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Accounting Cycle: 10 Steps of the Accounting Process

accounting cycle 5 steps

Cynthia must first collect and analyze all of the financial transactions undertaken by her company. She analyzes each transaction in order to determine how it affects the financial health of the company. For example, Cynthia https://simple-accounting.org/bookkeeping-services-examples/ will review all the sales conducted each day and all payments made to suppliers. In this step, every transaction will be looked at and analyzed to determine how it affects the financial position or the accounting equation.

Simply put, the credit is where your money is coming from, and the debit is what it’s going towards. If you buy some new business cards, for example, your marketing expense account is debited, and your bank Retail vs Cost Method of Accounting account is credited. Or, if you receive a payment, your sales revenue is credited while your bank account is debited. The new cycle starts as you begin to organize all of your financial transactions.

Closing Entries

A single-entry system is comparable to managing a cheque book as it only reports balances as positive and negative and does not require multiple entries. An accounting cycle starts with the recording of individual transactions and ends with the preparation of financial statements and closing entries. This is the final stage of the accounting cycle, locking in the accounting period. Closing the books resets temporary accounts on the income statement, such as revenue and expenses, to zero balances, meaning that they don’t carry into the next accounting period. Net income or loss from the income statement is transferred to the retained earnings account, which is a permanent account on the balance sheet that carries over to the next period.

Publishing may not happen, however, until the firm allows time for several kinds of final adjustments and auditing. Note that the time between closing the reporting period and the date the firm authorizes statements for publishing—the fifth step in the accounting cycle—is called the reporting period. Because debits and credits must always balance, you must prepare a closing trial balance once you’ve closed out the temporary accounts. Add up the totals for both the debit and credit columns of the general ledger to ensure they balance.

Generating financial statements

Companies need to make sure their books are balanced and that they reflect all financial activity that occurred during an accounting period before the books are closed. When handled manually, each step of the accounting cycle can be time-consuming, tedious and prone to error. Automating the process increases efficiency and reduces potential risks of misstatement. The accounting cycle is a comprehensive accounting process that begins and ends in an accounting period. It involves eight steps that ensure the proper recording and reporting of financial transactions. Once a company’s books are closed and the accounting cycle for a period ends, it begins anew with the next accounting period and financial transactions.

accounting cycle 5 steps

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