A Basic Explanation of the Accounting Cycle - Our Guide
The Accounting Cycle is the process of identifying, analyzing, and recording the accounting events of a company, beginning with the initial transaction, and ending with the financial statement.
Each step of the cycle is important because it helps convert all of a company’s financial information into financial statements. Each step, guarantees that the company’s financial statements will be consistent, accurate, and legal.
While you’re enjoying a cup of tea, your bookkeeping services or QuickBook experts are keeping track of your financial statements.
Accounting for Dummies: Becoming an expert in setting up finances
Before you do anything else, you need to know the basics of small business accounting. You can learn how to bookkeep on your own or you can contact a professional bookkeeping service like Totally Booked in New York to give you a hand. Let’s take a look at the steps in detail.
Step 1: Examine and register transactions
To be an expert in the accounting cycle, you always need to collect information concerning your company’s transactions for the current accounting period. These transactions may include sales invoices, purchase invoices, payment vouchers, bills of exchange, statement of accounts, cash receipts, and more. All the transactions are raw and need further processing to be presentable.
Step 2: Place the transactions in the ledger
After examining and registering the transactions, you will then need to place them in the general ledger. A ledger is an accounting document that consists of journal entries and sequential business transactions that follow the rules of double-entry accounting.
The rules of double-entry accounting require two journal entries, because each account will change as a result of a transaction; a change in debit and credit. For instance, if you buy a printer for your company, it will elevate your assets, while decreasing your bank account’s balance. Once you’re done converting everything to the general ledger, you can now use it to see how each transaction affects the accounts.
Additionally, if you want to find a financial record, the quickest way is to look for it in the general ledger. The general ledger should be updated frequently to keep up to track. Fortunately, accounting software and bookkeeping services can help you with the task.
Step 3: Start making an unadjusted trial balance
After placing the transactions in the ledger, the next step involves making an unadjusted trial balance at the end of a period. This involves calculating all the debits and credits in each account and finding out its total balance.
However, according to the rules of double-entry accounting, you need to keep in mind that the accumulated debit and credit balances need to be equal in a trial balance. If they are not equal, then you have to go back and find the possible error in the posting or recording of journal entries.
Note: If you are using an accounting program, it is possible that you’ve entered the wrong information into the system. Solving these issues is called making “correcting entries.”
Step 4: Adjust preparations at the end of the period
Once you’ve finished making entries, you can start with adjusting entries. Making entry adjustments is rather different than the basic entry. This ensures that the information in the financial statements fits a time period that you require. During the adjusting entry process, there are four kinds of adjustments: deferrals, accruals, tax adjustments, and missing transaction adjustments.
Step 5: Make an adjusted trial balance
After adjusting the entries, you will need to create one final trial balance. It’s technically the same thing you’ve created in step 3 but including all the adjustments that were made in step 4. This is what you call the adjusted trial balance. This clarifies your debit and credit balances in the previous steps. After this step, you can now think of creating financial statements for the company.
Step 6: Create financial statements
Why make a financial statement in the first place? To begin with, it provides information on where the business’ money goes and ends up. Financial statements include an income statement and a balance sheet.
The information needed for the income statement can be found in the trial balance under the revenue and expense accounts. Assets, liabilities, and owner’s equity can be found in the balance sheet. Before the accounting cycle is set to finish, the certified public accountants (CPAs) will do one more round of adjustments before continuing on to the next accounting cycle.
Going through the process of the accounting cycle takes time and effort. However, the results are still worth it. In addition, you can hire a bookkeeper to take care of the accounting cycle of your company. If you’re looking for Bookkeeping by QuickBooks Certified ProAdvisors, get in touch today! We’re happy to help.