Running a business can be complicated, especially when it comes to managing your finances. However, the accounting cycle is a time-tested tool that provides structure to what can be an overwhelming task for any business owner. In the most basic terms, the accounting cycle is the period covering the start of a transaction to the time it is recorded as part of your financial statements. This process allows businesses to track, measure, and accurately record business transactions. Read our guide from start to finish for a deep-dive into the eight steps of the accounting cycle and how your business can use it, or jump to a specific section to review a certain aspect of the process. Defining Key Terms You Need to Know What is the Accounting Cycle? The 8 Steps of the Accounting Cycle Why is Accurate Bookkeeping Important? Should You Consider Professional Services? Stop Stressing About Your Business’s Finances, Let Us Handle It We understand that navigating the financial side of your business can be confusing, especially because there are a lot of complex processes involved, along with vague technical terms. To get started, we’ll break down some of the technical jargon used in accounting so that the different aspects of the accounting cycle are easier to understand. Accountant– Accountants are the individuals who analyze your business’s financial information and help you use it to preserve the health of your business. Accountants aren’t required to have a degree, but many have a master’s degree. Accounting Period– An accounting period is established in order to create structure for how financial information for the business is recorded and analyzed. This might be monthly, quarterly, or annually. Businesses often follow a monthly or annual accounting period and have the option to follow a fiscal year or calendar year when it comes to their accounting cycle. Accounting Records– A collection of the original documentation of business transactions, journal entries, ledgers, as well as supporting documentation that is used to produce the financial statements for a given period. Adjusting Entries– Adjusting entries are made at the end of the accounting period to make necessary changes that ensure reports are accurate and up-to-date. Assets– Items that are considered company resources, including stocks, cash, equipment, and property that have future economic value. Balance Sheet– A financial statement that shows income and expenditures during a specific period, including assets, liabilities, and equity. Bank Statements– A monthly document that is issued by a bank detailing the transactions relevant to a specific bank account. Bookkeeper– A bookkeeper is the individual in charge of maintaining all the financial accounts related to your business. They will keep all of your information organized and accounted for. Bookkeepers only need a high school diploma to practice. However, they will often have an associate degree and certification. Credit (CR)– A credit is a type of accounting entry that denotes an increase in a liability or equity account or a decrease in an asset or expense account. In double-entry accounting, credits are always listed on the left side. Debit (DR)– A debit is an accounting entry that is used to record an increase in an asset or expense account or a decrease in a liability or equity account. In double-entry bookkeeping, debits are always recorded on the right side. Double-Entry Bookkeeping– A bookkeeping method that tracks every transaction with two entries — a “debit” and “credit.” By recording transactions using double-entry accounting, you can more clearly see if funds are being transferred to or from an account. Equity– The amount of funds that have been invested in a business by the owner(s) plus any retained earnings. It can be calculated as the difference between the total assets and liabilities on the balance sheet. Financial Statements– Records of a business’s financial activities, financial health, and cash flow. The most commonly used aspects of financial statements include the balance sheet, income statement, and statement of cash flows. Invoice– A document that provides information about a payment that is owed. Common aspects of an invoice include an invoice number, identification information, date of shipment or delivery, description of the items purchased, payment terms, and the total owed. Journal– Where individual transactions are listed. This information is later transferred over to the ledger. Journal Entries– The logging of a transaction in the business’s accounting journal. Ledger– The database (or physical book) that contains the accounting records for a business. The general ledger is a summary of all your business accounts on an on-going basis. Typically, you will refer back to the general ledger to compare transactions across different accounting periods. Liabilities– Debts the business is responsible for paying. Posting– Transferring information from the journal to the ledger. Transactions– A transaction is any incoming or outgoing money. For example, this may include a sale or return as well as a payment to a lender. Now, let’s get down to the reason you’re here, learning what the accounting cycle is. This eight-step system is used by businesses to record transactions and establish accurate and consistent financial documents for each period. Typically, businesses use the 12-month calendar tax year or a 12-month fiscal year. Here’s how you can put the accounting cycle into practice using the double-entry method: Note: Using the double-entry accounting is highly recommended. The only exception is when generating your income statement. In most cases, there will be eight steps in the accounting cycle. However, it isn’t a hard and fast rule, and you can modify the cycle to your needs when necessary. You will need to account for all transactions that have taken place over the period. This includes all expenses and revenue, which should be documented using receipts and invoices. You will want to hold onto all source documentation for these transactions. It is important that when you’re reviewing your transactions that you only include those that specifically pertain to the business. If you’ve taken out a personal loan for an expense that’s not related to your business activities, it shouldn’t be recorded. You record your transactions by creating journal entries. While most transactions will be recorded in the general journal, recurring transactions, such as bills that you pay every month, usually have their own separate journal. When recording your transactions, remember:
Enter your information to get started
|