The accounting cycle involves calculating, recording, and classifying financial transactions during an accounting period. These periods can be quarterly, annually, or any other time frame. A public company will often try to align its cycles with when its financial statements are due.
Accounting cycles are usually managed by bookkeepers who use accounting software. Several steps are involved, including a business documenting and reporting financial transactions. The accounting cycle should result in accurate financial statements at the end of every year.
What is the Accounting Cycle?
The accounting cycle is a series of steps accounting departments use to document and report a company’s financial transactions. The cycle follows transactions from when they occur to how they affect financial documents. The accounting cycle happens every accounting period or reporting period in that files are prepared.
The closing process (final step) can occur as a “soft close” throughout the fiscal year. However, a “hard close” only happens at the end of the fiscal year. Soft closes end the general ledger for an accounting period, so no new journal entries are booked. This happens so that financial documents can be prepared for a period without any account balances changing.
The hard close process consists of moving transactions from temporary accounts (accounts on the income statement) to permanent accounts (accounts on the balance sheet). It is an essential process since it ensures precision and accuracy throughout a company’s fiscal years.
What is the Main Purpose of the Accounting Cycle?
This is a crucial part of running a business smoothly. The main purpose is to adhere to statutory changes and accounting standards to increase a business’s efficiency. It provides a way to grasp how a company is performing. More accuracy is provided when bookkeepers break down complex financial information into clear categories and step-by-step calculations.
Each aspect of a business has to be accounted for, for various reasons. You need to be able to carefully track financial trends, analyze revenue growth and profitability, and make financial decisions about the business (managing expenses and optimizing profits).
How does the Accounting Cycle Work?
The steps for accounting cycles vary based on a company’s reporting needs. Some businesses may follow seven steps, while others will have to follow eight or nine. All of these steps help record and analyze data. The key steps in the accounting cycle are recording journal entries, posting to the general ledger, calculating trial balances, making adjusting entries, and creating financial statements.
What are the Steps of the Accounting Cycle?
Whether you are a business owner or an aspiring accountant, it is crucial to know and understand the accounting cycle process. There are eight accounting cycle steps to follow to record transactions and check for data accuracy.
The 8 steps in the accounting cycle are:
- Identification of business transactions
- Recording transactions in the books of accounts
- Ledger posting
- Prepare an unadjusted trial balance
- Post the adjustment entries
- Prepare the adjusted trial balance
- Prepare financial statements
- Closing the books of accounts
What is the Accounting Cycle Flow Chart?
After the cycle is finished, it starts over at the beginning. The cycle keeps revolving each period, and some steps are repeated more than once during a period. While business transactions and journal entries are recorded each period, only one set of financial statements is prepared.
How is the Timing of the Accounting Cycle?
For each accounting period, only one accounting cycle occurs. The accounting period is the period for which financial documents are prepared. It can occur monthly, quarterly, or yearly depending on a company’s requirements. A fiscal year is the company’s tax reporting year, which can be a calendar year or any 12 months. Accounting periods can be called fiscal years if they are one year long.
Some companies may use more than one accounting period, but keep in mind that the accounting period only reports transactions for that time period. For instance, if the SEC requires publicly traded companies to file financial statements quarterly, these companies will have quarterly accounting periods to meet this requirement. Companies also have to file yearly tax forms with the IRS, so these companies will have yearly accounting periods to accommodate that.
What is the Difference between the Accounting Cycle and Budget Cycle?
The difference between the accounting and budget cycles is their timing and focus. The accounting cycle records and reports past company transactions, while the budget cycle analyzes the direction and aspirations to determine future transactions for a business.
Another way to separate these terms is by considering the accounting cycle as part of a process that allows companies to share financial documents with external shareholders. On the other end, the budget cycle is part of a process used internally among company officials to gauge costs associated with future company activities.