Point of sale technology can help to combine steps one and two, but companies must also track their expenses. The choice between accrual and cash accounting will dictate when transactions are officially recorded. Keep in mind that accrual accounting requires the matching of revenues with expenses so both must be booked at the time of sale. The accounting cycle is a comprehensive accounting process that begins and ends in an accounting period. It involves eight steps that ensure the proper recording and reporting of financial transactions. Once a company’s books are closed and the accounting cycle for a period ends, it begins anew with the next accounting period and financial transactions.

Transactions include expenses, asset acquisition, borrowing, debt payments, debts acquired and sales revenues. 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 accounting cycle 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. The general ledger serves as the eyes and ears of bookkeepers and accountants and shows all financial transactions within a business. Essentially, it is a huge compilation of all transactions recorded on a specific document or in accounting software.

Accounting Cycle-Definition, Steps, Examples, and Explanation [With PDF]

And even if you do, the software automatically spots it and notifies you of a mismatch. This step is only necessary when the ending balance doesn’t match up. Accounting errors usually happen from mathematical slips, incorrect posting, or inaccurate transcriptions. Whatever the scenario, a bookkeeper needs to find out where the error took place.

A business’s accounting period depends on several factors, including its specific reporting requirements and deadlines. Many companies like to analyze their financial performance every month, while others focus on quarterly or annual reports. Apart from identifying errors, this step helps match revenue and expenses when accrual accounting is used. Any discrepancies should be addressed by making adjustments, which happens in the next step. Regardless of the scenario, an unadjusted trial balance displays all your credits and debits in a table.

Step 2: Record Transactions

And finally, you can create and view any financial statement with the click of a button. Temporary accounts include all revenues, expenses (which added together make up the income summary), and the owner’s drawings accounts. These are the accounts that close, meaning they get zeroed out. The third document is the balance sheet, where you display assets, liabilities, and owner’s equity.

As a result, transactions are defined as events that can be measured in terms of money and for which there are financial changes. The purchase of goods for $15,000 in cash, on the other hand, qualifies as a transaction because it affected the company’s finances. In the end, all financial statements are thoroughly explained and analyzed.

Why is the Accounting Cycle Important?

Mapping out plans and dates that coincide with your accounting deadlines will increase productivity and results. Completing the accounting cycle can be time-consuming, especially if you don’t feel organized. Here are some tips to help streamline the bookkeeping process and save accouting cycle you time. Once you’ve made the necessary correcting entries, it’s time to make adjusting entries. The purpose of this step is to ensure that the total credit balance and total debit balance are equal. This stage can catch a lot of mistakes if those numbers do not match up.