The eight-step accounting cycle is important to know for all types of bookkeepers. It breaks down the entire process of a bookkeeper’s responsibilities into eight basic steps. Many of these steps are often automated through accounting software and technology programs. However, knowing and using the steps manually can be essential for small business accountants working on the books with minimal technical support.
Key Takeaways
- The accounting cycle is a process designed to make the financial accounting of business activities easier for business owners.
- There are usually eight steps to follow in an accounting cycle.
- The closing of the accounting cycle provides business owners with comprehensive financial performance reporting that is used to analyze the business.
- The eight steps of the accounting cycle are as follows: identifying transactions, recording transactions in a journal, posting, the unadjusted trial balance, the worksheet, adjusting journal entries, financial statements, and closing the books.
- Although almost all accounting is done electronically, it still must be thoroughly checked.
What Is the Accounting Cycle?
Theaccounting cycleis a basic, eight-step process for completing a company’s bookkeeping tasks. It provides a clear guide for the recording, analysis, and final reporting of a business’s financial activities.
The accounting cycle is used comprehensively through one full reporting period. Thus, staying organized throughout the process’s time frame can be a key element that helps to maintain overall efficiency. Accounting cycle periods will vary by reporting needs. Most companies seek to analyze their performance on a monthly basis, though some may focus more heavily on quarterly or annual results.
Regardless, most bookkeepers will have an awareness of the company’s financial position from day to day. Overall, determining the amount of time for each accounting cycle is important because it sets specific dates for opening and closing. Once an accounting cycle closes, a new cycle begins, restarting the eight-step accounting process all over again.
Understanding the 8-Step Accounting Cycle
The eight-step accounting cycle starts with recording every company transaction individually and ends with a comprehensive report of the company’s activities for the designated cycle timeframe. Many companies use accounting software to automate the accounting cycle. This allows accountants to program cycle dates and receive automated reports.
Depending on each company’s system, more or less technical automation may be utilized. Typically, bookkeeping will involve some technical support, but a bookkeeper may be required to intervene in the accounting cycle at various points.
Every individual company will usually need to modify the eight-step accounting cycle in certain ways in order to fit with their company’s business model and accounting procedures. Modifications for accrual accounting versus cash accounting are usually one major concern.
Companies may also choose between single-entry accounting versus double-entry accounting. Double-entry accounting is required for companies to build out all three major financial statements: the income statement, balance sheet, and cash flow statement.
The 8 Steps of the Accounting Cycle
The eight steps of the accounting cycle include the following:
Step 1: Identify Transactions
The first step in the accounting cycle is identifying transactions. Companies will have many transactions throughout the accounting cycle. Each one needs to be properly recorded on the company’s books.
Recordkeeping is essential for recording all types of transactions. Many companies will use point of sale technology linked with their books to record sales transactions. Beyond sales, there are also expenses that can come in many varieties.
Step 2: Record Transactions in a Journal
The second step in the cycle is the creation of journal entries for each transaction. Point of sale technology can help to combine steps one and two, but companies must also track their expenses. The choice between accrual and cash accounting will dictate when transactions are officially recorded. Keep in mind that accrual accounting requires the matching of revenues with expenses so both must be booked at the time of sale.
Cash accounting requires transactions to be recorded when cash is either received or paid. Double-entry bookkeeping calls for recording two entries with each transaction in order to manage a thoroughly developed balance sheet along with an income statement and cash flow statement.
Generally accepted accounting principles (GAAP) require public companies to utilize accrual accounting for their financial statements, with rare exceptions.
With double-entry accounting, each transaction has a debit and a credit equal to each other, common in business-to-business transactions. Single-entry accounting is comparable to managing a checkbook. It gives a report of balances but does not require multiple entries.
Step 3: Posting
Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account. This allows a bookkeeper to monitor financial positions and statuses by account. One of the most commonly referenced accounts in the general ledger is the cash account which details how much cash is available.
The ledger used to be the gold standard for recording transactions but now that almost all accounting is done electronically, the ledger is less of an active concern as all transactions are automatically logged.
Step 4: Unadjusted Trial Balance
At the end of the accounting period, atrial balanceis calculated as the fourth step in the accounting cycle. A trial balance tells the company its unadjusted balances in each account. The unadjustedtrial balance is then carried forward to the fifth step for testing and analysis.
This is the first step that takes place once the accounting period has ended and all transactions have been identified, recorded, and posted to the ledger (this is usually done electronically and automatically, but not always).
The purpose of this step is to ensure that the total credit balance and total debit balance are equal. This stage can catch a lot of mistakes if those numbers do not match up.
