How to Identify the Steps in the Accounting Cycle

The accounting cycle, also known as the "bookkeeping cycle," accounts for the expenses and profits of a business. It starts with a transaction and ends when the financial books are closed at the end of the month and at the end of the fiscal year. Any activity involved with reporting financial transactions can be identified as steps in the accounting cycle. Most companies use software to manage the accounting cycle; however, it's helpful to understand the steps when reconciling account discrepancies or investigating fraud.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Accounting reference book

How to Identify the Steps in the Accounting Cycle

1. Identify the transaction and assign it to an accounting category. This may involve reviewing paperwork, such as receipts, invoices and purchase orders. The four major categories of accounting transactions are revenue, expenses, assets and liabilities.

2. Determine if the transaction will impact the ledger as a cost or a profit.

3. Record the transaction by making chronological journal entries. There are usually separate journals for revenue, expenses, assets and liabilities.

4. Post journal entries to the ledger using the appropriate ledger account. The goal of the ledger is to analyze the financial interactions and relationships between all the journal entries to give a sum total of a business's financial situation. Ledger accounts use standardized numeric codes that classify revenue, expenses, assets and liabilities. The ledger is a double-entry system, using credits and debits, and it generates the data needed for the balance sheet.

5. Run a trial balance on the ledger to ensure total debits equal total credits. If it doesn't add up, investigate to reconcile any discrepancies.

6. Make adjustments for accrued or deferred items in the ledger.

7. Calculate a trial balance that includes the adjustments made and investigate any discrepancies.

8. Prepare financial statements, which are the official financial documents of a company. There are four financial statements commonly prepared in business: balance sheet, income statement, retained earnings statement and statement of cash flow.

9. Make closing entries to finalize the financial information for the time period being reported. At year-end, closing entries zero out the ledger in preparation for a new business year. During the year, closing entries may be temporary adjustments to balance the books pending receipt of receivables or other monies.

10. Complete a final trial balance.

Tips & Warnings

• Doing trial balances at regular intervals makes discrepancy reconciliation easier, as there are fewer financial transactions to review. When trying to resolve discrepancies, always check to be sure debits are debits and credits are credits. A common error is to list one or the other in the wrong column. Don't wait until year-end to review accounts for errors and omissions. Unlike the monthly accounting cycle, year-end closing can't be amended, particularly for public companies.

Resources

• QuickMBA: Accounting Cycle Summary