Purpose of Accounting Cycles

An accounting cycle is a series of steps that happen over a predetermined period of time. Each period begins and ends with the same steps in the process. An accounting cycle usually happens on a monthly basis. Every month the accounts are closed and the results, for that cycle, are analyzed. Accounting cycles are necessary to measure a company's growth or decline over designated periods of time. They establish check points to measure the financial success of the business or organization. These results are analyzed monthly, quarterly and annually.

The Accounting Cycle

There are nine primary steps in an accounting cycle. These steps are: collect data from transactions, journalize transactions, post to the general ledger, prepare an adjusted trial balance, prepare and post adjustments, prepare a second trial balance, prepare financial statements, close the accounts and prepare a final trial balance. These steps repeat every month. Without an accounting cycle bookkeeping would be a hectic and unreliable task. The accounting cycle always starts and ends with the same tasks.

Comparing Data

The end of each accounting cycle allows a business to organize its data into different types of financial and managerial reports. The information can be compared to the same period in a different year or the period immediately preceding it. Quarterly and annual data can be compared similarly. This also makes it possible to compare your company's financial results with a competitor's. Trend data is generated from this analysis. A picture of a company's true growth and retraction periods will emerge. This is useful for future planning.

Financial Statements

Financial statements are the focus of an accounting cycle. Cash flow is the life's blood of most operations. The cash flow statements can be compared in the same manner as the other statements. The ebbs and flows of cash can be compared to previous years to determine if a pattern appears. This is helpful when planning your year's cash needs. The finance managers will know when to borrow money and when to pay off short-term lines of credit. Income statements are looked at in much the same way. They will show a company's profitability over certain periods of time. This data together with purchasing and raw material data can establish trends in the rise and fall of profits as tied to the cost of goods sold. The uses are endless.

Tax Compliance

The accounting cycle organizes all the company's financial information for tax filing purposes. Well-organized companies have little to fear from an Internal Revenue Service audit if their books are clean and well organized. The close adherence to accounting principles and polices combined with a tightly managed accounting cycle will make the tax season a simple process

Public Companies

Public companies are under the microscope of the investing public and U.S. regulators. The accounting cycle provides evidence of the company's health and profitability on a regularly scheduled program. The reporting requirements of public companies make it necessary to keep monthly records and provide the investing community with a frequent glimpse into their financial management. Public companies report their quarterly and annual earning results.

References

• The Accounting Process