A Quick Guide to the 8-Step Accounting Cycle
If you are new to accounting, this article provides a helpful guide to the 8-step accounting cycle used by small business owners.
Accounting is a core business process for any company. Even if you’re not a professional CPA, accountant or bookkeeper, it’s important to have a basic understanding of what is involved in the accounting cycle. Here is a brief breakdown of the 8 key steps included in this process:
The first step in the accounting cycle is the transaction. Transactions can include a number of items, including customer purchases, business expenses such as bill payments, asset acquisitions, and so forth.
2. Entries into the journal
After each transaction or set of transactions, the next step for the accountant is to enter these transactions into the company’s journal. The entries should be recorded in chronological order, and debits and credits (in other words, additions and subtractions to the company’s standing balance) must always balance.
3. General ledger posts
The journal entries are then transferred over to the company’s general ledger, which forms a summary of all transactions to individual accounts. This is the last step in the accounting cycle that involves inputting primary data. The next steps involve reconciling all recorded information for accuracy.
4. Trial balance
At the end of the accounting period (usually every month, every 3 months, or every year) the accountant calculates a balance total for the company accounts.
When the debits and credits from the trial balance don’t equal out, it’s the accountant’s responsibility to find errors and make necessary adjustments. These adjustments are tracked and recorded on a worksheet.
6. Adjusting entries
After the accountant balances out the debits and credits, he must add adjusting entries to certain accounts for accruals (e.g., charges for completed work that have not yet been invoiced) and deferrals (such as a customer payment for services to be rendered in the future).
7. Financial statements and reporting
The accountant prepares financial statements such as a balance sheet, cash flow statement, and audit report using the adjusted balances.
Revenue and expense accounts are “zeroed out” for the next cycle. Since balance sheet accounts provide current data on a company’s financial status at any given point in time, they remain open.
The accounting cycle has many moving parts, but in principle it is relatively straightforward. If you need further help in understanding the accounting cycle, or require the services of a professional accountant, reach out to the experts at E&E today.