The bookkeeping cycle outlines the procedures needed for a typical small firm to record its financial transactions in a sequence of steps. Although the bookkeeping cycle will differ from business to business, the fundamental phases are the same and may be seen in the figure.
There are 8 steps to the accounting cycle.
- Identify Transactions: Finding the transactions that make up a bookkeeping event is how a company starts its accounting cycle. This might be a purchase, a refund, a payment to a vendor, etc.
- Record Transactions in a Journal: Transactions are then recorded using journal entries. The entries are based on the fulfillment of other economic events, the receipt of an invoice, or the acknowledgement of a sale.
- Posting: After being entered as a journal entry, a transaction must be posted to an account in the general ledger. The general ledger breaks down all accounting activities by account.
- Unadjusted Trial Balance: An unadjusted trial balance is created after the company posts journal entries to certain general ledger accounts. The trial balance makes sure that all of the financial records' debits and credits balance out.
- Worksheet: As the fifth step in the accounting cycle, reviewing a worksheet involves locating adjusted entries. The purpose of the worksheet is to verify the equality of debits and credits. Any discrepancies will require adjustments to be made.
- Adjusting Journal Entries: Adjusting entries are created at the end of the period. These are the outcomes of worksheet corrections and the results of time passing. For instance, an adjusting entry can include interest income that has accrued over time.
- Financial Statements: A corporation creates an adjusted trial balance after publishing the adjusting entries, followed by the actual formalized financial statements.
- Closing the Books: Using closing entries, a company completes temporary accounts, including revenues and costs, at the conclusion of the quarter. Transferring net income into retained earnings is one of these closing entries. In order to confirm that the debits and credits match and the cycle may restart, a business produces the post-closing trial balance.
- The accounting cycle is a procedure made to make it simpler for business owners to keep track of their financial transactions.
- The first phase in the eight-step accounting cycle is to record transactions using journal entries. The last step, after creating financial statements, is to close the books.
- A year or other accounting term is typically included in the accounting cycle.
- Most of today's accounting software automates the accounting cycle.