The Accounting Cycle Explained for Beginners

The accounting cycle is an important part of proper bookkeeping and financial management. The accounting cycle, when used correctly, offers the data needed to make effective business decisions.

What is the accounting cycle, and how does it work?

It's a system for systematically recording, processing, analysing, and summarising financial data. The accounting cycle starts with a transaction and finishes with financial statement closing entries.

It is the role of the bookkeeper to oversee the accounting cycle's activities. However, as a business owner, you must have a fundamental understanding of how this works.

The Accounting Cycle's Stages

In general, the accounting cycle is divided into eight stages.

This number might range from 6 to 10 depending on who you ask. A stage may have a somewhat different name for each small business bookkeeper. Some accountants combine these steps, while others separate them into additional steps. We'll stick to the eight most typical processes in the accounting cycle to keep things simple.

Transactions

The initial stage of the accounting cycle is a transaction. There would be nothing to keep track of if there were no financial transactions. The following are some examples of transactions:

• Revenue from sales

• Expenses for the company

• Payments on debts

• Purchasing of assets

All of these scenarios would signal the start of the accounting cycle.

Keep a Journal

A transaction must be recorded once it has occurred. The accounting cycle then moves on to documenting those transactions in the company's accounting journal. All entries in the journal are kept in chronological sequence.

Double-entry bookkeeping should be used to post journal entries. Every time one account is debited, it must be credited. Your journal entries' debits and credits must always balance.

Create a General Ledger

Following the recording of journal entries, the next step in the accounting cycle is to submit those entries to the general ledger.

The general ledger is simply an account-by-account summary of all transactions. The balances of each ledger account fluctuate according to what is recorded.

• Assets

• Liabilities

• Equity of Shareholders

• Revenue from Operations

• Expenses of Operations

• Revenues and Gains from Non-Operating Activities

• Losses and Non-operating Expenses

• These seven classifications are commonly used to organise the general ledger.

Step 4: Trial and Error

At the end of the accounting period, the total balance for each general ledger account must be computed. Accounting periods can be monthly, quarterly, or annual, depending on the company.

The goal of the trial balance report is to confirm that the total debits and credits are the same. During the trial balance stage of the accounting cycle, you won't be confirming the accuracy of the journal entries, but any wrong-way balances will be obvious right away.

Adjusted Journal Entries

You must ensure that income and costs are attributed to the relevant accounting period while journal entries are documented chronologically. If you're utilising an accrual-based accounting system, you'll need to do this.

Adjustments to journal entries can be divided into four categories:

• Expenses that have accumulated

• Revenues Earned

• Expenses that have been postponed

• Revenues that have been deferred

Income that has been paid but not yet earned, for example, would not be recorded in the trial balance. This deferred revenue would be accounted for during the cycle's adjusted journal entries stage.

Accountants in Croydon help small businesses and startups with their accounting and taxation matters, to keep their business running smoothly.