Step 5: Worksheet
Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made.
In addition to identifying any errors, adjusting entries may be needed for revenue and expense matching when using accrual accounting.
Step 6: Adjusting Journal Entries
In the sixth step, a bookkeeper makes adjustments. Adjustments are recorded as journal entries where necessary.
Step 7: Financial Statements
After the company makes all adjusting entries, it then generates its financial statements in the seventh step. For most companies, these statements will include an income statement, balance sheet, and cash flow statement.
Step 8: Closing the Books
Finally, a company ends the accounting cycle in the eighth step by closing its books at the end of the day on the specified closing date. The closing statements provide a report for analysis of performance over the period.
After closing, the accounting cycle starts over again from the beginning with a new reporting period. Closing is usually a good time to file paperwork, plan for the next reporting period, and review a calendar of future events and tasks.
What Is the Difference Between the Accounting Cycle and the Budget Cycle?
The main difference between the accounting cycle and the budget cycle is the accounting cycle compiles and evaluates transactions after they have occurred. The budget cycle is an estimation of revenue and expenses over a specified period of time in the future and has not yet occurred. A budget cycle can use past accounting statements to help forecast revenues and expenses.
What Are the Steps of the Accounting Cycle in Order?
The steps in the accounting cycle are identifying transactions, recording transactions in a journal, posting the transactions, preparing the unadjusted trial balance, analyzing the worksheet, adjusting journal entry discrepancies, preparing a financial statement, and closing the books.
What Is the Main Purpose of the Accounting Cycle?
The main purpose of the accounting cycle is to ensure the accuracy and conformity of financial statements. Although most accounting is done electronically, it is still important to ensure everything is correct since errors can compound over time.
What Are Some of the Advantages and Disadvantages of Accounting?
Some advantages of accounting are that it provides help in taxation, decision making, business valuation, and provides information to important parties like investors and law enforcement. Some disadvantages are that the information may be biased, can be estimated to a degree, can be manipulated, and that the units used to measure business performance, namely cash, change in value.
The Bottom Line
The eight-step accounting cycle process makes accounting easier for bookkeepers and busy entrepreneurs. It can help to take the guesswork out of how to handle accounting activities. It also helps to ensure consistency, accuracy, and efficient financial performance analysis.
FAQs
The eight steps of the accounting cycle are as follows: identifying transactions, recording transactions in a journal, posting, the unadjusted trial balance, the worksheet, adjusting journal entries, financial statements, and closing the books.
What are the 8 important steps in the accounting cycle? ›
The eight steps of the accounting cycle are as follows: identifying transactions, recording transactions in a journal, posting, the unadjusted trial balance, the worksheet, adjusting journal entries, financial statements, and closing the books.
What are the 8 steps in the accounting cycle quizlet? ›
Match
- Step 1: Analyze Transactions. ...
- Step 2: Journalize. ...
- Step 3: Post. ...
- Step 4: Prepare Worksheet. ...
- Step 5: Prepare Financial Statements. ...
- Step 6: Journalize Adjusting and closing entries. ...
- Step 7: Post Adjusting and Closing Entries. ...
- Step 8: Prepare Post-Closing Trial Balance.
The steps of the accounting cycle are important because they ensure accurate record-keeping and provide a clear framework for finance professionals to understand and interpret the data they work with.
Is the first step of the accounting cycle that answers these questions? ›
Answer and Explanation:
The first step of the accounting cycle is analyze the accounting transactions to determine what accounts are affected. The second step is journalize. Then, post and create the trial balance.
What are the eight recurring steps performed each accounting period starting with recording? ›
The key steps in the eight-step accounting cycle include recording journal entries, posting to the general ledger, calculating trial balances, making adjusting entries, and creating financial statements.
Which is the correct order of the following steps in the accounting cycle? ›
The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance.
Why do you close accounts in step 8 of the accounting cycle? ›
Closing: The revenue and expense accounts are closed and zeroed out for the next accounting cycle. This is because revenue and expense accounts are income statement accounts, which show performance for a specific period.
What are the steps of the accounting cycle quizlet? ›
Match
- Analyze transactions.
- Journalize the transactions.
- Post the journal entries.
- Prepare a worksheet.
- Prepare financial statements.
- Record adjusting entries.
- Record closing entries.
- Prepare a postclosing trial balance.
9 Steps of the Accounting Cycle Process
- Identify all business transactions. ...
- Record transactions. ...
- Resolve anomalies. ...
- Post to a general ledger. ...
- Calculate your unadjusted trial balance. ...
- Resolve miscalculations. ...
- Consider extenuating circ*mstances. ...
