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:

When posting to a general ledger, it is crucial to match the transaction with the correct account and subaccounts 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. Thereby 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 do 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:

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 for 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. 


Ready to alleviate the burden of bookkeeping? FINSYNC has an extensive network of bookkeepers and accountants. We will match the right person based on your budget, industry, experience, and more. 

Helping small businesses is our core mission at FINSYNC.

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