Accounting Cycle Steps – How Do They Work

By Nino Gogitdze

Fiscal reports are fundamental to your business. Without them, you wouldn’t have the option to do things like cost management, secure advances, or sell your business. The accounting cycle is a multi-step process used to change the entirety of your organization’s crude financial data into budget summaries. So how do the accounting cycle steps work?

What’s The Reason For The Accounting Cycle?

The accounting cycle’s most important objective is to guarantee that the budget reports your organization produces are steady, precise, and comply with trustworthy bookkeeping guidelines (like IFRS and GAAP). To put it plainly, the idea of a bookkeeping cycle makes sure that all the cash going through your business is accounted for. The whole cycle is intended to keep financial information coordinated and effectively available to clients’ inner and outer data. 

The accounting cycle’s first four steps are identifying and analyzing transactions, recording them to a journal, posting journal info to a ledger, and preparing an unadjusted trial balance.  

Which Out Of The Accounting Cycle Steps Should Be Completed First?

Analyze and record exchanges

The accounting cycle’s initial phase is gathering records of your transaction data such as bank statements and invoices for the current accounting time frame. Basically, it means collecting all the raw financial data that you can then convert into valuable information.

Recognizing and breaking down transactions is the initial phase. It takes data from unique sources or activities and interprets that data into relevant information that can be used to create more patterns of data and observe trends if needed. 

Which Of The Accounting Cycle Steps Is Not Completed At The End Of The Period?

Recording transactions ( Journalize transactions as they occur)

This step involves organizing all the assembled data into a dedicated journal (called a ledger).  Accountants usually keep a double-entry system, where the result of all debits should be balanced with all the credits. Any transaction (even if no money was exchanged) must be recorded if it impacts the company’s assets and liabilities. It is considered anything that can change financial information presented on financial reports. Nowadays, transaction records are entered and kept automatically, but the nomenclature of journal and record stems from the days when this process was done by hand on a physical copy.

What Is A Record?

The record is an enormous list of all the transactions that are relevant to an organization and is used to keep track of individual accounts with suppliers and customers. It is part of an accounting indexing system that makes it easy to check any transaction data. The record must be kept as up to date as possible to ensure that no errors occur. Accounting software does this instantaneously, a ‘live’ ledger is always up to date. We can say that it is never completed, even at the end of an accounting year.

The Trial Balance

Stage 3: Prepare an unadjusted trial balance

The third step involved is tallying all the individual accounts of a business, to insert them into the main record (general ledger), which can then be tallied itself. Tallying means adding all the entries on both sides of a record, which in theory should be equal. These are the typical T-shaped accounts that are used in bookkeeping.

Image source:  Accounting cycle: Steps and Fundamentals

What is an Unadjusted Trial Balance?

As we’ve previously mentioned, accounts should have a balanced ledger where all debits and credits are tallied. If that is not the case, there is obviously something that must be corrected in the previous stages. This type of error is also possible in automatic accounting software, and it is usually indicative of incorrect entry of data, which can be remedied by correcting the initial entries.

Prepare The Last Stages Of The Accounting Cycle

Now that you’ve adjusted your entries and tallied all your records, it’s time to prep for the last stages of the accounting cycle. You will need to adjust your books to keep them relevant to the time period. 

  1. Deferrals are edits to your accounting ledger that relate to purchases or other transactions that are only relevant to the future. Your business year does not start and stop so abruptly, and you are bound to have some overlap. For example, a restaurant may pre-order (and pay for) some of the kitchen supplies they expect to need for a wedding they are catering to in the following months. This purchase does not have any place in the current financial statement and must be deferred. 
  2. Accruals are the collection of entries that were delayed. These are usually transactions that did not occur on time and thus were skipped at the time. Adjusting these (with assets and liabilities accordingly) ensures that the balance sheet of a financial statement is tallied, and that avoids future misunderstanding.
  3. Missing records – these are a self-explanatory adjustment, referring to any records that were forgotten at the time unintentionally.
  4. Tax edits are adjustments that allow a business to record any rebates or tax grants it may be eligible for. These are generally only relevant during the tax season, but must be done nonetheless. An experienced accountant is the best option for taxes, as it is a complicated system.

Which Accounting Step Should Be Completed Last?

Regardless of the number of steps that are implemented in the accounting cycle, there final two steps remain the same. The second before the last is two prepare an adjusted trial balance, followed by the preparation of the final financial statements.

Image source: How to Define Accounting for Business

Prepare An Updated Trial Balance

This is the last mile before the end. You’ve already prepared one trial balance, and added adjustments. Now, taking into consideration those adjustments, you can prepare an updated version known as the adjusted trial balance. This balance will have to tally and balance between your credits and debits. The information in it is enough for the next (final) step.

The Final Step

At the very end of the accounting cycle, is the part you’ve been working up to all along – the financial statements. These are the reports that give you detailed insights into the monetary situation of your business.

This isn’t complicated, and is usually broken down into the following steps:

  • Preparing an income statement
  • Preparing a balance sheet
Image source: staff accountant

After preparing these documents for you, there may be a brief review of all accounts just to make sure everything is in order. The accounting cycle is a laborious process but it is important in understanding your business’ financial situation.

Leave a Comment