The accounting cycle is an essential element of accounting that helps ensure all financial transactions are recorded accurately and efficiently. It is a gradual process that starts with the initial financial transaction and simplifies the entire financial process. Organizing all financial transactions is the first step in the accounting cycle. This includes coding accounts payable into the correct account, writing an invoice, reviewing receipts, creating an expense report, and paying employees.
Once this initial review has been completed and the transactions have been correctly encoded, you can move on to the next step in the accounting cycle. Using the accounting cycle also helps ensure that both you and your accountant have a complete and accurate view of the financial health of your company. It is a structured 10-step process that begins with a transaction and ends with financial statements that allow the company to plan expenses, guarantee loans or even sell the company. The next step is to record your financial transactions as entries in your accounting software or general ledger.
The use of the accounting cycle provides companies with the information needed to make critical financial decisions. Double-entry accounting is ideal for companies that create all major accounting reports, including the balance sheet, cash flow statement, and income statement. An accounting cycle also keeps companies in compliance with accounting standards and tax laws, ensuring accuracy and uniformity. The missing transaction settings take into account any financial transactions that you forgot or skipped in the first step.
Companies also modify the steps of the accounting cycle to adapt them to their business models and accounting procedures. Because debits and credits should always be balanced, you should prepare a test closing balance once you've closed your temporary accounts. The unadjusted test balance facilitates the next steps of the accounting process and provides balances for all accounts that may require adjustment in the next step. Even small businesses would benefit from using the accounting cycle in their businesses, and if you use accrual accounting, it's absolutely essential.