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What Is the Accounting Cycle? Steps and Definition

accounting cycle

Steps seven and eight usually occur only at the end of each fiscal year, but these steps may be completed at the end of each accounting period if the company chooses to do so. Returning to Supreme Cleaners, Mark identified the accounts needed to represent the $200 sale and recorded them in his journal. He will then take the account information and move it to his general ledger. All of the accounts he used during the period will be shown on the general ledger, not only those accounts impacted by the $200 sale. In this step, every transaction will be looked at and analyzed to determine how it affects the financial position or the accounting equation. In this step, documents such as receipts, invoices, bank statements, etc., will be looked into, as they provide proof of each financial activity taking place.

An original source is a traceable record of information that contributes to the creation of a business transaction. Obviously, business transactions occur and numerous journal entries are recording during one period. After accountants and management analyze How Much Do Bookkeeping Services Cost for Small Businesses! the balances on the unadjusted trial balance, they can then make end of period adjustments like depreciation expense and expense accruals. These adjusted journal entries are posted to the trial balance turning it into an adjusted trial balance.

How a Reversing Entry Works

Adjusting entries ensure that the revenue recognition and matching principles are followed. To find the revenues and expenses of an accounting period adjustments are required. Having eight steps in the overall accounting cycle may seem pretty straightforward, but it also means there are eight chances for your process to go awry.

One of the most commonly referenced accounts in the general ledger is the cash account which details how much cash is available. Regardless, most bookkeepers will have an awareness of the company’s financial position from day to day. Overall, determining the amount of time for each is important because it sets specific dates for opening and closing. Once an accounting cycle closes, a new cycle begins, restarting the eight-step accounting process all over again.

Identify and analyze transactions during the accounting period.

It is also important for the valuation of a company and for tax reporting. For example, if a business sells $25,000 worth of product over the year, the sales revenue ledger will have a $25,000 credit in it. This credit needs to be offset with a $25,000 debit to make the balance zero.

In the capable hands of the Irvine Bookkeeping Team, your financial records will be in good shape. Our team of women is detail-oriented and will record all of your company’s transactions and records precisely to provide you with the most reliable financial data. Business owners do not start their businesses to spend hours doing accounting. Yet, they must know the basics of accounting and bookkeeping if they want their business to thrive. Setting up an effective process and understanding the accounting cycle can help you produce financial information that you can analyze quickly, helping your business run more smoothly. Whether your accounting period is ‌monthly, quarterly, or annually, timing is crucial to implementing the accounting cycle properly.

Step 2: Record Transactions in a Journal

Barbara has an MBA from The University of Texas and an active CPA license. When she’s not writing, Barbara likes to research public companies and play Pickleball, Texas Hold ‘em poker, bridge, and Mah Jongg. Tax adjustments help you account for things like depreciation and other tax deductions. For example, you may have paid big money for a new piece of equipment, but you’d be able to write off part of the cost this year.

accounting cycle

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