The Accounting Cycle

Any time a business purchases an item or receives money from another business, a transaction takes place. Over time, the invoices and receipts can build up and become rather consuming. In order to keep all of the finances in order, accountants use a process to record all of this information. This process is known as the accounting cycle. As with most cycles, the accounting cycle is continuous. This means that when an accountant reaches the last step, the cycle starts all over. There are a total of nine steps in the accounting cycle, along with two steps that are optional for businesses. This paper will walk you through each step in the accounting process to give you a better understanding of how it is done.
The first step in the accounting cycle is to analyze the business transactions. There are many transactions that take place in a business. While many of the transactions are recorded, some will not be. If a transaction does not deal with the business directly, it is not recorded. The accountant will look at all of the source documents to decide which ones should be recorded and which ones are left out. These documents include receipts, bank statements, invoices, and checks.
Once the transactions have been analyzed, the accountant can then journalize the transactions. The double-entry method of accounting is used. This means that for every debit to one account, there is also a credit to another. In the accounting world, a journal is a complete and chronological recording of every transaction. This journal is ongoing throughout the whole accounting period.
Now that the transactions have been journalized, the next step is to post these transactions to the ledger accounts. Since you already know which accounts will be debited ...

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...ersing entries. Sometimes, a company will decide to cancel the adjusting entry made in the previous period. This reversing entry is done in the beginning of the accounting period and exactly the opposite of the adjusting entry. The reversal does not affect the amounts that were reported on the previous financial statements. This step is not very common but can help to reduce errors that may arise and can also help to save time.
The first three steps in the cycle will be used on a daily basis in the accounting world. Steps four through seven will be used periodically. Typically, these steps are completed on a monthly, quarterly, or annually basis. The last two steps will only take place at the end of the accounting period, which occurs annually. Hopefully the accounting cycle can be understood a little easier now that all of the steps have been explained in detail.