Accounting Cycle — Complete Guide
The accounting cycle is a systematic process for recording and reporting an entity’s financial transactions over an accounting period. It ensures accuracy, consistency, and that financial statements fairly present a business’s financial position. Modern accounting software automates many steps, reducing manual errors.
Key takeaways
- The accounting cycle typically comprises eight steps, from identifying transactions to closing the books.
- It ensures accurate recording and preparation of financial statements.
- The cycle usually operates within an accounting period (commonly an annual period) and may be tied to regulatory reporting deadlines.
- Small businesses or sole proprietors may use a simplified process, while most organizations follow the full cycle.
The eight steps of the accounting cycle
-
Identify transactions
Recognize events that have financial impact (sales, purchases, payments, receipts). -
Record journal entries
Enter transactions chronologically in the general journal using double-entry bookkeeping. -
Post to the general ledger
Transfer journal entries to ledger accounts to accumulate activity by account. -
Prepare an unadjusted trial balance
Summarize ledger balances to confirm total debits equal total credits. -
Create a worksheet (optional)
Analyze balances to identify required adjusting entries and correct discrepancies. -
Make adjusting journal entries
Record accruals, deferrals, depreciation, and other period-end adjustments so revenues and expenses are recognized in the correct period. -
Prepare financial statements
Use the adjusted trial balance to produce the income statement, balance sheet, statement of retained earnings (or equity), and cash flow statement. -
Close the books
Close temporary accounts (revenues, expenses, dividends) to retained earnings, then prepare a post-closing trial balance. The cycle then restarts for the next period.
When to run the accounting cycle
The cycle is performed within each accounting period. Common cadences:
* Monthly or quarterly for internal management and monitoring.
* Annually for statutory financial statements and tax reporting.
Public companies and regulated entities often align cycles with reporting deadlines and disclosure requirements.
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Accounting cycle vs. budget cycle
- Accounting cycle: Focuses on historical events—recording what already occurred and producing financial statements for external and internal users.
- Budget cycle: Forward-looking—planning expected revenues, expenses, and resource allocation for future periods. Primarily an internal management tool.
Why the accounting cycle matters
- Ensures financial records are complete and accurate.
- Produces reliable financial statements for stakeholders and regulatory compliance.
- Supports better decision-making through clear financial information.
- Provides an audit trail and internal control structure.
Benefits
- Consistent method for recording transactions.
- Reduced risk of missed or duplicated entries.
- Easier preparation of reports, tax filings, and audits.
- Automation through accounting software increases efficiency and reduces errors.
Who performs the accounting cycle
- In larger organizations, accounting staff or finance departments handle the cycle.
- Small businesses or sole proprietors may perform the tasks themselves or outsource to an accountant or firm.
- Software vendors and cloud-based platforms frequently automate many routine steps.
Bottom line
The accounting cycle is a fundamental framework that turns individual transactions into meaningful financial statements. Following the cycle—whether manually or via software—helps businesses maintain accurate records, meet reporting obligations, and make informed financial decisions.