What Is the Accounting Cycle?
The accounting cycle’s primary goal is, once complete, a business or company will be able to create accurate financial statements. Certified Public Accountants (CPA) also recommend following the accounting cycle appropriately in order to help determine a company’s financial status, especially when preparing corporate tax returns.
The accounting process has very predefined steps, ten to be exact and each step should be followed in order to ensure the accounting cycle flowchart produces accurate information. Often, the accounting cycle is referred to as the bookkeeping cycle.
Breaking Down the Accounting Cycle Flowchart
First, download and print the Sample Accounting Cycle Flowchart found in our Media Gallery to obtain a better understanding of the accounting cycle. Because each of the ten steps in the accounting cycle serves a specific purpose to get from point A to point B (or accurate financial records), it’s important to understand the purpose of each cycle.
- Identify the Transaction – This is determining what occurred and defining it as a transaction.
- Analyze – Where and how will you post the defined transaction? Keep in mind you may have to post the journal entry as a single or a double entry.
- Journal Entry – Make the appropriate journal entry(s).
- Post to Ledger – Once you make the appropriate journal entry, it must be posted to the accurate accounts or sub-accounts within the general ledger.
- Trial Balance – Check to ensure the debits and credits in the trial balance are equal.
- Adjusting Journal Entries – Does anything need to be adjusted after checking the trial balance? If so, make appropriate adjusting journal entries and post to correct general ledger accounts.
- Adjusted Trial Balance – After adjusting journal entries are made, the trial balance should be re-examined.
- Financials – If your trial balance is accurate and in balance, financial statements such as the income statement and balance sheet can be produced and printed.
- Closing Entries – This is typically where revenues or expenses are re-checked, verified, and re-posted if needed.
- Closing Trial Balance – After all closing entries and adjustments are made, a final trial balance is created, printed, and the accounting cycle can be closed for the determined period.
The Importance of the Accounting Cycle Flowchart
Unorganized or inaccurate accounting makes it difficult for any business to understand where they are financially, especially when it comes to printing and trusting accounting reports. Were all the journal entries made? Were the correct accounts affected? Have the balance sheet accounts been reconciled?
If the accounting cycle flowchart is not followed, erroneous data could appear in financial statements, the trial balance, and the balance sheet. Accurate steps in the bookkeeping cycle will ensure your income and expense statement is correct to determine your net profit (or loss).
These days, only in very small companies is the accounting cycle performed by hand and must be done with complete accuracy. If you find your accounting off base, accounting software programs can help you determine what isn’t in balance, where mistakes lie, and offer reports and insights on inaccurate information.
The accounting cycle flowchart is defined as a cycle because the financial accounting process must flow in a certain way in order for your financial records to be accurate. If you want to have a better understanding of the accounting world, try enrolling in some online accounting classes or invest in accounting software such as Quickbooks to aid you in ensuring your financial records are accurate.