Accounting Cycle

REVIEWED BY WILL KENTON

Updated Jun 26, 2019

What Is the Accounting Cycle?
The accounting cycle is a collective process of identifying, analyzing, and
recording the accounting events of a company. The series of steps begin when a
transaction occurs and end with its inclusion in the financial statements.
Additional accounting records used during the accounting cycle include the
general ledger and trial balance.

How the Accounting Cycle Works

The accounting cycle is a methodical set of rules to ensure the accuracy and
conformity of financial statements. Computerized accounting systems and the
uniform process of the accounting cycle have helped to reduce mathematical
errors. Today, most software fully automates the accounting cycle, which results
in less human effort and errors associated with manual processing.

Key steps in the eight-step accounting cycle include recording journal entries,
posting to the general ledger, calculating trial balances, making adjusting entries,
and creating financial statements.
Steps of the Accounting Cycle
There are eight steps to the accounting cycle. An organization begins its
accounting cycle with the recording of transactions using journal entries. The
entries are based on the receipt of an invoice, recognition of a sale, or
completion of other economic events. After the company posts journal entries to
individual general ledger accounts, an unadjusted trial balance is prepared. The
trial balance ensures that total debits equal the total credits in the financial
records. At the end of the period, adjusting entries are made. These are the
result of corrections made and the results from the passage of time. For
example, an adjusting entry may accrue interest revenue that has been earned
based on the passage of time.

Upon the posting of adjusting entries, a company prepares an adjusted trial

balance followed by the financial statements. An entity closes temporary
accounts, revenues, and expenses, at the end of the period using closing entries.
These closing entries transfer net income into retained earnings. Finally, a
company prepares the post-closing trial balance to ensure debits and credits
match.
KEY TAKEAWAYS

 The accounting cycle includes identifying and recording accounting

events.
 The cycle is a set of rules and steps to ensure financial statements are
prepared accurately and timely.
 The first step in the eight-step accounting cycle is to record transactions
using journal entries, ending with the eighth step of closing the books after
preparing financial statements.
 Accounting software today mostly automates the accounting cycle.
 The accounting cycle is generally a year, encompassing an accounting
period.
Timing of the Accounting Cycle
The accounting cycle is started and completed within an accounting period, the
time in which financial statements are prepared. Accounting periods vary and
depend on different factors; however, the most common type of accounting
period is the annual period. During the accounting cycle, many transactions
occur and are recorded. At the end of the year, financial statements are generally
prepared. Public entities are required to submit financial statements by certain
dates. Therefore, their accounting cycle revolves around reporting requirement
dates.

Accounting Cycle Vs. Budget Cycle

The accounting cycle is different than the budget cycle. The accounting cycle
focuses on historical events and ensures incurred financial transactions are
reported correctly. Alternatively, the budget cycle relates to future operating
performance and planning for future transactions. The accounting cycle assists in
producing information for external users, while the budget cycle is mainly used
for internal management purposes.

Reference:

https://www.investopedia.com/terms/a/accounting-cycle.asp