The Financial Accounting Cycle: A Complete Guide for Bookkeeping and Accounting Firms

WHAT IS THE ACCOUNTING CYCLE?

The accounting cycle is an eight-step process for carrying out the accounting tasks of a business. It provides a clear guide to recording, analyzing, and bookkeeping reporting a company’s financial activities.

The accounting cycle is widely used throughout a full reporting period. So staying organized throughout the process can be important in maintaining overall efficiency. The accounting cycle will vary depending on reporting needs. Most companies seek to analyze their performance monthly, although some may focus more on quarterly or annual results.

Either way, most accountants will be aware of the day-to-day financial position of the business. In general, it is important to determine the length of each accounting cycle, as this sets a specific opening and closing date. A new cycle begins when an accounting cycle ends, starting over the eight-step accounting process.

UNDERSTAND THE ACCOUNTING CYCLE IN 8 STEPS

The eight-step accounting cycle begins with recording each business transaction and ends with a complete report of business activities for the specified cycle period. Many businesses use accounting software to automate their accounting cycles. This allows accountants to schedule cycle dates and receive reports automatically.

Depending on each company’s system, it is possible to use more or fewer automation techniques. For the most part, the Bookkeeping Services In Dubai will include a few specialized back, but a bookkeeper may be required to intercede within the bookkeeping cycle at diverse times.

Each business will by and large have to alter the eight-step bookkeeping cycle in certain ways to fit its trade demonstration and bookkeeping methods. For example, accrual versus cash accounting changes is often a primary concern.

Businesses can also choose between one-time accounting and double accounting. Double bookkeeping is required for companies to prepare three main financial statements:

THE BALANCE SHEET, THE INCOME STATEMENT,  AND THE CASH FLOW STATEMENT.

Eight stages of the accounting cycle

THE EIGHT STAGES OF THE ACCOUNTING CYCLE INCLUDE:

STEP 1: IDENTIFY THE TRANSACTION

The first step in the booking cycle is identifying the transaction.  The business will have many transactions throughout the accounting cycle. Each person must be properly recorded in the company’s books.

Record keeping is essential for recording all types of transactions. For example, many businesses will use point-of-sale technology tied to their books to record sales transactions. In addition to sales, some expenses can take many forms.

STEP 2: RECORD TRANSACTIONS IN THE LOG

The second step within the cycle is to form diary sections for each exchange.  Point-of-sale technology can help combine steps one and two, but businesses must also track their spending. Accrual and cash accounting will be determined when transactions are officially recorded. Remember that accrual accounting requires reconciling income and expenses, so both must be accounted for at the time of sale.

Cash accounting requires that transactions be recorded upon receipt or payment of money. Double-entry accounting requires recording two entries with each transaction to maintain a well-developed balance sheet with the income and cash flow statements. With double-entry bookkeeping, each transaction has equal debits and credits between them. One-time bookkeeping is comparable to chequebook management. It gives a balance report but only asks for one entry.

STEP 3: POSTING

After a transaction is posted as a journal entry, it must be posted to the general ledger account. The ledger provides a breakdown of all accounting activities by account. This allows an accountant to monitor financial positions and status by account. One commonly referenced account in the general ledger is the cash account, which lists available cash.

Ledgers were the gold standard for recording transactions. Still, now that almost all accounting is done electronically, the ledger is of less concern as all transactions are recorded automatically. Motion.

STEP 4: UNADJUSTED TRIAL BALANCE

At the end of your billing period, your trial balance will be calculated as the fourth step in your billing cycle. The trial balance shows the business its unadjusted balance in each account. The unadjusted trial balance is then moved to step five for testing and analysis.

This is the first step after the accounting period has ended and all transactions have been recorded, identified, and entered into the ledger (this is usually done automatically electronically, but only occasionally is broken). In any case

This step aims to ensure that the total credit balance and the total debit balance are equal. This step can detect many errors if these numbers don’t match.

STEP 5: SPREADSHEET

Analysing the spreadsheet and identifying adjustments is the fifth step in the cycle. First, a worksheet is created to ensure that debits and credits are equal. Then, if there is a difference, it should be adjusted.

In expansion to distinguishing mistakes, alteration sections may be required to accommodate salary and costs when utilizing gathering bookkeeping.

STEP 6: ADJUST DIARY ENTRIES

In the sixth step, an accountant makes the adjustments. Adjustments are recorded as log entries if needed.

STEP 7: ECONOMIC SITUATION

Once the company has made all the adjustments, it generates the financial statements in step seven. These reports include income, balance, and cash flow statements for most businesses.

STEP 8: BOOKBINDER

Finally, a company completes the accounting cycle in the eighth period by closing the books at the end of the day on a specified end date. The closing report provides a performance analysis report over the period.

Once finished, the accounting cycle starts with a new reporting period. Closing is frequently a great time to yield records, arrange for the another detailing period, and audit the plan of future occasions and errands.

WHAT IS THE DIFFERENCE BETWEEN AN ACCOUNTING CYCLE AND A BUDGET CYCLE?

The key difference between the accounting and budgeting cycles is that the accounting cycle aggregates and evaluates transactions after they have occurred. On the other hand, the budget cycle estimates income and expenditure for a specified time in the future and has yet to occur. Therefore, a budgeting cycle may use past accounting reports to help forecast income and expenses.

WHAT ARE THE STEPS OF THE BOOKKEEPING CYCLE IN ORDER?

The steps in the accounting cycle include identifying transactions, recording transactions in a journal, posting transactions, preparing unadjusted trial balances, analysing spreadsheets, and adjusting for discrepancies in the accounting cycle. Journaling, financial reporting, and closing.

WHAT IS THE MAIN PURPOSE OF THE BOOKKEEPING CYCLE?

The primary objective of the accounting cycle is to ensure the accuracy and compliance of financial statements. While most accounts are done electronically, ensuring everything is correct is important, as mistakes can worsen over time.

WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF BOOKKEEPING?

Some of the benefits of accounting are that it provides tax assistance, decision-making, business valuation, and information to important parties such as investors and law enforcement. Some disadvantages are that information can be misleading, can be estimated to some extent, can be manipulated, and the units used to measure business performance, namely cash, change in value.

THE END

The eight-step accounting cycle process makes bookkeeping easier for busy accountants and entrepreneurs. This can help eliminate the guesswork about how accounting operations should be handled. It also helps to ensure accuracy, consistency, and efficiency in financial performance analysis.