Accounting is a crucial part of any business. Without an Accounting and Bookkeeping, it’s challenging to grow your business. As a business owner, you must have a clear idea about what is going on with your firm’s finances.
For this, it is essential to establish an efficient Accounting cycle. This arrangement helps you get the final financial reports on your hand whenever you need them. Once you have this cycle in place, it becomes easy to manage your finances and cash flow.
Today, I will be discussing seven must-have steps for any accounting cycle.
Seven steps of an Accounting Cycle
- Recognizing Transactions
Every business has to perform multiple financial transactions daily. So the primary step is to identify all these transactions and record them in the relevant heads.
These transactions include investments for new business acquisitions, providing quality service to the client, wages to the employees, various bills and any other spending in the name of the business. All must be recognized and recorded regularly.
- Recording Transactions
Once the identification is done, the second step is to create Journal entries for every transaction. The recording of marketing depends on the mode of accounting.
If you chose the accrual accounting, the recording of the statement must be done at the time of sales. The reason is, you will have to match revenues and expenses in this mode of accounting.
If you opt for Cash accounting, the transaction must be recorded when the cash is received or paid.
Generally, the double-entry system, including the income statement and Cash-flow statement, is followed to manage the balance sheet efficiently. In Double entry system, each transaction has equal debit and credit.
- Posting
After the recording of a transaction in the General entry, it has to be posted in General Ledger. A complete breakdown and classification of all the accounting activities are available in General Ledger.
General ledger offers precise monitoring of various accounting activities in multiple accounts. Out of all the accounts in General Ledger, Cash account that gives a detailed view of the available cash is most important.
- Unadjusted Trial Balance
Once the accounting period ends, the unadjusted Trial Balance is calculated. The Trial balance offers insight about any unadjusted balance in every account. It is a significant step as its vital to adjust every performance at the end of the accounting period. This Unadjusted Trial Balance is then carried forward for the testing and analysis phase.
- Worksheet
A detailed analysis of the Worksheet is the fifth step in the accounting cycle. This step consists of identifying and adjusting the entries.
It is done by matching credits and debits, and if any error is identified, it’s adjusted accordingly. In the case of accrual accounting, adjustments are also made to fit income generated and expenses incurred.
- Adjustments in Journal entries
In case of any discrepancies or necessary adjustments, adjustments are made in the form of journal entries by the bookkeeper or data entry operator.
- Preparation of Financial Statements
The seventh step of the Accounting Cycle is Preparation of Financial statement. Once all the entries and adjustment entries are recorded, a detailed financial statement is generated.
Generally, this financial statement includes a detailed income statement, Cash flow Statement and a proper Balance sheet
- Closing of Books
The final step of every Accounting Cycle is marked by Closing of Books at the specified date. A detailed report of the financial performance of a company is prepared to analyze how it performed during the mentioned period.
After Closing the Books, the new Accounting Cycle begins, and the whole process is repeated.
Conclusive Thoughts
Following these eight steps of the Accounting Cycle is vital for the efficient financial management of any business. With a detailed financial statement in hand, it becomes easy for the management to take certain critical decisions. Apart from this, it helps in maintaining accuracy and consistency in work.
Managing all these steps with an in-house accounting team is a complicated task. You will need a dedicated accounting and bookkeeping team, a different set-up and a lot of resources. So, as an Accounting and Bookkeeping Experts, we recommend outsourcing these tasks to a Specialist.
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