An Introduction to the Accounting Cycle
When you're working with business finances, you'll probably hear the term accounting cycle from time to time. But what is it exactly and what are the steps involved in the cycle? Here's a quick overview to help you get started.
The accounting cycle starts when you record a transaction and comes to an end when it's recorded on your company's financial statements. The steps that you go through help your company's accounting records remain accurate. The cycle was originally used when paper records required a high degree of accuracy to ensure the records remained accurate. The cycle can be any length of time.
But what are the steps in the cycle?
Here's a quick look at the process.
A transaction is recorded. This can be based on the receipt of an invoice, a sale transaction or another economic event. This transaction is recorded in a journal.
The journal entries are posted to the general ledger accounts. At this point, a trial balance is prepared that is unadjusted to ensure that unadjusted debits and credits balance.
When the end of the accounting period is reached, any adjusting entries that are needed are made to the ledgers. Why? Adjusting entries account for issues such as inaccuracies or changes that have happened over time, such as interest revenue that has occurred during the accounting period.
Once the adjusting entries have been posted to the journals, an adjusted trial balance is calculated to ensure that the credits and debits are still in balance.
Following the verification of the adjusted trial balance, the financial statements are prepared. At this time, closing entries are made to the temporary accounts, which include revenues and expenses, transferring your company's net income into retained earnings.
At the end of the cycle, a post-closing trial balance is calculated by the company so that the balance between the debits and credits as the cycle ends.
By understanding the accounting cycle, you can get a better grip on your business finances and make the most of your company's equity at the right times. If you need help with getting your accounting processes in order or setting up accounting for your business, the financial professionals at AccountRely are here to help. Contact us today and see what a difference the family touch makes to your company.