The accounting cycle is a series of steps that
businesses follow to record, analyze, and report their financial transactions
and activities. It is a methodical process that ensures the accuracy and
conformity of financial statements. The main purpose of the accounting cycle is
to create an accurate record of a company's financial position, as summarized
on its financial statements. Here are the eight steps of the accounting cycle:
- Identify
and analyze transactions: An organization begins its accounting cycle
by identifying the transactions that comprise a bookkeeping event, such as
a sale, refund, or payment to a vendor.
- Record
transactions in a journal: The next step is to record the transactions
using journal entries. These entries are based on the receipt of an
invoice, recognition of a sale, or completion of other economic events.
- Post
transactions to a general ledger: Once the transactions are recorded
in the journal, they are posted to the general ledger, which is a
collection of all the company's accounts.
- Determine
the unadjusted trial balance: At the end of the accounting period, a
company prepares an unadjusted trial balance, which is a list of all the
accounts and their balances.
- Analyze
the worksheet: If the debits and credits on the trial balance don't
match, the bookkeeper must look for errors and make corrective adjustments
that are tracked on a worksheet.
- Prepare
adjusting entries: At the end of the accounting period, adjusting
entries must be posted to accounts for accruals and deferrals.
- Generate
financial statements: Once the adjusting entries are made, the company
can generate its financial statements, including the income statement,
balance sheet, and cash flow statement.
- Close
the books: The final step in the accounting cycle is to close the
books for the period. This involves transferring the balances of temporary
accounts (revenue, expenses, and dividends) to the retained earnings
account and starting the next accounting period with zero balances in
these accounts.
The accounting cycle is a fundamental process that helps
businesses maintain accurate financial records and provides them with
comprehensive financial performance reporting for analysis. Today, most
software fully automates the accounting cycle, resulting in less human effort
and fewer errors associated with manual processing.
Prepared by Taman Abdulahi