The accounting cycle is a set of rules that is followed by most accountants to ensure that the financial statements they produce are accurate and correct. Because of today’s technology, most accounting systems are computerised and the accounting cycle is usually automated by software which means that there are less human or mathematical errors. The final product of the accounting cycle will include meaningful financial information such as the balance sheet, income statement, statement of owner’s equity and statement of cash flows. The steps in the accounting cycle are repeated in the same order every time and so accuracy and contingency are present in all statements produced in this way meaning that this is the most efficient method for accountants to make use of. There are two main ways that companies can use the accounting cycle that being quarterly companies which produce an entire accounting cycle every 3 months, meaning that 4 financial statements are produced each year, and annual companies which complete one entire accounting cycle per year. With this being said, there are some companies which produce their statements monthly which means the accounting cycle will be completed 12 times in a year!
Steps in the Accounting Cycle
The first step is to analyse and identify transactions that have been made throughout the year. These can include things like any purchases made by the company, revenue made from sales, payoff of debts and any other expenses tied to the company.
Log Transactions as Journal Entries
Once the transactions have been identified the next step is to record the entries in chronological order. When debiting and crediting one or more accounts they must be balanced so that any debts can be paid in the future.
Post to the General Ledger
The journal entries which include all transactions in chronological order will then need to be posted to the general ledger where a summary of all transactions to each individual account can be viewed.
Total Balance Trial
At the end of the accounting period, which is different depending on the company, a total balance for the accounts will be calculated.
If the debits and credits on the total balance trial don’t match then the bookkeeper of the company will have to manually look for errors and correct any mistakes that are tracked on a worksheet.
At the end of the accounting period of a company any adjustments to entries must be posted for accruals and deferrals.
The balance sheet, income statement and cash flow statement can now be prepared using the correct balances for everything.
In the closing stage, the revenue and expense accounts are closed and zeroed for the next accounting cycle. This is done because the revenue and expense accounts are used for income statements which shows the performance of the company over a specific period. Balance sheet accounts are not closed for the sole reason that they show the company’s financial at a certain point in time.
Timings of the Accounting Cycle
The accounting cycle is completed within an accounting period which is the time it takes to prepare financial statements. Accounting periods can be different depending on the company and other factors and the most common accounting period used is annually. Throughout the accounting cycle of a company there are many transactions that will be made and recorded. At the end of the year, financial statements showing these transactions will be prepared. Financial statements must be submitted by certain dates set by the company.
The general ledger is a document that is produced to help the bookkeepers and accountants and will show all financial transactions that have been made by a company or business. It includes all transactions recorded on a specific document or by using accounting software (which is the most popular option in today’s society). The general ledger is good to refer to if needing to see any transactions or to monitor the cash levels etc. and it will show both debits and credits.
Accounting Cycle and Budget Cycle
The accounting cycles differs from the budget cycle as it mainly focuses on events that have happened in the past of the company and it ensures that all financial transactions are correctly reported. The budget cycle’s main purpose is to evaluate future plans for transactions and operations. Also, the accounting cycle is mainly used to produce information for external users whereas the budget cycle is mainly for internal management and staff to examine.