The accounting cycle refers to a series of steps that records and analyzes all aspects of a company’s finances. The information gleaned throughout the accounting cycle gives accountants, business owners, and other stakeholders a clearer picture of the business’s overall financial health and helps them strategize their next moves.
Traditionally, accountants manually write down transactions and use physical ledgers and journals for bookkeeping. Today, several companies invest significantly in setting up a reliable accounting system, upgrading their hardware and infrastructure, and streamlining processes to bolster their accounting department.
While many of the traditional steps have been automated, taking a closer look at the entire accounting cycle can give you a deeper understanding of how accounting works and equip you to manage your company’s finances more effectively. To elaborate further, here is a quick breakdown of the accounting cycle process.
How Does the Accounting Cycle Work?
The traditional accounting method people know of today typically comprises eight steps. The number can be slightly lower or higher depending on what type of business you are in and the accounting method your company uses. The accounting cycle spans months—commonly three or six months, which starts over after an accounting period ends. For a closer look, consider the steps below.
This is part one of the data-gathering portion. In this step, you simply collect all of the transactions in the company, including cash sales, purchases, and exchanges. Simply put, any measurable asset that affects the business’s financial position should be noted for the next step: recordkeeping.
Traditionally, accountants jot each transaction down in their corresponding journals or books. Today, however, accountants can enter the information on a digital spreadsheet, which is stored either online or on a computer.
The general ledger is essentially the master source of all the transactions done throughout the accounting period. These include revenues, expenses, assets, liabilities, and owner’s equity. While it is arguably one of the most important documents in traditional accounting, general ledgers now work in the background due to automated accounting software.
The first three steps should be accomplished daily throughout the accounting period to avoid missed receipts and transactions. At the end of an accounting period, it is time to check whether the numbers match. A trial balance collates all of the numbers and shows you whether the company’s total debit balance and total credit balance match. It is usually in this stage that accountants find anomalies like unpaid invoices, uncollected payments, or simple miswritten numbers, which the accountant addresses in the next step.
The goal for this step is to take a closer look at the anomalies discovered beforehand and resolve them. This step can be especially difficult if you forget to keep receipts of transactions. That is why it is crucial to note them down as soon as possible for accurate bookkeeping and store receipts safely.
After addressing the anomalies spotted in the first trial balance, the accountant creates another trial balance with the new adjustments. This will double-check if the numbers match and if any other anomalies need to be resolved.
If there are no issues in the adjusted trial balance, the accountant can proceed to making financial statements. These documents will give business management and other stakeholders insight into how the company performed in the previous accounting period, monitor the enterprise’s finances, and conduct data-driven decision-making. The most common financial statements generated are income statements, balance sheets, and cash flow statements.
To close the accounting period, bookkeepers will close the temporary accounts and transfer the numbers into permanent accounts. This is part of preparing the company for the next accounting period and simply making sure that all finances are in place for the upcoming cycle.
At this point, it becomes clear that accounting is a meticulous process that requires a lot of data entry, calculations, and checking. The introduction of accounting software and other forms of technology has automated several processes like recordkeeping and made workflow faster and more efficient. Mistakes are minimized, and accountants can refocus their efforts on data analysis and business strategy.
Implementing accounting software is inevitable as a business grows and the number of transactions substantially increases. That said, picking an accounting program can be tricky without the right help. If you are in the market for an accounting system that works best with your business, ANSI is here to help you find the best match. There are multiple programs available to choose from, but it is vital to pick a system that matches your business’s present (and potentially future) needs. ANSI has the expertise and experience from working with several different companies over the years and will be more than happy to assist you to upgrade your accounting processes.
For more info, contact us today, and let us help you improve and optimize your business’ accounting cycle.