What is an accounting cycle?
Accounting cycles follow several steps to analyze and record financial data, starting with a transaction and end when that said transaction is already a part of a financial statement. What is a financial statement? It is a summary of all trades. The term’s name is as such because it repeats every after accounting cycles. An accounting period follows a fiscal business year or a financial calendar.
Why does a business owner need to conduct accounting cycles?
A wise business owner tracks finances and accounting through organized documents to prevent errors like discrepancies in ending amounts and unsettled accounts. Accounting cycles record every single cent that passes through the business. Listed below are the three main reasons to do accounting cycles:
- Analyzing business performance. You can be able to evaluate whether your business strategy is effective or not. You can also assess how much more you need to spend in the future.
- Generating more money. An accurate financial statement is essential for potential future investors and to achieve more profits.
- Compliance with regulations and standards. A business owner is required to follow given sets of principles and laws. Conducting an accounting cycle helps when the government requires disclosure of finances and taxes in line with the business profit.
Accounting Cycle step by step
Below is a model framework on how to make an accounting cycle.
- Identifying Transactions.An accounting cycle starts with identifying transactions that contain bookkeeping events that could be anywhere from sales, refunds to payments, and the like.
- Transaction records on journals. Journal entries record collected receipts, sale recognitions, event completions, etc.
- Posting: After recording, posting in a general ledger is next. What is a general ledger? It contains the accounting activities breakdown.
- Unadjusted Trial Balance. The trial balanceensures no discrepancy between total debits and the full credits in the financial records.
- Worksheet analysis: This fifth step comprises a worksheet analysis and adjusting entries identification. A worksheet ensures that there is no discrepancy between debits and credits and if there is, adjustment is necessary.
- Adjustments in Journal Entries.Businesses conduct adjusting entries that are results of worksheet corrections from the time passage after every period.
- Financial Statements: Adjusting trial balances succeeded by actual and formal financial statements is next after adjusting entries.
- Closing entries: After closing temporary accounts that include income and expenses, a business transfers the balance or net income to permanent accounts that include all assets, liabilities, and central accounts at the end of an accounting period. The next accounting period would then have a zero balance.
This framework or model follows accounting principles that match.
The confusion between an accounting cycle and a budget cycle
There is confusion between accounting and a budget cycle. Accounting cycles ensure that all financial transactions are correct with no discrepancies, while budget cycles are more on future endeavors. Examples are future performances and transaction plans. Accounting cycles are for external users, while budget cycles are for internal purposes.