The eight-step accounting cycle is important to be aware of for all types of bookkeepers. It separates the whole procedure of an accountant's duties into eight essential advances.
What Is the Accounting Cycle?
The accounting cycle is the way towards accepting, recording, sorting and crediting payments made and received within a business during a particular accounting period. It is the comprehensive procedure of recording and preparing every single money related exchange of a company, from when the transaction occurs, to its representation on the financial statements, to closing the accounts. Organizations, for the most part, balance their books each quarter and afterward again at year-end, however, others may want to settle the books each day or consistently – that is a great deal of work, but it can be done if you choose to.
Steps in the accounting cycle
Journal Entries
A journal entry is the first step in the accounting cycle. A journal brings all financial transactions of a business and makes a note of the accounts that are affected. In debiting one or more accounts and crediting one or more accounts, the debits and credits must always balance.
Financial Transactions
A financial transaction is one in which there is a type of movement that changes the estimation of the assets, liabilities, or owner's equity of an organization. If there were no financial transactions, there would be nothing to keep track of.
There are four main types of financial transactions, such as sales, purchases, receipts, and payments.
Posting to the General Ledger
Posting to the general ledger includes recording detailed accounting transactions in the general ledger. It includes accumulating financial transactions from where they have stored in specialized ledgers and moving the information into the general ledger.
Trial Balance
Multiple entries in different accounts will make a Ledger. Taking all the ledger balances and presenting them in a solitary worksheet as on a specific date is Trial Balance.
In trial balance, at the end of the accounting period (which may be quarterly, monthly, or yearly, depending on the company), a total balance is determined for the accounts.
Worksheet
When the debits and credits on the trial balance don’t match, the bookkeeper must look for errors and make corrective adjustments that are tracked on a worksheet.
Adjusting Entries
Adjusting journal entries made at the end of an accounting cycle to refresh certain revenue and expense accounts and to ensure you agree with the matching principle. The matching principle states that expenses have to be matched appropriately to the accounting period.
Financial Statements
A financial statement is the combination of the three major reports on business. It contains the cash flow statement, the income statement, and the balance sheet. Each of the three together produces a general image of the health of the business.
Closing book
The revenue and expense accounts are closed and focused out on the next accounting cycle. This is because revenue and expense accounts are income statement accounts, which show execution for a particular period.
Thus, these are some of the 8 important steps in the accounting cycle.
Comments