Accounting function is a backbone of any business, and it is very important to have a proper Accounting Cycle to save your accounting team from hassle. Its main purpose is to make sure
that accounting team is on track and their time is not wasted.
It is a multistep process used by businesses to create an accurate record of their financial position, as summarized on their financial statements. The amount of time it takes a company to advance through the accounting cycle depends on several factors, including the volume of transactions, whether it uses automated accounting software and the type of financial close.
The main purpose of the accounting cycle is to keep track of all financial activities that occur during a specific accounting period, be it monthly, quarterly or annually.
Below are the eight steps of the accounting cycle:
Step 1: Identify and analyze transactions.
Analyze the transactions made during the accounting period. Categorize them based on their nature such as income, expense, capital, fixed asset etc.
Step 2: Record transactions in a Journal
Second step is to record the transactions in chronological order based on the categorization done in Step 1. Make sure you record the Debits and Credits in correct subledgers.
Step 3: Post transactions to a General Ledger
As soon as transactions are recorded, approving authority must verify the transactions and approve them for posting into the General Ledger. This additional step will help in filtration of incorrect entries.
Step 4: Determine the unadjusted Trial Balance
After posting entries in general Ledger, we check the unadjusted Trial Balance so unbalanced accounts can be identified.
Step 5: Analyze the Worksheet
In this step, analyze the work done till now to make sure that all the various accounts are lining
up. This step will help in identification of any error or anomalies.
Step 6: Adjust Journal Entries and fix any errors
After analyzing the worksheet, fix any errors that were identified through an adjustment entry.
Also make sure to make entries related to any accruals or prepaids at this point.
Step 7: Create Financial Statements
Once the adjustment entries are made, Financial Statements can be generated. Financial Statements shows the activity and performance of the company in a summarized manner. It helps management to formulate the strategy of the business too.
Step 8: Close the Books
This is the last step of accounting cycle. In this step, we lock the posting in the accounting period. This will lock any sort of postings so that the books are not altered, and balances are not changed.
Conclusion:
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Identify and analyze transactions.
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Record transactions in a Journal
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Post transactions to a General Ledger
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Determine the unadjusted Trial Balance
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Analyze the Worksheet
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Adjust Journal Entries and fix any errors
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Create Financial Statements
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Close the Books
The steps in the accounting cycle are same in most of the cases, but they can vary industry to industry. Business must try to develop its own accounting cycle and processes as per the
need of industry to achieve maximum utility.