The eight-step financial accounting cycle must be known to all types of professionals. It breaks down the entire process of a bookkeeper’s work into eight basic things. Many of these steps are often automated through financial accounting software and technologies. However, knowing and doing the steps manually can be important for small business accountants working on the books with minimal technical support.
What Is the Finance and Accounting Cycle?
The accounting cycle is a primary, multi-step process for completing a company’s bookkeeping tasks. It gives a clear guide for recording, analyzing, and reporting a business’s financial activities.
The finance and accounting cycle is required comprehensively through one full reporting period. Thus, staying organized throughout the whole process’s time frame can be a main element that helps to maintain overall efficiency. The Financial Accounting cycle periods will differ by reporting needs. Most companies require to analyze their performance every month. Though some may focus more on quarterly or annual results.
Regardless, almost all bookkeepers will be aware of the company’s financial position daily. Overall, determining the amount of time for each finance and accounting cycle is important because it sets specific dates for opening and closing. A new cycle begins once a finance and accounting cycle closes, restarting the eight-step financial accounting process.
Understanding the 8-Step Financial Accounting Cycle
The eight-step finance and accounting cycle starts with recording every company transaction individually and completes with a detailed report of the company’s activities for the designated cycle timeframe. Most companies use financial accounting software to automate the cycle. This process allows accountants to program cycle dates and receive automated reports. Companies may rely on some technical support for bookkeeping, but bookkeepers may need to intervene at various points in the financial accounting cycle. ting cycle in many ways to cope with their company’s business model and financial accounting procedures.
Companies may also select between single-entry accounting and double-entry accounting. Double-entry accounting is needed for companies to build out all three major financial statements. It usually includes the income statement, balance sheet, and cash flow statement.
The Eight Steps of the Finance and Accounting Cycle
The eight steps of the financial accounting cycle include the following:
Step 1: Identify Transactions
The first step in the financial accounting cycle is identifying transactions. Companies will have many transactions throughout the financial accounting cycle. Each one has to be properly noted on the company’s books.
Recordkeeping is a must for recording all kinds of transactions. Many companies use point-of-sale software linked with their books to jot down sales transactions. Beyond sales, there are also outlays that can come in many varieties.
Step 2: Record Transactions in a Journal
The second step in the process is making journal entries for each transaction. Point of sale software can combine steps one and two. However, companies must keep track of their expenses. When recording transactions, it is important to consider whether to use accrual or cash accounting. When recording transactions, it’s important to match income with expenses in accrual accounting. This means that both must be recorded at the time of sale. On the other hand, cash accounting only records transactions when money is received or paid. Double-entry bookkeeping demands recording two entries with every transaction to manage a proper balance sheet, income statement, and cash flow statement.
Generally accepted finance and accounting principles require public companies to use accrual accounting for their financial statements, with rare exceptions.
With double-entry accounting, every transaction has a debit and a credit matching, which is common in business-to-business transactions. Single-entry accounting is similar to managing a checkbook. It reports funds but does not require multiple entries.
Step 3: Posting
However, once a transaction is noted down as a journal entry, it may post to an account on the general ledger. The general ledger gives a breakdown of total financial accounting activities by account. This allows a professional to monitor financial positions and situations by account. One of the more commonly referenced accounts in the general ledger is the money account, which notes how much cash there is.
The ledger used to be the premium standard for recording transactions. Still, now that almost all accounting is done digitally, the ledger is less of an active thing as all transactions are automatically logged.
Step 4: Unadjusted Trial Balance
At the end of the financial accounting period, a trial balance is figured out as the next step in the accounting system. A trial balance tells the business its unadjusted balances in each account. After ending the finance and accounting period and zeroing in on all transactions, we record and post them in the ledger. We usually do this digitally and automatically, but sometimes we manually carry the remaining trial balance to the fifth step for checking and analysis.t balance and entire debit balance are the same. This stage can catch many problems if those numbers do not match up.
Step 5: Worksheet
Analyzing a worksheet and finding adjusting entries make up the next step in the process. Make sure to ensure that the debits and credits are the same by creating a worksheet. If you come across any discrepancies, you will need to make adjustments. Also, remember that adjusting entries may be necessary to match revenue and outlay when using accrual accounting..
Step 6: Adjusting Journal Entries
In the next step, a bookkeeper makes adjustments. Adjustments are written as journal entries where necessary.
Step 7: Financial Statements
After the company does all adjusting entries. It then generates its financial documents in the seventh step. These statements will include most businesses’ income results, balance sheets, and cash flow.
Step 8: Closing the Books
Finally, a company ends this cycle by closing its books at the end of the year on the specified end date. The closing statements provide a final report for performance analysis over the period.
After reaching the end, the accounting cycle begins from the start with a new reporting period. Closing is usually a better time to file paperwork. Plan for the upcoming reporting period, and review a calendar of future events and tasks.
Difference Between the Finance and Accounting Cycle and the Budget Cycle.
The main difference between the finance and accounting cycle and the budget system is the accounting cycle gathers and evaluates transactions after they have happened. The budget cycle is a rough estimate of revenue and expenses over a specified period in the future that has yet happened to occur. A budget cycle can use past financial accounting statements to help forecast revenues and expenses.
What Are the Steps of the Finance and Accounting Cycle in Order?
The steps in the financial accounting cycle are a few. These are identifying transactions, recording them in a journal, posting the same, preparing the unadjusted trial balance, analyzing the worksheet, and adjusting journal entry problems. Lastly, preparing a financial document and closing the books.
What Is the Main Reason for the Accounting Cycle?
The main aim of the accounting cycle is to make the accuracy and conformity of financial documents. However, most accounting is done online. Ensuring everything is right is important since errors can compound over time.
What Are Some of the Upsides and Downsides of Accounting?
Some advantages of accounting are that it gives help in taxation and decision-making. Also, it helps business valuation and provides information to important groups like investors and law enforcement. One can estimate biases in the information to a degree. also susceptible to manipulation, and businesses often measure performance in terms of changes in monetary value.