What Is The Accounting Cycle? | ScaleFactor

Accounting Cycle Steps · Identify Transactions · Record Transactions · Post to General Ledger · Calculate Unadjusted Trial Balance · Make Adjusting Journal Entries. SkiptoprimarynavigationSkiptomaincontentSkiptoprimarysidebarSkiptofooterAsktheExpertsPostedIn:AccountingGenericselectorsExactmatchesonlyExactmatchesonlySearchintitleSearchintitleSearchincontentSearchincontentSearchinexcerptSearchinpostsSearchinpostsSearchinpagesSearchinpagesHiddenInorderforbusinessestolookbackonhowtheydidinthepast,theyneedtofollowacertainsetofstepstoverifythattheirfinancialsareaccurate.Thesestepsarecommonlyreferredtoastheaccountingcyclebecause,aftereachaccountingperiodhasended,businessesrepeatthesamebasicsteps. Thegoaloftheaccountingcyclestepsistoensurethateverycentthatchangedhandsduringtheaccountingperiodisaccountedforproperlyandreflectedinacompany’sfinancialstatements.Financialstatementsserveastheultimatehistoricalrecordforabusiness,andthestakesarehighforgettingthemright.Outsidepartieslikebanks,investors,andtheIRSwilllookatyourfinancialstatementstodecidethingslikewhethertogiveyoualoanorwhetheryoupaidtherightamountintaxes. Youcanthinkoftheaccountingcycleasachecklistthatneedstobecompletedattheendoftheaccountingperiod.Whenallstepsarecheckedoff,youcanmoveontothenextaccountingperiodwithacleanslate. Anaccountingperiodcanbeamonth,quarter,oryeardependingonhowoftenyourbusinessneedsfinancialreports.Beforewegothrougheachstepofthecycleandtheaccountingtermsassociatedwitheach,it’simportanttorememberthatthisprocessoriginatedwhenaccountantscompletedthesestepsbyhandinphysicalledgersandjournals.We’llhighlightwhichofthesestepsnowhappenbehindthescenesthankstocomputers,butwe’llgothrougheachsothatyou’vegotafullunderstandingoftheprocess. YourultimateguidetoSMBaccountingLet’sgetthosebooksinorder.DownloadGuideAccountingCycleStepsDependingonwhoyouask,therecanbeanywherefromsixtoninestepsintheaccountingcycle.Someprefertoconsolidateafewstepsintoone,butit’sreallyamatterofpersonalpreference.Forsimplicity’ssake,we’llstartbyshowingyouthelongversionoftheaccountingcycle,witheachstepbrokenoutclearly. IdentifyTransactionsStepone:gathertogetheralltheinformationyouhaveoneverytransactionthattookplaceduringtheperiod.Hopefullyyouoryourbookkeeperaredoingthisthroughouttheperiodinsteadofwaitinguntilthemonthendsandscramblingtofindreceipts. Rememberthatwhenyourecognizeincomeandexpensesdependsonthetypeofaccountingyouuse.Ifyourunoncashaccounting,you’lllookforeverytimethatcashchangedhandsduringtheperiod.Ifyou’reusingaccrualaccounting,you’llonlyrecognizefinancialtransactionswhenincurred.  RecordTransactionsIntheolddays,recordingatransactionmeantwritingdownthetransactionintheappropriatejournals.Thesejournals,or“books,”arehowbookkeepinggotitsname.Accordingtodouble-entryaccounting,eachtransactionshouldberecordedasbothacreditanddebitinseparatejournals. Now,aslongasyouclassifythetransactioninyouraccountingsoftware,therestwillhappenmoreorlessautomatically. PosttoGeneralLedgerAnotherhallmarkofbygonedaysisthegeneralledger.Thegeneralledgerwasamasterlistofalltransactions.Ifafirebrokeoutinyourbackoffice,thiswouldbethethingtosave.Afterrecordingatransactionintheappropriatejournals,youwouldalsoaddittothegeneralledger. Thankstothemagicoftheinternetandautomation,thegeneralledgernowlivesinthebackgroundoftheaccountingcycletoday.It’stransitionedfromaphysicalbooktoapartofthecloud,andaccountantsdon’treallyhavetotouchit. CalculateUnadjustedTrialBalanceThefirstthreestepsoftheaccountingcyclecan(andshould)takeplacethroughouttheaccountingperiod.Calculatingtheunadjustedtrialbalanceisthefirststepthatcanonlytakeplaceoncetheperiodhasendedandalltransactionshavebeenidentified,recorded,andpostedtothegeneralledger. Creatinganunadjustedtrialbalanceisakintocheckingyourhomework.Becauseeverytransactionisrecordedasadebitandacredit,thegoalofthisstepistoensurethatyourtotaldebitbalanceandtotalcreditbalanceareequal.Ifnot,somethingwasmissedormisclassified.It’snormaltodiscoveranomaliesatthisstage.Invoicesthatyouexpectedtobepaid(butweren’t)canthrowitoff.Paymentsthatyouexpectedyourvendorstocollect(butdidn’t)canalsocauseissues. Whateverthecase,anunadjustedtrialbalancesimplyshowsyouallyourdebitsandcreditsinatable.Andiftheydon’tadduptothesameamount,youcanusethistabletobegininvestigatingwhy. MakeAdjustingJournalEntriesThisstepsimplyresolvesanyanomaliesthatarefound.First,youidentifywhatiscausingthedebitsandcreditstobemisaligned.Thenyoumakejournalentriestofixthem. CreateanAdjustedTrialBalanceNextup,timetodoublecheckyourworkonelasttimewiththehelpofanadjustedtrialbalance.Thistableshowsyourunadjustedtrialbalance,youradjustingentries,andyouradjustedamounts.It’sthefinalstepbeforecreatingfinancialstatements,soit’sworthtriplecheckingeverything. CreateFinancialStatementsYourfinancialstatementsarethebiggestdeliverableyou’llreceiveasaresultoftheaccountingcycle.Theincomestatementandbalancesheetareaccuraterecordsofwhathappenedinyourbusinessoverthelastaccountingcycle.(Thecashflowstatementisn’tmandatory,butwerecommendmakingoneofthose,too.) They’reimportantdocumentsforanyoneoutsideyourbusinesswhoneedstobeabletocompareyourbusinesstoothers(investors,lenders,etc.),butthey’realsoincrediblyvaluabletobusinessowners.Knowinghowtoreadandinterpretyourfinancialstatementscanhelpyoustayontopofyourbusiness’financesandstrategizeforgrowth. MakeClosingEntriesThelaststepintheaccountingcycleismakingclosingentriesandpreparingyourbusinessfortheupcomingaccountingcycle.Thismeansclosingouttemporaryaccountslikerevenueandexpensesandfoldingthemintopermanentaccounts,likeretainedearnings. Oncethisfinalstepiscomplete,youcanstartthewholeprocessoveragain.YourultimateguidetoSMBaccountingLet’sgetthosebooksinorder.DownloadGuideTheAccountingCycle&TechnologyWe’vepointedoutareaswheretechnologyhaspushedsomeaspectsoftheaccountingcycleintothebackground.Inotherwords,whilethosestepsarestillhappeningtoadegree,automatedaccountinghasmadethemlessrelevanttoaccountantsandbusinessownerswhodon’tneedtotakedirectactionforthosestepstobecompleted. Ifweweretolookattheaccountingcyclethroughthelensofanaccountanttoday,theprocesswouldlookalittledifferent.Forexample,thegeneralledgerdoesn’texistinthesameformtoday,sothere’snoneedtoposttransactionstoit. Eventheideaofadjustingtrialbalancesissimplified.Thoughtheprocessismostlythesame,accountingsoftwarecanhelpidentifyvariancesandpromptuserstohelpreconcilethemwithoutcreatingexplicittrialbalances. Theaccountingcyclereflectstherulesandprocessesthatallbusinessesmustfollowinordertohaveaccuratenumbers,soit’simportanttoknowallsteps—eventhosegoingonbehindthescenes.However,astechnologyandaccountingcontinuetomix,theaccountingcyclecontinuestobecomemuchlessmanualandsignificantlyfaster. LearnhowScaleFactorcanbringyouraccountingpracticesintothe21stcentury.Requestademoofourinnovativesoftwaretoday.sidebarMoreAccountingTopicsHowtoCalculateTotalRevenueWhatAretheRulesforDebitsandCreditsinAccounting?WhatAreClosingEntriesinAccounting?WhatistheGeneralLedgerinAccounting?WhatIsTheAccountingCycle?Footer[email protected]ScaleFactorisonamissiontoremovethebarrierstofinancialclaritythateverybusinessownerfaces.Usingsoftwaretospeedupeverydaytasksandanetworkoffinancialexpertstoaddresscomplexmatters,we’vesetouttoprovidebusinessownerswithwhattheyneedtoruntheirbackofficeswithconfidence,nowandateverystageofbusinessgrowth.facebookinstagramtwitteryoutubelinkedinProductsResourcesCompanyAnImportantUpdatefromScaleFactor'sCEO