- Create a financial statement.
Most businesses produce a cash flow statement; while it's not mandatory, it helps project and track your business's cash flow. These financial statements are the most significant outcome of the accounting cycle and are crucial for anybody interested in comparing your business with others.
What is the most important step in accounting? ›
Preparing financial statement is the most important phase of accounting cycle.
What is an example of the accounting cycle? ›
An example of the accounting cycle is a business owner collecting their financial information, journalizing it, posting it to the ledger by account, performing an unadjusted trial balance, making adjustments, performing an adjusted trial balance, preparing financial statements, closing accounts, and finally preparing a ...
What is the accounting cycle quizlet? ›
The accounting cycle is the process of gathering, preparing, analysing and reporting the activities of the business during one accounting period so that business and other decisions can be made.
What are the 7 steps of accounting cycle? ›
The seven steps in the accounting cycle are as follows:
- Identifying and Analysing Business Transactions.
- Posting Transactions in Journals.
- Posting from Journal to Ledger.
- Recording adjusting entries.
- Preparing the adjusted trial balance.
- Preparing financial statements.
- Post-Closing Trial Balance.
Accounting, which is often just called "accounting," is the process of measuring, processing, and sharing financial and other information about businesses and corporations.
What are the basic steps in the recording process in accounting? ›
The basic steps in the recording process are: (a) analyze each transaction in terms of its effect on the accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information to the appropriate accounts in the ledger.
What is financial statements in accounting cycle? ›
Financial statements are prepared in this order: Income Statement, Statement of Retained Earnings, Balance Sheet and Statement of Cash Flows. Once the Adjusted Trial Balance is finalized, the balance for each account is reported on the Income Statement, the Statement of Retained Earnings or the Balance Sheet.
How many types of accounting process are there? ›
The 3 types of accounting include cost, managerial, and financial accounting. Although 3 methods of accounting are both vital to the healthy functioning of a business, they have different meanings and accomplish different goals. Let's dive into each of each below.
What is the accounting process? ›
What is the Accounting Process? Accounting is a process that helps in recording the financial transactions which are necessary for the business. This process includes summarizing, analyzing and reporting the transactions to give an overview to the agencies, regulators and tax collection entities.
The accounting cycle refers to the complete process of accounting procedure followed in recording, classifying and summarizing the business transactions. The accounting cycle starts right from the identification of business transactions and ends with the preparation of financial statements and closing of books.
What are the basic accounting information? ›
What are the basics of accounting? Basic accounting concepts used in the business world cover revenues, expenses, assets, and liabilities. These elements are tracked and recorded in documents including balance sheets, income statements, and cash flow statements.
How do you explain the closing process in accounting? ›
The financial close process is a recurring system in which an accounting team verifies and adjusts account balances at the end of a designated period and before the accounting cycle closes. It starts with documenting the journal entry for each transaction and ends with preparing data for the next period.
What is a required step in the accounting cycle is the preparation of? ›
A required step in the accounting cycle is the preparation of: reversing entries.
What is the accounting cycle and closing entries? ›
Closing entries take place at the end of an accounting cycle as a set of journal entries. The closing entries serve to transfer these temporary account balances to permanent entries on the company's balance sheet. This resets the balance of the temporary accounts to zero, ready to begin the next accounting period.
Why the accounting cycle is important for organizations? ›
The accounting cycle's purpose is to ensure that all the money coming into or going out of a business is accounted for. That's why balancing is so critical. However, errors are frequently made when recording entries, leading to an incorrect trial balance that needs to be adjusted so that debits and credits match.
Why are accurate accounting records important to a business? ›
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make. Good records can increase the likelihood of business success.
How many trial balances are there in the accounting cycle? ›
What are the three trial balances? There are three types of trial balance: the unadjusted trial balance, the adjusted trial balance, and the post-closing trial balance. Each is used at different stages in the accounting cycle.
What is the 10 step accounting cycle? ›
The ten steps are analyzing transactions, journalizing transactions, post transactions, preparing an unadjusted trial balance, preparing adjusting entries, preparing the adjusted trial balance, preparing financial statements, preparing closing entries, posting a closing trial balance, and recording reversing entries.
What is accounting 9? ›
To make the language convey the same meaning to all interested parties, accountants have agreed on number of concepts which they try to follow. 9 Accounting concepts; Separate Business Entity, Dual Aspect, Cost, Money Measurement, Going Concern, Accounting Period, Matching, Accrual, and Realization.
Why is Accounting important? Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.
