What Are Five Steps in the Accounting Cycle?
Maintaining the financial documents necessary to properly track the performance of a business centers around the ledger. Once a physical book formatted for a system called double entry accounting, the ledger now has digital representations in accounting software. General accounting procedures are a series of steps that guide the accountant or bookkeeper with a standard of conduct to create and maintain a detailed and accurate ledger, whether on paper or in a computer program.
Central to the maintenance of the ledger is a process called the accounting cycle. It is a systematic series of steps that aids the collection, processing and reporting of financial data. While there are many versions of the accounting cycle that include greater detail, the general process includes five major steps essential to the integrity of a company’s accounting process.
The cyclical nature of the accounting process starts with transactions, and these can be anything that affects the financial position of your company. As a minimum, any company should collect:
- Cash sales
- External transactions such as exchanges with other companies
- Internal transactions such as interdepartmental exchanges
- Anything else that may be relevant financially and which can be measured
Recording transactions is a procedure called journalizing. This is a chronological list of the transactions identified in the analysis stage. A double-entry accounting system records each transaction as a four-part journal entry. These parts are:
- The account and amount of debit
- The account and amount of credit
- The transaction date
- The transaction description
Every transaction is expressed as both a credit and debit, the double entry that gives the system its name and builds in a way to identify many data entry errors. You may not be aware of the double entry process if you are using accounting software, since many programs take care of these details automatically.
In the days of pen and paper accounting systems, the journal served as the working copy of the ledger. Typically now, posting is an automated function at the end of the day or some other financial period, carried out by an accounting software application. In the hard copy world, several journals could have their contents transferred to the general ledger.
Because double entry accounting has a debit and credit made for every transaction, these amounts should always match. When they don’t, it indicates a problem which then needs tracking down. These comparisons are called trial balances. An unadjusted trial balance may come before posting, before late arriving transactions or error corrections are made. Adjusted trial balances occur after posting and reflect all financial activities occurring within the posting period.
Once the adjusted trial balance is completed, financial reports for the posting period can be generated. These vary, depending on the period and the reports required. Representing the completion of an accounting cycle, the ledger accounts are reset to zero in preparation for the next cycle, starting again with transaction analysis.
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