Accounting Cycle: multi-step process
The Accounting Cycle Process is a series of steps followed by businesses to record and maintain their financial transactions accurately and systematically. The cycle starts at the beginning of an accounting period and continues until the end of the period, after which it starts again.
The accounting cycle is the process of calculating, recording, and classifying and analysing financial transactions over an accounting period, which may be monthly, quarterly, or annually, depending on the size and needs of the business. The time it takes to complete the accounting cycle depends on several factors: the volume of transactions, the automated processes and system (or lack thereof), and the type of financial close (hard vs. soft close).
A hard close is a comprehensive approach to closing the accounts, ensuring the accuracy of all information and marking the end of financial activity for the reporting period. A soft close occurs when companies want to close their books quickly but not permanently, for example for internal management reporting purposes. It is generally understood that the results may be substantially inaccurate, in contrast to a so-called hard close, where companies take a more rigorous approach to ensure the accuracy of reporting and final financial statements and to close the accounting period. Ideally, a business would engage in continuous closing, spreading the workload over the entire accounting period rather than waiting for it to end. This results in a faster close, whether the goal is a weekly soft close or a hard close at the end of the quarter.
The accounting process is a fairly common procedure for all businesses to help detect transaction errors. Errors can be detected quickly using the NetSuite cloud-based accounting system.
The steps involved in the accounting cycle process are as follows:
Identifying and Analysing Transactions: The first step in the accounting cycle is to identify and analyse all transactions that occurred for the company during the period. This includes expenses, debt payments, sales revenue and receivables from customers. At this stage, it is important to identify any transactions that affect the company's financial position, although this should be a regular task for the company's accounting team to ensure a faster close.
Recording Transactions: This step involves identifying and recording financial transactions that have taken place in the business. This is done through journal entries in the general ledger, which is a record of all transactions.
Posting to Ledger Accounts: In this step, the transactions recorded in the general journal are transferred to the appropriate ledger accounts. These accounts include the balance sheet accounts (assets, liabilities, and equity) and the income statement accounts (revenue and expenses).
Unadjusted Trial Balance: In this step, the balances in all ledger accounts are tallied to ensure that the total debits equal the total credits. If the trial balance does not balance, it means there is an error in the ledger accounts, and it must be corrected.
Adjusting Entries: If the trial balance is not balanced, this step involves correcting errors in the ledger accounts. This may include recording depreciation, accruing expenses, or adjusting accounts receivable.
Adjusted Trial Balance: After the adjusting entries have been made, the trial balance is tallied again to ensure that the debits equal the credits.
Financial Statement Preparation: In this step, the financial statements, including the balance sheet, income statement, and cash flow statement, are prepared based on the information in the ledger accounts.
Closing Entries: Closing is the last step in the accounting cycle. This locks the accounting period and finalises the books. This step involves transferring the temporary accounts, such as revenue and expense accounts, to the permanent accounts, such as retained earnings. This ensures that the ledger accounts are ready for the next accounting period. However, zeroing of accounts does not apply in case of soft closure.
The accounting cycle process is a critical component of any business as it helps to ensure that financial transactions are recorded accurately and that financial statements are prepared correctly. This process provides valuable information to stakeholders, such as investors and lenders, to make informed decisions about the financial health of the business.
As a business grows, the number of daily financial transactions increases – as does the potential for error when manually recording each transaction. NetSuite cloud accounting software automates and simplifies every step of the accounting cycle, from creating journal entries to creating financial statements that reflect a company's profitability, net worth and solvency. The software manages payables and receivables, provides real-time dashboard and reporting capabilities, prepares financial statements that comply with accounting regulations, and speeds up the process of closing financial periods. Automation saves accounting teams and accountants time, reduces business costs and ensures more accurate financial reporting.