The Steps of an Accounting Cycle You Need to Know About
Every business, big or small, must have a proper accounting system in place to record its financial transactions systematically. The company must update all financial records from time to time if their business is to run efficiently. Well, there are eight essential steps of an accounting cycle that every firm should follow.
Why Do You Need to Update Your Financial Records Periodically?
Accounting helps you to monitor your income and expenditure and makes you compliant with legal requirements. It provides necessary financial information to the company’s management and investors, which enables them to make proper business decisions. Accounting provides the financial position of a business on a specific date and shows the amount of cash spent and generated during a particular period.
Updating your financial records periodically will enable you to compare the current data with that of previous years. Analyzing the records will help you plan your budget accordingly and also evaluate your company’s performance. The financial data available will help to make future projections and enable you to maintain business operations profitable.
Understanding the 8 Steps of an Accounting Cycle
Every bookkeeper must be aware of the accounting cycle, which consists of eight steps. The process begins with identifying and recording daily transactions and ending with the full financial business report.
The eight steps involved in an accounting cycle are:
Step 1: Identifying Daily Transactions
Every firm undergoes various transactions during the entire accounting cycle. Identifying these transactions is necessary to record them properly in the accounting books.
Step 2: Recording All Transactions
The accountant makes journal entries for each transaction and records them systematically in a journal. As per the double-entry system of bookkeeping, there must be two entries for each transaction to maintain a perfect balance sheet, and the income and cash flow statements. Each transaction in this system has an equal debit and credit entry.
Step 3: Posting the Journal Entries
Once the recording of transactions in a journal is over, posting them to a general ledger account is the next step. The general ledger helps to classify all accounting activities by account, enabling the bookkeeper to monitor the financial position of the company easily. For example, the cash account shows how much cash is available at any given period.
Step 4: Preparing the Unadjusted Trial Balance
The fourth step of the accounting cycle involves preparing the trial balance. It shows the unadjusted balances of each account. This trial balance is further analyzed and checked in the next step.
Step 5: Analyzing a Worksheet
The next step is preparing a worksheet and analyzing it thoroughly. The bookkeeper ensures that all debits and credits are equal, and if there are differences, he makes proper adjustments.
Step 6: Journal Entry Adjustments
The sixth step comprises adjusting journal entries as needed.
Step 7: Preparing Financial Statements
After the adjusting entries, the seventh step involves generating financial statements, such as the income statement, balance sheet, and cash flow statement.
Step 8: Closing the Company’s Books
In the last, eight-step, the bookkeeper closes the company’s books, and this marks the end of the accounting cycle. The closing statement shows the analysis of the company’s performance during a specific period.
The above eight steps of an Accounting Cycle enable entrepreneurs to record financial transactions accurately and make a proper analysis of the company’s financial status. 3E Accounting’s team are India accounting experts, providing comprehensive accounting and taxation services to several types of businesses over the past several years. Our professional team manages all your accounting worries and prepares all the financial statements required to analyze your company’s financial position. If you would be interested in getting more information regarding our services, please contact us at the earliest.