What is the most important type of accounting? ›
Tax accounting is the most popular type of accounting. Tax accountants help individuals, businesses and nonprofit organizations comply with the Internal Revenue Code. They also help their clients develop tax strategies to reduce their taxes as much as legally possible.
What are the most important functions of accounting? ›
The primary functions of accounting are to track, report, execute, and predict financial transactions. The basic function of financial accounting is to also prepare financial statements that help company leaders and investors to make informed business decisions.
What are the golden rules of accounting? ›
Take a look at the three main rules of accounting: Debit the receiver and credit the giver. Debit what comes in and credit what goes out. Debit expenses and losses, credit income and gains.
Why is it important to balance a ledger account? ›
The main purpose of balancing a ledger account is to know that every debit and credit balance is offset from each other. In a double-entry system, all credit totals must equal all debit totals.
What is in the trial balance? ›
Trial balance sheets contain all of a business's accounts that experience debits or credits during a given reporting period, the amount credited or debited to each account, the account numbers, the dates of the reporting period, and the total sums of debits and credits entered during that time.
What is accounting cycle simple? ›
The accounting cycle consists of the steps from recording business transactions to generating financial statements for an accounting period. The operating cycle is a measure of time between purchasing inventory, selling the inventory as a product, and collecting cash from the sales transaction.
How long is an accounting cycle? ›
In financial accounting the accounting period is determined by regulation and is usually 12 months. The beginning of the accounting period differs according to jurisdiction. For example, one entity may follow the calendar year, January to December, while another may follow April to March as the accounting period.
What are two major purposes of accounting? ›
The main functions of accounting are to store and analyze financial information and oversee monetary transactions. Accounting is used to prepare financial statements for a company's employees, leaders, and investors. Accounting also functions to ensure the payment of funds into and out of a company.
What is 7 concept of accounting? ›
: Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realisation Concept, Accrual Concept and Matching Concept.
To quickly summarize, the five steps in the accounting cycle include: collecting and analyzing transactions, journalizing the entries, posting the entries into the ledger, checking for errors and trial balance, and lastly, the reporting period.
What are the 5 basic accounting cycle? ›
Defining the accounting cycle with steps: (1) Financial transactions, (2) Journal entries, (3) Posting to the Ledger, (4) Trial Balance Period, and (5) Reporting Period with Financial Reporting and Auditing.
What are the 4 types of accounting? ›
Discovering the 4 Types of Accounting
- Corporate Accounting. ...
- Public Accounting. ...
- Government Accounting. ...
- Forensic Accounting. ...
- Learn More at Ohio University.
Three main types of accounting include financial accounting, managerial accounting, and cost accounting.
What is 3 meaning of accounting? ›
According to Bierman and Drebin:” Accounting may be defined as identifying, measuring, recording and communicating of financial information.”
What are the 9 steps of accounting cycle? ›
9 Steps of the Accounting Cycle Process
- Identify all business transactions. ...
- Record transactions. ...
- Resolve anomalies. ...
- Post to a general ledger. ...
- Calculate your unadjusted trial balance. ...
- Resolve miscalculations. ...
- Consider extenuating circ*mstances. ...
- Create a financial statement.
The process that begins with analyzing and journalizing transactions, and ends with the post closing trial balance is called an accounting cycle. The most important output of the accounting cycle are the financial statements.
What is the accounting cycle? ›
The accounting cycle is the process of accepting, recording, sorting, and crediting payments made and received within a business during a particular accounting period.
What are the steps in the accounting cycle quizlet? ›
Match
- Analyze transactions.
- Journalize the transactions.
- Post the journal entries.
- Prepare a worksheet.
- Prepare financial statements.
- Record adjusting entries.
- Record closing entries.
- Prepare a postclosing trial balance.
5 Accounting Reports that Are Essential for Your Business Operations
- Profit and Loss/Income Statement. ...
- Balance Sheet. ...
- Accounts Receivable Aging. ...
- Revenue by Client or Customer. ...
- Accounts Payable Aging.
What are the basics of accounting? Basic accounting concepts used in the business world cover revenues, expenses, assets, and liabilities. These elements are tracked and recorded in documents including balance sheets, income statements, and cash flow statements.
What is the purpose of accounting? ›
The main objective of accounting is to record financial transactions in the books of accounts to identify, measure and communicate economic information. Moreover, tax reporting agencies require you to keep books at a minimum level that tracks income and expenditure.
What is the first rule of accounting? ›
Rule 1: Debit What Comes In, Credit What Goes Out.
By default, they have a debit balance. As a result, debiting what is coming in adds to the existing account balance. Similarly, when a tangible asset leaves the firm, crediting what goes out reduces the account balance.
