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Accounting Cycle

WHAT IS THE ACCOUNTING CYCLE?

The accounting cycle is a straightforward eight-step procedure for finishing a business’ bookkeeping duties. It offers a precise roadmap for the documentation, evaluation, and final reporting of a company’s financial activities.

The eight-step accounting cycle begins with the individual recording of each business transaction and concludes with a thorough report of the business’s actions for the specified cycle timeframe. To automate the accounting cycle, many businesses employ accounting software. As a result, accountants may schedule cycle dates and get automated reports.

Step 1: Identifying Transaction

The accounting cycle’s initial stage is to identify transactions. Business transactions will be numerous throughout the accounting cycle. Each one must be accurately recorded in the business’s books.

Step 2: Record Transaction in Journal

The production of journal entries for each transaction is the cycle’s second step. Steps one and two can be combined with the aid of point-of-sale technology, but businesses must also keep track of their costs. When transactions are formally recorded will depend on whether you use accrual or cash accounting. Remember that accrual accounting mandates that revenues and expenses be matched, meaning that both must be recorded at the time of sale.

Step 3: Posting

A transaction should post to an account in the general ledger once it has been entered as a journal entry. All accounting actions are broken down by account in the general ledger. This enables a bookkeeper to keep track of account-by-account financial conditions and statuses. The cash account, which provides information on available cash, is one of the general ledger accounts that is most frequently referred to.

Step 4: Unadjusted Trial Balance

The fourth stage of the accounting cycle involves calculating a trial balance at the conclusion of the accounting period. The company can learn the unadjusted amounts in each account from a trial balance. After testing and analysis in the fourth stage, the unadjusted trial balance is taken on to the fifth step.

Step 5: Worksheet

The fifth step in the cycle involves reviewing a worksheet and locating adjusting entries. To check if the debits and credits are equivalent, a worksheet is made. There will need to be modifications made if there are inconsistencies.

Step 6: Adjusting Journal Entries

A bookkeeper makes corrections in the sixth phase. When necessary, adjustments are documented as journal entries.

Step 7: Financial Statements

The seventh phase is when the company generates its financial statements after completing all adjustment inputs. These statements typically consist of an income statement, balance sheet, and cash flow statement for businesses.

Step 8: Closing the Books

In the eighth phase, a business finally completes the accounting cycle by closing its books at the end of the day on the designated closing date. The concluding remarks offer a report for analysing performance throughout the course of the time.

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Reference:

https://www.investopedia.com/ask/answers/050815/what-are-most-important-steps-accounting-cycle.asp#:~:text=The%20eight%20steps%20of%20the,statements%2C%20and%20closing%20the%20books.

 

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