on a single sheet. If the numbers do not balance, an accountant or bookkeeper will have to go through the data and make adjustments. For Tewkesbury Accountants, visit randall-payne.co.uk/services/accountancy/tewkesbury-accountants
- Fix errors and correct journal entries
This step is a continuation of the two previous steps. In this step are also recorded manual adjustments, for example, accruals of expenses incurred but not entered into the AP system prior to posting the account to the GL or reconciling items uncovered in the account reconciliation process.
- Create financial statements
Financial statements can be produced once the adjustments have been made and the account balances corrected. Accounting reports summarising a company’s performance and activities over a specified period, such as quarterly or monthly, are called financial statements. The income statement, balance sheet, and cash flow statement are the three main financial statements companies produce.
- Close the books
The accounting period is locked in at this stage. The closing of the books resets the temporary accounts, like revenue and expense, on the income statements to zero balances. This means that they do not carry over into the next period.