Understanding The Accounting Cycle From Start To Finish

Everyone knows that taking care of numbers when running a business is one of the crucial things you will have to do. After all, numbers speak louder than words, and they are sure to be great indicators of your success. This means that you will, naturally, need to make sure that you are taking care of those numbers, and thus getting a clear picture of your performance, which will further allow you to make informed business decisions, maintain a good cash flow, as well as, of course, remain in compliance with the important rules and regulations.

All of this means, naturally, that you will have to understand the accounting cycle, if you really want to do everything the right way. Whether you are a small business, or a large one that has been around for a while, understanding this particular concept is of crucial importance, as it will certainly help you stay in compliance, make smart decisions, ensure a good cash flow, and generally lead your business towards the success you desire. So, if you are ready to learn, then let us start answering some important questions for you.

What Exactly Is the Accounting Cycle?

Before we start breaking down the cycle from start to finish, let us first ensure that you understand what it really is. To cut right to the chase, it is basically a series of steps that accountants have to follow during every accounting period, in order to track the financial activity of a business, and thus prepare completely accurate financial statements. They do it monthly, quarterly, or annually, depending on your requirements. And, the steps that they take within this cycle allow for consistency, while reducing errors and making it easier for you to analyze the performance of your business, as well as to file the taxes correctly, and to, of course, plan for the future.

While you can understand this cycle, and become familiar with all the steps that it entails, which we will help you with below, the truth is that managing it yourself can be quite time-consuming and frustrating. And often inefficient, as well as leading to some inaccuracies, especially if you don’t really have the right skills or tools. This is why working with professionals is a must. For example, talking to Dave from Profitwise Accounting or some other great professionals is sure to give you a better idea about what all of this entails, as well as shed light on the fact that you cannot do it alone. And that you, of course, need to hire great experts to do it for you, meaning that you should carefully go through the hiring process.

Understanding It From Start to Finish

Let us now proceed to the main question of the day. It is time for you to understand the accounting cycle from start to finish. So, we are now going to talk about the steps that are a part of this process.

• Identifying Transactions

The process starts, of course, with identifying the transactions that have been made. As you probably already know, every transaction has to be accounted for, no matter its type. Working with professionals will help here, because they will have the necessary tools that will automatically identify the transactions and thus ensure that nothing is overlooked.

• Recording Them in the Journal

Once the transaction is identified, it will, of course, have to be recorded. So, a journal entry has to be made. The journal actually functions as the running record of your business’s financial transactions. And, of course, when you hire pros, you’ll ensure that everything is recorded accurately and on time, thus reducing human error.

• Posting to the General Ledger

Next, you have to transfer the transactions to the general ledger. This is a record that will organize the transactions into specific accounts. Once again, professionals will ensure that all the accounts are regularly reconciled, which is definitely a big deal, as it prevents discrepancies and fraud, and is crucial for accurate reporting.

• Preparing a Trial Balance

When all the transactions have been logged into the general ledger, the next thing to do is ensure that the entries balance out. In other words, total credits have to equal total debits. So, to do that, you have to build a trial balance, which is basically a worksheet that compiles the balances of the ledger into the credit and debit account columns respectively. This balance is usually created at the end of an accounting period – so, monthly, quarterly, or annually.

• Analyzing the Worksheet

Once all of that is done, the worksheets will have to be carefully analyzed, in an effort to have any kinds of discrepancies uncovered. You have to make sure that all the transactions are accurately recorded and classified, that there are no errors, and that the balance accounts match. Clearly, having a professional on your side is sure to make things easier, as they will know how to successfully and accurately, as well as efficiently, analyze the worksheet.

• Making Necessary Adjustments

Now, if you happen to spot any kinds of discrepancies, you will need to make the necessary adjustments for everything to match. This is, therefore, the next stage in the accounting cycle. Hiring professionals means having someone knowledgeable on your side to quickly uncover the errors and make the necessary adjustments, thus making sure that you are getting a real financial picture of your business, as well as that you are staying in compliance.

• Making Financial Statements

When all the adjustments have been made, the next step will consist of, naturally, generating financial statements. Those include the income statement, the cash flow statement, as well as the balance sheet. And, they will certainly help you get a clear overview of your performance, and, of course, make smart business decisions based on the data.

• Closing the Books

The final step consists of closing the books. This basically resets the actual system for the next accounting period. And, as you may have guessed it already, letting the pros handle this will ensure that you are doing everything right and on time, and that you are meeting the necessary deadlines, especially when it comes to filing taxes.