The 8 Steps in the “Accounting Cycle”

The consecutive steps as to how to document the financial transactions of a business.

  1. Private company: a fiscal period = one month
  2. Public company :a fiscal period = 3 months (quarter)

The accounting cycle happens every fiscal period,

no matter the type of business or the form of ownership.

  1. Journalize transactions daily (as they occur) in a General Journal
  1. Post individual account activity and ending monthly balances from the Journal to individual General Ledgers
  1. Depreciate any assets that lost value during the fiscal period and update their new account values on a Work Sheet
  1. Update All account balances on a Trial Balance Sheet: Temporary and Permanent accounts
  2. Temporary accounts: Sales, Expenses and Drawing
  3. These account values must be made to $0.00 at the end of every FP
  4. Permanent accounts: all other A, L, and OE accounts other than Sales, Expenses and Drawing
  5. Those balances are transferred from FP to FP
  1. Close out all temporary accounts and transfer data from permanent accounts to the next fiscal period’s account balances
  1. Create and Post Financial Statements:
  1. Cash Flow Statement
  2. Balance Sheet
  3. Income Statement
  1. Analyze the Financial Statements.
  1. Make decisions to improve the Business.

What Is the Importance Following all of Steps of the Accounting Cycle?

A common accounting cycle in any given business often has8 or 9 steps, depending on the procedures outlined by the given accounting department. Each step in the accounting cycle plays an important role in creating accurate entries and managing the company’s finances each time a purchase is made or revenue is earned. If a company decides to implement an accounting cycle, it is important that each step is followed in the right order.

Proper Analysis

One important role of having the 8-step accounting cycle in an accounting department is the attention to detail each transaction gets in terms of analysis and recording. Every transaction made, whether money spent or received, is analyzed so the accountant knows the exact amount, the purpose of the transaction and the date and time of the transaction and also has documented proof it took place. The first two steps of the cycle deal with collecting, analyzing and recording the data so the company is prepared should a customer or client inquire about a specific transaction. Ensuring the accuracy of the transaction is also beneficial for when you create annual budgets and reports.

Company Accounts

Every time a customer or client makes a payment, the accounting department must track the single payment to ensure the specific account linked to the customer or client is paid in full. If a single client owes $5,000, he may make smaller payments such as $300 or $1,000 to pay off an account slowly over a period of time. The accounting cycle ensures that all accounts are updated and maintained so all payments owed to the company are addressed. This is important since the accounts receivable representatives will get the company’s owed funding to keep the finances balanced. This is the third step -- posting the transactions details to the ledger.

Financial Statements

At the end of a fiscal period, the accounting department must prepare a financial annual report for investors and shareholders. The accounting cycle ensures the data presented in the report is organized and accurate, as step seven of the report involves creating financial statements covering the company’s fiscal year. The financial statements must be prepared in a certain order to ensure accuracy. The income statement must be prepared first, followed by the retained earnings. A balance sheet and cash-flow statements must be made third and fourth in the financial statement process.

Future Planning

An accounting department must know the current standing of the company, even at the end of a fiscal period. Part of the cycle involves planning for the upcoming accounting cycle so all account issues are addressed and all entries are closed before a new fiscal period starts. This is helpful for tax purposes and annual document reporting. These actions are taken in steps 7 and 8 of the cycle.