The 8 Step Accounting Cycle: Beginners Guide

The world of accounting has many moving parts. Many businesses follow an accounting cycle to keep track of the books and remain on a consistent schedule.

 

There are eight steps involved in this cycle. Upon completion, a company can ensure that every dollar is accounted for and reflected properly in the financial statements. 

 

Here is a checklist to use every month or at the end of an accounting period. Once completed, you can move on to the next period with a fresh, clean slate.

 

1. Transactions

 

We kick off the process by identifying and analyzing the financial transactions. These transactions include all monetary movement in and out of the organization. 

 

Activities would include but are not limited to receiving payment for an invoice, paying for utilities, selling products, purchasing equipment, and payroll.

 

2. Journal Entries

 

Journal entries are records of the initial transactions. Often, a bookkeeper manages and records these daily transactions and puts them in chronological order. 

 

Journal entries are a comprehensive way to keep track of money in and out of the company.  

 

In double-entry accounting, there must be two entries for each transaction. When a credit occurs, there must be a resulting debit. 

 

3. Posting

 

Each journal entry is organized and summarized in the general ledger. The general ledger is a record that categorizes all of the transactions into one of the accounts (categories) listed below:

 

◦ Assets

◦ Liabilities

◦ Equity

Revenue

◦ Expenses

 

When posting to a general ledger, it is crucial to match the transaction with the correct account and subaccount, such as rent, marketing, loan payments, etc.

 

4. Trial Balance

 

At the end of an accounting period, a trial balance assures that all debit and credit totals are equal. Therefore, running this common report makes discrepancies easy to identify. 

 

The trial balance brings to light the unadjusted ratios for each account and subaccount posted in the general ledger. 

 

When the total for all credits does not equal the total debits, a mathematical or recording error was made somewhere earlier in the process and must be fixed in order for “the books to balance.”

 

5. Worksheet

 

Unfortunately, many times, the first calculation of the trial balance will produce a discrepancy. Meaning the credit total does not equal the debit total. Therefore, adjustments need to be calculated until these equate.

 

Adjusting these entries is also called the worksheet analysis. Here is where we can identify when payments aren’t received, or a transaction wasn’t recorded. These discrepancies must be identified and eventually corrected before the period ends.

 

6. Adjusting Journal Entries

 

Once discrepancies related to cash transactions have been identified and entry adjustments recorded, it is time to recalculate a new trial balance.

 

You’ll then want to add any journal entries for non-cash transactions, such as a deferral or depreciation.

 

Once the trial balance is complete and the credits and debits balanced, you can move forward with producing financial statements.

 

7. Financial Statements

 

Now that the accounts are adjusted and recorded correctly in the general ledger, we are ready to create the financial statements.  

 

Financial statements include the following:

 

◦ Income Statement

◦ Balance Sheet

◦ Statement of Cash Flow

Statement of Retained Earnings (optional)

 

The insight you and the company’s management will gain from these financial statements will aid in planning the next steps.  

 

8. Closing the Books

 

The last step in the accounting cycle is closing the books. Closing ties up all loose ends and occurs at the end of each accounting period. Accounting periods could be every month, quarter, year, or other consistent timeframes.

 

After the books are closed out, the cycle starts all over again with the new period. New revenue and expense accounts start over with zero balances.

 

In the most basic terms, the accounting cycle is the process of ensuring the accuracy of the books. This process demonstrates all money going in and out is accounted for and balanced.

 

Errors made throughout this process typically occur. Therefore, having a procedure for identifying and examining these errors is recommended for all organizations. 

 

How FINSYNC Can Help

 

FINSYNC allows you to run your business on One Platform. You can send and receive payments, process payroll, automate accounting, and manage cash flow. To learn more about how we can help your business start, scale, and succeed, contact us today.

Helping small businesses is our core mission at FINSYNC.

Centralize your accounting, payroll, and cash flow management on our all-in-one platform.

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