The 8 Important Steps in the Accounting Cycle

The eight-step accounting cycle is important to be aware of for all types of bookkeepers. It breaks down
the entire process

s of a bookkeeper’s responsibilities into eight basic steps. Many of these steps are often automated
through accounting software and technology programs. However, knowing and using the steps manually
can be essential for small business accountants working on the books with minimal technical support.

What Is the Accounting Cycle?

The accounting cycle is a basic, eight-step process for completing a company’s bookkeeping tasks. It
provides a clear guide for the recording, analysis, and final reporting of a business’s financial activities.

S ororting period. Thus, staying organized throughout the process’s timeframe can be a key element that
helps to maintain overall efficiency. Accounting cycle periods will vary by reporting needs. Most
companies seek to analyze their performance on a monthly basis, though some may focus more heavily
on quarterly or annual results.

Regardless, most bookkeepers will have an awareness of the company’s financial position from day-to-
day. Overall, determining the amount of time for each accounting cycle is important because it sets
specific dates for opening and closing. Once an accounting cycle closes, a new cycle begins, restarting
the eight-step accounting process all over again.

KEY TAKEAWAYS

The accounting cycle is a process designed to make financial accounting of business activities easier for
business owners.

There are usually eight steps to follow in an accounting cycle.

The closing of the accounting cycle provides business owners with comprehensive financial performance
reporting that is used to analyze the business.

Understanding the 8-Step Accounting Cycle

The eight-step accounting cycle starts with recording every company transaction individually and ends
with a comprehensive report of the company’s activities for the designated cycle timeframe. Many
companies use accounting software to automate the accounting cycle. This allows accountants to
program cycle dates and receive automated reports.
Depending on each company’s system, more or less technical automation may be utilized. Typically,
bookkeeping will involve some technical support, but a bookkeeper may be required to intervene in the
accounting cycle at various points.

Every individual company will usually need to modify the eight-step accounting cycle in certain ways in
order to fit with their company’s business model and accounting procedures. Modifications for accrual
accounting versus cash accounting are usually one major concern.

Companies may also choose between single-entry accounting vs. double-entry accounting. Double-entry
accounting is required for companies building out all three major financial statements, the income
statement, balance sheet, and cash flow statement.

The 8 Steps of the Accounting Cycle

The eight steps to the accounting cycle include the following:

Step 1: Identify Transactions

The first step in the accounting cycle is identifying transactions. Companies will have many transactions
throughout the accounting cycle. Each one needs to be properly recorded on the company’s books.

Recordkeeping is essential for recording all types of transactions. Many companies will use point of sale
technology linked with their books to record sales transactions. Beyond sales, there are also expenses
that can come in many varieties.

Step 2: Record Transactions in a Journal

The second step in the cycle is the creation of journal entries for each transaction. Point of sale
technology can help to combine Steps 1 and 2, but companies must also track their expenses. The choice
between accrual and cash accounting will dictate when transactions are officially recorded. Keep in
mind, accrual accounting requires the matching of revenues with expenses so both must be booked at
the time of sale.

Cash accounting requires transactions to be recorded when cash is either received or paid. Double-entry
bookkeeping calls for recording two entries with each transaction in order to manage a thoroughly
developed balance sheet along with an income statement and cash flow statement.
With double-entry accounting, each transaction has a debit and a credit equal to each other. Single-
entry accounting is comparable to managing a checkbook. It gives a report of balances but does not
require multiple entries.

Step 3: Posting

Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The
general ledger provides a breakdown of all accounting activities by account. This allows a bookkeeper to
monitor financial positions and statuses by account. One of the most commonly referenced accounts in
the general ledger is the cash account which details how much cash is available.

Step 4: Unadjusted Trial Balance

At the end of the accounting period, a trial balance is calculated as the fourth step in the accounting
cycle. A trial balance tells the company its unadjusted balances in each account. The unadjusted trial
balance is then carried forward to the fifth step for testing and analysis.

Step 5: Worksheet

Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet
is created and used to ensure that debits and credits are equal. If there are discrepancies then
adjustments will need to be made.

In addition to identifying any errors, adjusting entries may be needed for revenue and expense matching
when using accrual accounting.

Step 6: Adjusting Journal Entries

In the sixth step, a bookkeeper makes adjustments. Adjustments are recorded as journal entries where
necessary.

Step 7: Financial Statements

After the company makes all adjusting entries, it then generates its financial statements in the seventh
step. For most companies, these statements will include an income statement, balance sheet, and cash
flow statement.

Step 8: Closing the Books

After closing, the accounting cycle starts over again from the beginning with a new reporting period. At
closing is usually a good time to file paperwork, plan for the next reporting period, and review a calendar
of future events and tasks.