When getting accounting services, it’s crucial to hire professionals who know accounting and bookkeeping like the back of their hands. Out of all the concepts crucial for the financial success of every business, every bookkeeper should know the eight-step accounting cycle.
The eight-step accounting cycle breaks down the whole process of a bookkeeper’s responsibilities, and many of these steps have automation integrated through accounting software and programs. However, knowing these steps can also benefit small business owners like you, even with minimal technical support.
If you’re curious about the responsibilities of a credible bookkeeper, keep reading. In this article, we’ll take a deep dive into the entire accounting cycle — from the first down to the last step.
What is the Accounting Cycle?
The accounting cycle is an eight-step process that helps bookkeepers complete a company’s bookkeeping tasks. This cycle provides bookkeepers with a guide for recording, analyzing, and reporting a business’s financial activities.
The Eight-Step Accounting Cycle
Step #1: Identify Business Transactions
In the first step of the accounting cycle, bookkeepers are required to identify all the business transactions and should be properly recorded in the company’s books. Recordkeeping is crucial because this allows bookkeepers to get an overview of the company’s financial health and understand the business’s cash flow.
Step #2: Record All Transactions in a Journal
As mentioned earlier, recordkeeping is crucial when it comes to bookkeeping. With that said, bookkeepers need to create journal entries for each transaction so that transaction and revenues can be matched, providing a clearer picture of the company’s finances.
Some companies use point-of-sale technology to help merge steps one and two to help track their expenses and cash flow.
Step #3: Posting in the General Ledger
Once a transaction has been recorded, it will then be posted to an account in the general ledger. This ledger will provide a breakdown of all the accounting activities by account, providing bookkeepers with an overview of the company’s financial position and the statuses of each account.
Step #4: Unadjusted Trial Balance
After every accounting period, a trial balance is calculated, which tells the company its unadjusted balances for each account. The results here will be carried over to the next step.
Step #5: Analyzing a Worksheet
After determining the unadjusted balance for each account, the bookkeeper analyzes the worksheet, and they’ll identify the adjusting entries. This ensures that debits and credits are equal, and if there are discrepancies, adjustments will be made.
Besides identifying errors, adjusting entries is all required for revenue and expense matching.
Step #6: Adjusting Journal Entries
Once all errors and adjustments are determined, the bookkeeper will then begin making adjustments in the journal entries.
Step #7: Generate Financial Reports
After making all the adjustments, your bookkeeper can now generate financial statements. These statements include the income statement, balance sheet, and your company’s cash flow statement.
Step #8: Closing the Books
The final step of the eight-step cycle ends by closing the books at the end of the specified closing date. The closing statement will serve as a report for analysis of the company’s performance over a certain period.
The Bottom Line: Every Credible Bookkeeper Will Know the Eight-Step Accounting Cycle, Giving You a Smooth and Effective Accounting Process
After closing the books, the accounting cycle will start again from the first step with a new reporting period. Ideally, you want to work with a credible bookkeeper to ensure that all finances are in check and that every transaction is recorded to avoid any penalties and discrepancies in your accounts.
Looking For a Bookkeeper?
If you’re looking for bookkeepers and accountants in Rochester, we’re here to help.
Bianchi & Associates has been providing exceptional accounting services since 1945. We are the leading financial partners in Rochester, NY, offering accounting, tax, bookkeeping, and financial planning needs.
Learn more about how we can help you today!