What are the Steps Involved in an Accounting Cycle?
Every businessman understands the importance of Accounting in a business. The collecting, processing, and presenting the financial information is of great importance as this will allow the management to understand the present financial condition and make future strategies for the business.
Every business must follow proper accounting methods. There is a process of accounting, which is also known as the accounting cycle. Let us understand more about this Accounting cycle and what are the benefits to the company for sticking to the accounting cycle.
Accounting Cycle
Accounting Cycle is a combination of a number of processes to collect, Process, and Present all the financial data of the business. The accounting cycle will also help the management in staying organized, which will help in increasing the profitability of the company.
The Period of the accounting cycle depends upon the requirement of the management and the business. The period for which the accounting cycle is used is very important as when the cycle finished. A new cycle is started, which repeats all the steps once again. This cycle is of huge importance to a business and is a very important part of the Accounting Process.
Eight Steps of Accounting Cycle
There are many steps to an accounting cycle, but the basic accounting cycle comprises of eight (8) steps which have been described below:
1.Acknowledging the Transactions
The first step to start the accounting cycle is a very simple but very crucial one. It is Identifying all the different transactions made by the business during a specific time. These recordings make the base for the accounting process, and each of the steps which will be discussed below will depend on these transactions. Not only will keeping the record help in maintaining the accounting books of the company but will also help the company in question to be more organized.
2.Recording the Transactions
This is the second step in the accounting cycle. In this step, all the journal entries are made, which helps us to understand if the transaction was a debit entry or a credit entry. There are two different methods to record the transactions in the journal. Cash accounting and accrual accounting.
In accrual accounting, both the revenues and the expenses must match at the time of sale, whereas in cash accounting, a record is maintained of whether the cash is paid or received.
3.Posting the Transactions
After posing in the journal, an entry should be made in the ledger. The entries made in the ledger will allow the management to know the details of the transaction by account. It will also help the bookkeeper to understand the financial status of the accounts.
4.Preparing an unadjusted Trial Balance
This is the fourth step in the accounting cycle. In a trial balance, all the unadjusted balance of each account is shown. Preparing a trial balance is very important as it will be carried forward to the next step for analysis and testing.
5.Maintaining a Worksheet
In this step, a worksheet is created in which all the debits and credits are made equal. If there is any inconsistency in the records, then the necessary adjustments have to be made.
6.Adjusting the Journal Entries
In this step, the Bookkeeping processes are followed by the management of the company. The bookkeeper must make the necessary adjustments in the books but should take care that these adjustments are recorded as journal entries.
7.Preparing the Financial Statements
In this step, the financial statements will be generated using the adjusting journal entries. Usually, the financial books include the Income Statement, Cash Flow Statement, and Balance Sheet of the company.
8.Closing the Financial Books
This is the last and final step of the accounting cycle. In this step, all the books of accounts are closed on a specified day. This will lead to the ending of the accounting cycle, and a new accounting cycle will be initiated.
These are the eight steps that are usually followed by a business as their accounting cycle. The accounting cycle will help the accountant to keep all the business activities and transactions in check. It will also help increase the efficacy and accuracy of the business and also enhance financial performance.
If, after hearing the benefits of the accounting cycle, you too want to implement it in your business, then JAXA Chartered Accountants can help you in the matter. The experts at JAXA will not only provide the solution to the accounting problem being faced by the business but will also assist the business in increasing its profitability by providing various other services such as Auditing service, VAT and Tax related services, etc. You can Contact Us for more details. We will be happy to help you.
