What is the accounting cycle?

What is the accounting cycle?

Definition: The accounting cycle is the collective process of recording and processing the accounting events of a firm or industry. The series of steps begin when a transaction occurs and end with its addition in the financial statements is called accounting cycle. Additional accounting records used during the accounting cycle include the general ledger trial balance sheet.

Explanation:

The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial statements.

 Accounting Cycle steps

A firm begins its accounting cycle with the recording of transactions using journal entries. The entries are based on the receipt of an invoice, recognition of a sale or completion of other economic events. After the company posts journal entries to individual general ledger accounts, an unadjusted trail balance is prepared. The trial balance ensures the total debits equals the total credits in the financial records. At the end of the period, adjusting entries are made. These are the result of corrections that need to be made as well as results from the passage of time. For example, an adjusting entry may accrue interest revenue that has been earned based on the passage of time.

Upon the posting of adjusting entries, a company prepares an adjusted trail balance followed by the financial statements. An entity closes temporary accounts -- revenues and expenses -- at the end of the period using closing entries. These closing entries transfer net income into retained earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits match.

Timing of Accounting Cycle

The accounting cycle is started and completed within an accounting period. The period is a predetermined range of time including each month, each quarter and each fiscal year. The transactions are added during the accounting cycle, while the remainder of the accounting cycle is typically completed towards the end of the accounting period. Public entities are required to submit financial statements by certain dates. Therefore, their accounting cycle revolves around reporting requirement dates.