What Exactly is the Accounting Cycle?
Accounting is a lot easier when you have a thorough process in place. However, unlike other business tasks, such as creating a website or developing products, accounting isn’t something you can just ‘set and forget’. Companies need an ongoing cycle of tasks to keep everything running smoothly.
In this post, we explain the accounting cycle in 4 simple steps.
The accounting cycle begins with financial transactions. This could be a client paying an invoice, your company paying its suppliers or just outgoing expenses for new equipment. Whatever money your business pays or receives needs to be recorded, as it contributes to the overall financial position.
The next step is to record transactions in the company’s journal, including the date, description and value. A company journal is simply the first point of entry for any transactions. All entries should be made in chronological order, so they can be easily referred back to and reviewed.
These records will then be transferred to in the general ledger, where they are organised into accounts and classified by transaction type. A general ledger acts as a collection of all financial transactions for a company over time.
At the end of your accounting period – whether that’s monthly, quarterly or annually – accounts need to be balanced. All debits and credits have to be added together, to create a total balance for each account. If these numbers don’t balance, it’s up to your bookkeeper to identify any errors and make corrective adjustments.
Finally, balances are used to create financial statements for the accounting period. This includes the balance sheet, cash flow statement and income statement, which are used to close the accounting period and complete the cycle. Revenue and expense accounts are closed, while the balance sheet rolls onto the next accounting period.
How software makes things easier
While the accounting cycle has traditionally been a step-by-step process, modern businesses benefit from the advent of innovative accounting software. This automates a lot of the accounting cycle, making it easier to record transactions, transfer information from place to place and create financial statements at the end of each accounting period.
Software also makes it easier to retrieve different transactions or statements – not to mention the saving on space by going paper-free.
Need some help?
While accounting software makes the accounting cycle a lot less painful, businesses still need the right expertise on board to keep everything running smoothly. UWM Accountants is a team of expert cloud accountants in Leeds that can provide exactly that.
We use state-of-the-art Xero software to give businesses complete control over their finances. You get access to financial data on the go, innovative collaboration tools and in-house training for all your staff – not to mention complete peace of mind.
Want to find out more? Get in touch with our team today to discuss how we can help you.