What Are the Steps in the Accounting Cycle?

The accounting cycle is continuous with steps reoccurring simultaneously

Businesses must follow accounting rules to keep track of financial performance. The accounting cycle has two distinct phases, the recording phase and the reporting phase. Often adjusting entries must be made due to timing differences. While the two phases are distinct the processes overlap because businesses continue to have transactions even as the accounting department records and analyzes previous transactions.

Recording Phase

The accounting process starts with the recording phase. Information is collected about economic transactions and is converted into accounting friendly forms. Business documents are analyzed in this phase. Transactions are recorded in the general journal. The journal entry process has three steps. First, identify the accounts involved in a transaction or event. Second, determine if each account is increased or decreased. Third, determine the effect on each account. Then transactions are are posted to the general ledger.

Reporting Phase

The Reporting Phase begins with a trial balance of the accounts in the general ledger. In this phase information is organized and summarized into financial statements for decision makers. A trial balance is used to make sure that debits and credits balance. Trial balances list all the accounts and the balances in each account. Then adjusting entries are recorded. The purpose of adjusting entries is to make balance sheet accounts current and to have the correct revenue and expense amounts on the income statement. Next, financial statements are prepared. Nominal accounts are then closed. Finally a post-closing trial balance is prepared.

Common Adjusting Entries

There are many adjustments that must be made during the accounting cycle. Common adjusting entries include unrecorded assets that have been earned, but not yet recorded; unrecorded liabilities that have been incurred and not recorded; prepaid expenses that have been recorded, but not yet incurred; unearned revenues that have been recorded, but not yet earned. Transactions involving estimates also require analysis.

Overlap

The recording phase and the reporting phase of the accounting cycle overlap. These phases overlap due to the fact that business operations do not shut down just to produce financial statements. Recording transactions is ongoing even when transactions of the preceding period are being summarized and reported. Computers and accounting software are useful to deal with the overlap. Computers allow companies to collect information quickly and often automatically organize much of the data into the proper accounting files.

References

• Santa Fe College: Accounting Cycle and Year End
• Austin Community College: Steps to the Accounting Cycle
• Twin Cities University of Minnesota: The Accounting Cycle

Resources

• The Motley Fool: Foolish Fundamentals: GAAP