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Overview of Accounting Cycle
Definition of
Accounting Cycle
What is the Accounting Cycle? The Accounting Cycle is a collective, multi-step process that businesses use to identify, analyze, record, summarize, and report their financial transactions over a specific accounting period (e.g., a month, quarter, or year). It begins with the occurrence of a financial transaction and ends with its inclusion in the financial statements and the preparation of the books for the next period through closing entries. This systematic procedure ensures that financial information is processed consistently and accurately, adhering to accounting principles.
Activities Related to
Accounting Cycle
Here is a list of Accounting Cycle related activities (typically 8 steps):Â
1. Identifying and analyzing transactions from source documents.
2. Recording transactions as journal entries in the journal.
3. Posting journal entries to the General Ledger accounts.
4. Preparing an unadjusted trial balance to check if debits equal credits.
5. Recording adjusting entries for accruals and deferrals.
6. Preparing an adjusted trial balance.
7. Preparing the financial statements (Income Statement, Balance Sheet, Cash Flow Statement).
8. Recording closing entries to zero out temporary accounts (revenue, expenses, dividends) and transferring net income/loss to retained earnings.
Optionally, a post-closing trial balance may be prepared.
Following these bookkeeping steps ensures accurate financial reporting.
The Importance of
Accounting Cycle
For small business owners, understanding and implementing the Accounting Cycle is crucial for maintaining accurate and reliable financial records. It provides a standardized framework that ensures all financial transactions are captured, classified, and summarized correctly. This leads to the production of accurate financial statements, which are vital for assessing business performance, making informed decisions, securing financing, and meeting tax compliance obligations. A consistent accounting cycle helps in identifying errors, preventing fraud, and providing a clear audit trail.
Key Aspects of
Accounting Cycle
Systematic Process
A defined sequence of steps performed during each accounting period to process financial information.
Chronological & Logical Flow
Moves from initial transaction recording in the journal to summarization in the general ledger, and finally to the preparation of financial statements.
Foundation for Financial Reporting
Ensures that financial data is processed consistently and accurately, leading to reliable financial reports used by internal and external stakeholders.
Concepts Related to
Accounting Cycle
The Accounting Cycle encompasses many core accounting and bookkeeping concepts. It starts with analyzing source documents for transactions, then creating Journal Entries using the double-entry bookkeeping system (with Debits and Credits). These are posted to the General Ledger, which feeds into the Trial Balance. Adjusting entries are made before producing the final Financial Statements, such as the Income Statement and Balance Sheet.
Accounting Cycle
in Action:
The Adventures of Coco and Cami
Follow Coco and Cami as they learn that just writing down sales isn't enough – there's a whole process to make sure their business finances are recorded properly from start to finish each month.
Watch as Professor A explains the Accounting Cycle, taking Coco and Cami through the steps from recording initial transactions to creating their financial reports.