Accounting Cycle
The accounting cycle is the comprehensive process of documenting and processing all of a company’s financial transactions, from when they occur to when they are represented on financial statements to when the accounts are closed. One of a bookkeeper’s key responsibilities is to maintain track of the whole accounting cycle from beginning to end. As long as a firm is in operation, the cycle repeats itself every fiscal year.
Over the course of a whole accounting cycle, all accounts, journal entries, T accounts, debits and credits, and adjusting entries are included
The Accounting Cycle’s steps
1 Business Transactions
Financial transactions are the first step in the process. There would be nothing to keep track of if there were no financial transactions. A debt payback, any asset purchases or acquisitions, sales income, or any costs incurred are all examples of transactions.
2 Journal Entries
Journal Entries: Once the transactions are in place, the following step is to record them in chronological order in the company’s journal. When debiting and crediting one or more accounts, the debits and credits must always be in balance.
3 Entering information into the General Ledger (GL)
The journal entries are subsequently uploaded to the general ledger, which displays a summary of all transactions to individual accounts.
4 Trial and Error
A total balance for the accounts is determined at the conclusion of the accounting period (which may be quarterly, monthly, or annually, depending on the firm).
5 Worksheet
When the debits and credits on the trial balance don’t match, the bookkeeper must check for mistakes and make corrections on a worksheet.
6 Making Changes to Entries
Adjusting Entries: At the conclusion of the accounting period, adjusting entries for accruals and deferrals must be submitted to accounts.
7 Financial Statements
Financial Statements: The right balances may be used to create the balance sheet, income statement, and cash flow statement.
8 Closing
Closing: For the following accounting cycle, the revenue and cost accounts are closed and cancelled out. This is due to the fact that revenue and expenditure accounts are income statement accounts that demonstrate performance over time. Because balance sheet accounts indicate the company’s financial situation at a certain moment in time, they are not closed.
The General Ledger
The general ledger reflects all financial transactions inside a firm and acts as the eyes and ears of bookkeepers and accountants. In essence, it’s a massive collection of all transactions recorded on a certain document or accounting software, which is the most common way currently. For example, if you want to examine how cash levels have changed over time and all of the transactions that go with them, you’d look at the general ledger, which lists all of the cash debits and credits.
Fundamentals of the Accounting Cycle
It’s critical to have a firm grasp on fundamental accounting concepts in order to completely comprehend the accounting cycle. Revenue recognition (when a corporation can record sales revenue), the matching principle (matching costs to revenues), and the accrual principle are all important concepts to understand.