Financial Accounting Cycle Steps
The financial affairs of any enterprise require constant attention, accuracy, and reporting. The accounting cycle is the process of recording and analyzing a company’s financial transactions necessary for reporting, which is repeated every accounting period. The cycle helps to make it easier to control financial transactions and business activities for business leaders. It is usually tracked from beginning to end by a bookkeeper. The purpose of this paper is to identify and describe the steps of the accounting cycle.
The accounting cycle includes eight standard steps, the first of which is transactions identification. They are the basis for subsequent tracking and can be the issuance of salaries to employees, the sale or purchase of goods, and other processes that affect the enterprise’s finances. One can define a transaction with the source documents – checks, invoices, and others (“The accounting cycle,” n.d.). The second step is to journal the identified transactions in chronological order with balanced debit and credit.
In the third step, entries from the journal are transferred to the general ledger, distributed by accounts – this process is called posting. That means the transaction’s debit and credit should be sorted into the appropriate columns in the ledger (Skousen, 2019). If the total amounts in these columns are equal at the subsequent trial balance stage, there are no errors in the reports. This step requires that all records in the accounting period have already been transferred from the journal.
If the credit and debit balances do not match, the next step includes checking the worksheets with records (“What is an accounting,” 2020). The causes of errors may be an incorrect record, its absence, and other similar issues. After that, the adjusting entries are added – records made at the end of the accounting period. These include transactions that may not have occurred, but the bookkeeper considers it necessary to count them during this period – for example, interest payments.
Approaching the end of the cycle, accountants are preparing financial statements. The purpose of such documents is to provide accurate information about the financial situation of the company. After adjusting entries, the employee calculates a new balance sheet and systematizes the data into several reports – income statement, balance sheet, and the cash flow statement. At this stage, enterprises also conduct an audit of reporting – a review and verification (“What is an accounting,” 2020). This process is necessary to ensure that all stakeholders are convinced of the data’s accuracy and correctness.
The final step of the cycle is called closing the books. At this stage, bookkeepers prepare for the next account period (Weygandt et al., 2018 ). Revenue and expense accounts are completed because they provide data only for a specific period of activity. In turn, balance sheet accounts remain because they display the state of the company and will be necessary for analysis in the future.
In conclusion, the accounting cycle is an integral part of the company’s financial department’s activities. The cycle consists of eight main steps, based on business transaction tracking. This process helps to see the enterprise’s main cash flows and draw conclusions about its financial success or failure. Statements generated at the end of the cycle provide understandable data for managers, investors, and other stakeholders. The complexity of the process requires the mindfulness and professionalism of employees.
Skousen, C. J. (2019). The accounting cycle. Bookboon.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial and managerial accounting. John Wiley & Sons.
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