The accounting cycle is an important part of the normal operations of a business. A typical accounting cycle is broken up into different stages which must be followed to get the desired results.
How Does an Accounting Cycle Work?
If you want to keep accurate records for your business, then you will need to learn how to follow the steps in the accounting cycle. You can use an accountant or software for this process - it’s your choice.
What Are the Steps of the Accounting Circle?
Step #1 - Identify Your Transactions
The first step of the accounting cycle is to identify transactions. The responsibility of the accountant or software is to spot and analyse transactions. What types of accounts are involved in these transactions?
Step #2 - Recording Transactions
You need to record all the transactions sequentially, preferably in at least two corresponding accounts in a journal. The rule is that the amounts that you enter as debits have to be equal to the amount that you enter as credits.
Step #3 - Recording Journal Entries in the General Ledger
Every business will have a general ledger. The accountant will need to take the journal entries and transfer them into the ledger. Each entry needs to be entered correctly, and there should also be a registration number in the journal.
Step #4 - Prepare For Trial Balances
The fourth step in the process is to prepare a trial balance. This is the total of all credit and debts. Your credit amount must be equal to your debt. The accountant should also look for any errors and make adjustments if necessary.
Step #5 - Preparing Financial Statements
Your company can use the adjusted trial balance to help make financial reports that can be used for other things. This includes such things as payments. You can also use it to create a cash flow statement.
Step #6 - Making Closing Entries
Once the accounting cycle has been completed, the accountant would need to close up the expense and revenue accounts and all of the net income into your retained earnings. They also need to reset all of the temporary accounts back to zero. Finally, a trial balance is prepared again to make sure that everything balances properly.
When Do We Use an Accounting Cycle?
The accounting cycle will need to be repeated every accounting period for as long as your business is operating. This cycle will usually start at the beginning of January and end towards the end of December, but you can do it for any amount of time that you choose.
Understanding how the accounting cycle works is important for any business that wants to maintain accurate financial records. Obviously, if you are trying to maintain accurate records, then we at Probookkeeper can help you. It’s important to outsource your accounting needs wherever possible, as this will help to guarantee a level of quality that you may not have without proper training.