The 8 Steps in the Accounting Cycle

This process, known as journalizing, creates a detailed, day-by-day record of all financial events. A typical journal entry includes the date, account names debited and credited, monetary amounts, and a brief description. This provides a complete historical record of the business’s financial activities. Obviously, business transactions occur and numerous journal entries are recording during one period. If the total credit and debit balances don’t match, you need to figure out what’s missing, record those transactions and post these adjusting entries to the general ledger. Following the cycle ensures that all transactions are captured, accounts are reconciled, adjustments are made, and reports are accurate and ready for decision-making or compliance purposes.

#6 Adjusting Entries

Assets and Expenses are presented as positive balances, while liabilities, equity, and revenues are presented as negative balances. The fourth step of the accounting cycle is preparing the Unadjusted Trial Balance. The Unadjusted Trial Balance consists of the summary of each account balance.

• The objective of the trial balance is to help you catch mistakes in your accounting.
• The Statement of Cash Flows reports cash generated and used, categorized into operating, investing, and financing activities.
• Below is the rule of Debits and Credits that accountants or bookkeepers should know and apply in the process of analyzing transactions.
• The ledger groups similar transactions together and gives you an up-to-date view of each account’s balance.

Thus, any increase shall be recorded on the Debit side, and if it decreases, we shall record it on the Credit side. He’s a co-founder of Best Writing, an all-in-one platform connecting writers with businesses. He has built multiple online businesses and helps startups and enterprises scale their content marketing operations.

• For illustration purposes, we will show only the Income Statement and Balance Sheet.
• Typos, broken formulas, version control issues, and lack of real-time visibility can all slow down the process and lead to inaccurate reporting.
• For every transaction, make sure you include the date, debit and credit amounts, account names, and a short description.
• A credit in one account offsets a debit in another, so all credits must equal the sum of all debits.

Step 5: Journalizing Adjustment Entries

ABC Co has not received the utility bill yet as of 31 December 20×9. From past experience, ABC Co normally incurs utility expense of US$1,000 per month. However, on 5 January 202x, ABC Co received the utility bill with the actual amount of US$1,200. After ABC Co has prepared its Adjusted Trial Balance, it is time to prepare the Financial Statements. Below are the preparation of both the Income Statement and Balance Sheet. In a computerized accounting or a modern accounting world, we do not need to maintain such Journal Book.

It also standardizes your workflow so nothing is missed and deadlines are met. For instance, if you know reconciliations always happen before preparing a trial balance, you can avoid the back-and-forth that happens when those steps are done out of order. At the start of the next accounting period, occasionally reversing journal entries are made to cancel out the accrual entries made in the previous period.

#2 Journal Entries

This guide breaks down the accounting process into easy-to-follow steps that are repeatable every time a new accounting period begins. The accounting cycle is compatible with technology and can be implemented by companies using accrual or cash accounting and double or single-entry accounting. Unlike spreadsheets, which still require a degree of manual work, modern tools like QuickBooks, Xero, and others automate almost the entire process.

The Accounting Cycle: A Complete Guide

These adjusted journal entries are posted to the trial balance turning it into an adjusted trial balance. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business.

For example, you might run the accounting cycle every month to prepare management accounting cycle reports, then again at year-end to create annual statements for tax filing. A business’s financial activities need to be accurately recorded and reported not only for internal use but also to meet legal and regulatory requirements. The accounting cycle, an eight-step guide on the various bookkeeping phases, helps make that daunting task more manageable. The closing of the books also marks the start of the next accounting period. The cycle is complete, and it’s time to begin the process again, starting with step one.

Similarly, all transactions resulting in inflow and outflow of cash are entered in the cash account. Journalizing transactions is the second step among the 10 steps of the accounting cycle. After analyzing transactions, considering the source of documents and the rule of Debits and Credits. The accountant or Bookkeeper shall need to record those transactions in Journal.

For illustration purposes, let’s assume that the below expenses have not been adjusted yet by an accountant of ABC Co. Use your workflow dashboard to identify trends and continuously refine the process. This keeps your accounting cycle on track, even as your client base grows.

Making two entries for each transaction means you can compare them later. All popular accounting apps are designed for double-entry accounting and automatically create credit and debit entries. An accounting workflow is a predefined set of steps your team follows to complete a specific accounting process, like month-end close, reconciliations, or year-end reporting. It shows what needs to be done, who’s responsible, and when it’s due. “A good workflow is a structured sequence of steps that efficiently guides tasks from start to finish,” says Dawn Brolin, CPA, CFE.

Accurate financial reporting starts with recording every transaction, classifying it correctly, and making all necessary adjustments before preparing statements. The accounting cycle gives you a clear process to follow, helping your team complete each step in the right order and on time. This reduces the risk of errors, missed entries, or reporting items in the wrong period. The accounting cycle is the structured process accountants follow to record, organize, and report a business’s financial transactions for a specific period. It begins when a transaction occurs and ends when the period’s financial statements are prepared and the books are closed. The initial phase of the accounting cycle involves identifying and recording all business activities with a financial impact.