What is the Accounting Cycle?
The accounting cycle is the complete process of recording and processing all financial transactions within a company. This includes the recording of the transaction, its representation on the financial statement, and closing the accounts. A bookkeeper’s main responsibility is to track the entire accounting cycle, from beginning to end. As long as a company is in business, the cycle will continue each fiscal year.
Accounting cycles include all accounts, journal entries T accounts, and debits as well as credits and adjusting entries.
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Steps in the Accounting Cycle
1. Transactions
Transactions: The process begins with financial transactions. There would be no need to track financial transactions if there weren’t. Transactions can include debt repayment, acquisitions of assets, sales revenue, or any expenses incurred.
2. Journal Entries
Journal Entries – Once the transactions have been completed, it is time to record them in the company’s journals in chronological order. In debiting one or more account(s) and crediting one or more account(s), all debits and credit must be in balance.
3. Posting to the General Ledger (GL)
Posting to the GL: The journal entries are then posted on the general ledger, where you can see a summary of transactions to each account.
4. Trial Balance
Trial Balance: A total balance for the accounts is calculated at the end of each accounting period. This could be either quarterly, monthly, or yearly depending on the company.
5. Worksheet
Worksheet: If the trial balance’s debit and credit amounts don’t match up, the bookkeeper needs to look for errors and make corrective adjustments. This is tracked on a worksheet.
6. Adjusting Entry
Adjusting entries: After the accounting period ends, adjustments must be posted to accounts in order to accrue and deferral accruals.
7. Financial Statements
Financial Statements Using the correct balances, you can prepare the balance sheet, income statement, and cash flow statements.
8. Closing
Closing: Revenue and expense accounts are closed. They will be zeroed out in the next accounting cycle. This is because revenue accounts and expense accounts are income statement accounts that show the performance of a period. Because they reflect the financial position of the company at a specific point in time, balance sheet accounts cannot be closed.
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General Ledger
The general ledger is the eye and ears of accountants and bookkeepers. It records all financial transactions within a company. It is basically a compilation of all transactions that were recorded in a particular document or in accounting software.
If you want to see changes in cash levels throughout the life of your business, and all transactions that relate to them, then you can look at the general ledger. It shows all debits and credits of cash.
Accounting Cycle Fundamentals
It is important to be familiar with the fundamental accounting principles in order to fully comprehend the accounting cycle. It is important to understand revenue recognition (when sales revenue can be recorded), the matching principle (matching revenues to expenses), and the accrual principle.
These fundamental concepts will help you create an income statement, balance sheet and Cash flow Statement are two of the most critical steps in an accounting cycle.
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