What is the accounting cycle?

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The accounting cycle is a descriptive term for the entire process of accepting, recording, categorizing, and crediting of all the financial transactions of a company. However, this is never a one-time operation but instead a repetitive one – after every fiscal year, it reoccurs. It is the holistic duty of a bookkeeper to keep all details of these financial statements through the full accounting cycle steps. Let’s draw our focus on these steps of the accounting cycle.

In a full cycle accounting, matters considered include the accounts, T accounts, journal entries, debits, and credits. However, all these come in on stages. Below are the eight accounting cycle steps you should know.

The accounting cycle Steps

1. Transactions

In any business anywhere, the accounting cycle begins with transactions. It is until enterprises make transactions that financial tract records can commence. Various ways through which transactions occur include the following;

  • Debt payoff,
  • Purchases/ acquisition of assets,
  • Sales revenue
  • Expenses incurred

2. Journal Entries

From the transaction, journal entries follow. Here, all there is a chronological order recording of all the transaction details in the company’s journal. However, in this entry, books must balance, credits’ total must match debits.

3. Posting to General Ledger (GL)

This third accounting cycle step involves posting the journal entries to the general ledger. The GL summarises all the transaction details of the individual accounts for easier interpretation.

4. Trial Balance

The total account balance that remains at the end of each accounting period stands to be the trial balance. Accounting periods vary according to specific companies. It could, therefore, be quarterly, monthly, or yearly.

5.Worksheet                                                                         

The worksheet is the fifth among the accounting cycle steps When debits are not matching credits, the bookkeeper must find the error and correct it. The worksheet helps track discrepancies in balancing.

6. Adjusting Entries

This step involves adjusting the entries and posting them to the accounts for accumulations and deferrals. Bookkeepers need t do this at the elapse of the company’s accounting period.

7. Financial Statements

Only after having the correct balance details that a bookkeeper can prepare the balance sheet, income statement, and cash flow statement.

8. Closing

At the end of each accounting cycle, all books are closed – both the revenue and expense account waiting for the next period.  These two accounts show the details of incoming finances and expenses. Once balanced and close, they indicate the company’s level of financial strength.

Each of the above steps of the accounting cycle is very important. They form a spiral relationship with each other and therefore need to draw lots of the bookkeepers’ attention while working on them.

General Ledger In Accounting Cycle

A General Ledger is a crucial business recording asset that paints a clear picture of business financial transactions. Most business nowadays has it installed as a program within their accounting software. Otherwise, initially, it involved loads of paperwork. This document is highly essential in showing alterations in cash levels throughout the cycle. Plus, it gives all the detailed information on cash debits and credits.

Fundamentals of the Accounting Cycle

The full comprehension of the this cycle, what it is how it works and the nitty-grits between it, learning its principles would be crucial. First on the list of policies is revenue recognition. On this, you must learn on when possibilities exist for a company to make sales and so revenue. Secondly, is the matching principle. Here, you need to be an excellent bookkeeper to ensure the balancing of expenses and income.  Lastly is the accrual principle.

These three fundamental concepts will facilitate you in constructing a proper income statement, balance sheet, and also cash flow statement. Remember, these three play a significant role as steps in this cycle.

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Abdul Ghaffar

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