Accounting Cycle Steps | Complete Guide - Patriot Software

The accounting cycle is the process of recording your business's financial activities consistently and accurately. An accounting cycle looks ... Skiptocontent BlogHome PayrollTips AccountingTips Press SearchBlog SearchtheBlog Searchfor: Youwantasimplewaytocompletebookkeepingtasks.Afterall,themoreorganizedyourprocess,thefasteryoucanrecordtransactionsandgetbacktobusiness.Tostayontrack,youmightconsiderusinganaccountingcycle.Andtodothat,youneedtoknowtheaccountingcyclesteps. Readontolearntheaccountingcycledefinitionandstepsinaccountingprocess.  StreamlinetheaccountingcyclestepswithPatriot Accountingsoftwarethatiseasytouse Quickandaccuratereporting FreeUSA-basedexpertsupport TryItFreefor30Days Whatistheaccountingcycle? Theaccountingcycleistheprocessofrecordingyourbusiness’sfinancialactivitiesconsistentlyandaccurately.Anaccountingcyclelooksbackintimeattheendofadesignatedperiod(e.g.,monthly,quarterly,orannually).Thereareseveralstepsinthecycle,beginningwhenatransactionoccursandendingwhenyoucloseyourbooks.  Youcanusetheaccountingcycletomakeaccountingeasierbybreakingyourbookkeepingresponsibilitiesdownintosmaller,bite-sizedtasks.  Followtheaccountingcycleto: ManageyourtimeSetgoalsCompareonecycletoanotherReconcilebankstatements Useaccountingsoftware?Youcanprogramdatesforyouraccountingcycle,andthesoftwaregeneratesreportsbasedonyourselecteddates.  Accountingcyclesteps Usually,thereareeightstepsinfull-cycleaccounting.Butdependingonhowyoudoyouraccounting,youmightbeabletomodify,skip,orevenaddsteps.  Manystepsinthestandardaccountingcyclearemeantforaccrualaccounting,whereyouuseadouble-entryaccountingsystem(i.e.,debitsandcredits).Ifyouuseaccrualaccounting,youcanfollowallthestepsintheaccountingcycle.  Ifyouuseasingle-entryaccountingsystem(i.e.,cash-basisaccounting),youcanstillusetheaccountingcycletorecordentries,closeyourbooks,etc.But,youdon’tneedtofollowthestepsthatrequireyoutocheckentriesfordebitsandcredits.  Thebottomline:Usethestepsthathelpyoustayorganizedandmaintainaccuraterecords. So,whatarethestepsintheaccountingcycle?Getstartedhere. 1.Identifytransactions Whatisthefirststepintheaccountingcycle?Thefirststepintheaccountingcycleistoidentifybusinesstransactions.Yourbusinesstransactionsareanyfinancialactivitieswherethereisanexchangeofmoney. Examplesoftransactionsinclude: ProductsalesPurchasereturns PurchasesLiabilitypayments Usesourcedocumentstoidentifybusinesstransactions,suchasreceiptsandinvoices.Savethesekindsoffinancialdocumentstosupportyourrecords.Asyouidentifybusinesstransactions,decidewhichtypeofaccounttheyfallunder.  Roadblock:Ifyoudon’thaveaseparatebusinessbankaccount,thisstepwilllikelytakelonger.You’llneedtosortthroughbusinessandpersonalexpensestoidentifyyourbusinesstransactions.  2.Recordtransactionsasjournalentries  Yourjournaliswhereyouinitiallyrecordbusinesstransactions.Itisarunninglistoffinancialactivities,likeacheckbook.Tracktransactionsinyourjournalchronologicallyastheyhappen.  Todothis,createjournalentries.  Inaccrualaccounting,yourecordtransactionswhentheytakeplace,withorwithoutthetransferofmoney.So,youmustcreatetwoentriesforeachtransaction:adebitforoneaccountandacreditforanother.Thedebitandcreditshouldbeequal.  Ifyouusecash-basisaccounting,recordtransactionswhencashphysicallyexchangeshands(i.e.,whenyoureceivemoneyorpay).Youdonotneedtomakemultipleentries.  3.Postentriestothegeneralledger Thegeneralledgerisarecordthatsortsandsummarizesallofyourbusinesstransactions.Yourgeneralledgerconsistsofthesefivemainaccounttypes: AssetsLiabilitiesEquityRevenue/IncomeExpenses Whenpostingentriestoyourgeneralledger,organizetransactionsintothesedifferentaccountsandsubaccounts.Forexample,youcouldrecordacashpaymentfromacustomerunderyourrevenueaccount.  