Accounting Cycle Explained 8-Step Process Tipalti
Accounting Cycle Explained 8-Step Process Tipalti
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Accounting Cycle:
Definition and
Process
What is the
Accounting Cycle?
The accounting cycle is a standard, 8-
step process that tracks, records, and
analyzes all financial activity and
transactions within a business. It starts
when a transaction is made and ends
when a financial statement is issued
and the books are closed.
Accounting Cycle
Steps
1. Identifying and
recording
transactions.
The first step in the accounting
cycle is to identify and record
transactions through subsidiary
ledgers (journals). When financial
activities or business events
occur, transactions are recorded
in the books and included in the
financial statements. Types of
accounting periods for recording
transactions include monthly
and annually.
As an accounting period
example, businesses use a
calendar year with an accounting
period start date of January 1
and an accounting period end of
December 31. Or they may elect
with the IRS to use a different
month end as a fiscal year for the
end of the annual accounting
period, also known as the fiscal
accounting period. Financial
statements may present
summarized quarterly and year-
to-date information.
2. Preparing journal
entries
To record non-routine
accounting transactions,
prepare journal entries for a
required transaction not
recorded through a subsidiary
ledger like accounts receivable.
You can also use journal entries
to make corrections. Use
automatic journal entries when
possible.
4. Generating
unadjusted trial
balance report
When you generate an
unadjusted trial balance report
from the financial records, you’re
checking for errors to ensure
that all transactions are recorded
in the general ledger. The trial
balance format is that every
general ledger account balance
or total is listed without the
details. With a double-entry
bookkeeping system, total
debits should equal total credits.
5. Preparing
worksheets
Use worksheets to analyze,
reconcile, and identify adjusting
entries and consolidation
entries. When possible, use the
capabilities provided by your
accounting system.
6. Preparing adjusting
entries
Make adjusting journal entries to
correct errors and reflect any
differences noted in reconciling
balance sheet accounts. Journal
entries require review and
approval.
7. Generating "nancial
statements
Choose your customized
financial reports to generate
financial statements for the
accounting period, whether
monthly or year-end. Your
financial statements can be set
up to show quarterly totals in
many accounting systems. The
SEC requires quarterly financial
reporting for public companies.
Financial statements have a
management review and
approval process before they are
issued.
• Balance sheet
• Statement of owner’s equity
• Income statement
• Statement of cash flows
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Accounting Cycle
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Accounting Cycle vs
Operating Cycle
The accounting cycle vs operating
cycle are entirely different financial
terms. The accounting cycle consists of
the steps from recording business
transactions to generating financial
statements for an accounting period.
The operating cycle is a measure of
time between purchasing inventory,
selling the inventory as a product, and
collecting cash from the sales
transaction.
Why is the
Accounting Cycle
Important?
The accounting cycle is used by
businesses and organizations to record
transactions and prepare financial
statements. The standardized
accounting cycle process (supported
by accounting systems) is important
because it helps business owners,
small businesses, and established
companies close their books for the
accounting period. It also helps to
generate financial information to
perform financial statement analysis
and manage the business.
Optimizing the
Accounting Cycle
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