How to Complete the Accounting Cycle
Accounting cycles occur on an annual basis and a quarterly or monthly basis. The term "cycle" simply means a period of time over which financial data is gathered and reported. The lengths of the cycles are determined by common practice. Before accounting data from the annual, quarterly or monthly cycle can be reported to company owners, shareholders and executives, certain steps need to be followed to ensure that all data is recorded and accurate. While accounting software and systems vary somewhat from one company to the next, the basic concepts and processes are basically the same. Closing accounting cycles is also essentially the same for non-profit organizations as for for-profit companies. Read on to learn how to complete the accounting cycle.
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Instructions
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Completing the Quarterly or Monthly Accounting Cycle
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At the end of the accounting cycle, make certain that all data has been posted to your various accounting modules, including accounts payable and accounts receivable.
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Gather all schedules of depreciation or other amortized expenses--workers compensation insurance and liability insurance, for instance. Gather all documentation pertaining to any long term liabilities or receivables with accrued interest. Prepare the appropriate journal entries for accumulated depreciation, other amortized expenses and any accrued interest. Post these to your general journal.
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Look at the previous cycle journal entries to see if there are any entries that need to be reversed. Automatically reversing entries only need to be verified as correct. Verify the transaction dates as well as the amounts. Some entries may need to be reversed manually.
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Make certain that the final payroll for the month or quarter has been correctly processed, giving special attention to payroll taxes and when they will be deducted from your bank account. If your payroll taxes will not be deducted until the following month, you may need to make a reversible general journal entry on your books to record the liability in the current month.
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Gather all bank statements and reconcile all bank accounts.
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Prepare a trial balance report listing all the accounts on your books and the debits and credits to each account. Examine each balance, looking carefully for any unusual numbers recorded to your accounts. If you see any, they merit thorough investigation. Make correcting entries where required. Be sure to document correcting entries thoroughly.
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If you need approval before proceeding with final completion of the accounting cycle, prepare a preliminary balance sheet and income statement and submit these along with any other required documentation to your supervisor.
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After receiving approval to go ahead with completing the monthly or quarterly accounting cycle, back up all your computerized accounting data and store the backed up data in a secure location. According to your accounting software instructions, execute the completion procedures for the accounting cycle so that your system is ready to receive data for the next cycle.
Completing the Annual Accounting Cycle
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When completing your annual accounting cycle you will likely need to do some additional software processes to reset your expense and revenue accounts, and to prepare your accounts to receive data for the new year.
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Review your vendor or sub-contractor accounts. Prepare any required tax forms for vendors or sub-contractors that require them. Submit copies of the tax forms to the proper government agency.
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Finally, be prepared for your annual independent CPA audit or review and tax return preparation. Now is the time to thoroughly look over your accounts again and prepare any additional schedules, tax documents and reports you know your CPA will require. Correct account balances and a properly completed accounting cycle will make the ordeal much less stressful and also help prevent costly tax filing errors.
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Tips & Warnings
Most modern accounting software allows you to enter data for the next cycle before you have completed the previous cycle. This makes it easier to continue with business while you complete your prior cycle carefully and accurately.
Always document your journal entries thoroughly. You should always assume that you will not be present to explain your journal entries; your documentation should do the explaining for you.
Never make adjustments to your accounts for unexplained discrepancies. Discrepancies or unexplained transactions may indicate errors that materially affect your financial statements.
Do not make adjustments to your books to eliminate unexplained discrepancies you discover while reconciling your bank accounts, even if the amount is very small; even small discrepancies are sometimes an indicator of larger bookkeeping or bank errors that should be corrected before you complete your accounting cycle.