4.Prepareanunadjustedtrialbalance Youwantaccuratebooks.Infact,youneedaccuratebooks.Thatmeansyourdebitandcreditentriesmustbeequal.So,thenextaccountingcyclestepistocreateanunadjustedtrialbalance.  Anunadjustedtrialbalanceshowsyouwhetheryourbalancesmatch.Makeanoteofeachaccountbalance.Addallthedebitbalancestogetherandaddallthecreditbalancestogether.Ifthetwototalsarenotthesame,moveontothenextstep… 5.Lookforreasonsforanimbalance  Ifyourtrialbalanceshowsthatthere’sanimbalanceinyourbooks,usethissteptoworkitout.Lookforerrorsandidentifyadjustingentriessoyoucanmakeadjustmentsandbalanceyourbooks.  Adjustingentries:Attheendofanaccountingperiod,youmighthaveincurredexpensesbutnotpaidforthemyet.And,youmighthaveearnedincomebutnotcollectedityet.Useadjustingentriestorecognizetransactionsthathaveoccurredbuthavenotbeenrecorded. Forexample,youearnedinterestonabankaccountbalance.Youhavenotrecordedtheinterestinyourbooks,butitappearsonyourbankstatement.Useanadjustedentrytorecognizetheinterestinyourbooks. 6.Makeadjustments  Ifyouneedtomakeadjustmentsbecauseofanimbalance,goaheadandmakethemduringthisstep.Tomakeadjustments,simplycreatenewjournalentries,ifapplicable. Doanadjustedtrialbalanceaftermakingadjustingentriesandbeforecreatingfinancialstatementstoseeifthedebitsandcreditsmatchaftermakingadjustingentries. 7.Createfinancialstatements Onceyouraccountsareup-to-date,createfinancialstatements.Financialstatementscompileyourbusiness’sfinancialinformationandshowyourfinancialhealth.  Therearethreemaintypesofbusinessfinancialstatements: IncomestatementscompareyourprofitsandlossesfortheperiodBalancesheetsdetermineprogressbydetailingassets,liabilities,andequityCashflowstatementsshowmoneycomingintoandoutofyourbusiness Useyourfinancialstatementstomeasureperformance,makeimprovements,andsetgoals.Youcanalsousestatementstoapplyforloansorinvestmentsandnegotiatetermswithvendors. 8.Closeyourbooks  So,whatisthelaststepintheaccountingcycle?Ta-da,you’rehere!Thefinalaccountingcyclestepistocloseyourbooks.  Closingyourbookswrapsupfinancialactivitiesfortheperiod.Tocloseyourbooks,youneedto: UpdateaccountspayableReconcileaccountsReviewyourpettycashfundCountinventory …Andsoon.  Whenyoucloseyourbooks,youshouldgetyouraccountingsetupforthenextperiod.Decidewhichprocessesaremovingyourbusinessforward.Createacalendarforcompletingfuturetasks.Fileanyfinancialdocumentsfromthelastperiodandgetridofolddocumentsthatarenolongeruseful. ThisarticlehasbeenupdatedfromitsoriginalpublicationdateofSeptember5,2017. Thisisnotintendedaslegaladvice;formoreinformation,pleaseclickhere. FacebookTwitterPinterestLinkedIn Stayuptodateonthelatestaccountingtipsandtraining Youmayalsobeinterestedin: WhatAreGrossReceipts,andWhatDoYouNeedtoKnowThemFor? AComparisonofAccrualvs.Cash-basisAccounting DoYouHaveaCash-intensiveBusiness?[Definition,AuditProcess,&More] Relax—runpayrollinjust3easysteps! Getupandrunningwithfreepayrollsetup,andenjoyfreeexpertsupport.Tryourpayrollsoftwareinafree,no-obligation30-daytrial. StartMyFreeTrial OryoucanEXPLOREADEMOACCOUNT! × Seeforyourselfhoweasyouraccountingsoftwareistouse! Tiredofoverpayingforaccountingsoftware?Savemoneywithoutsacrificingfeaturesyouneedforyourbusiness. StartMyFreeTrial OryoucanEXPLORETHEDEMO! × Seeforyourselfhoweasyouraccountingsoftwareistouse! Tiredofoverpayingforaccountingsoftware?Savemoneywithoutsacrificingfeaturesyouneedforyourbusiness. StartMyFreeTrial OryoucanEXPLORETHEDEMO! Nothanks,Idon'tneedeasieraccounting × Relax—runpayrollinjust3easysteps! Getupandrunningwithfreepayrollsetup,andenjoyfreeexpertsupport.Tryourpayrollsoftwareinafree,no-obligation30-daytrial. StartMyFreeTrial OryoucanEXPLOREADEMOACCOUNT! Nothanks,Idon'tneedeasierpayroll ×