10 Stages Of The Accounting Cycle You Must Understand

Did you know, if an accountant does not know the accounting cycle properly then it can have a fatal impact on his performance as a professional?

And a businessman should also know about the accounting cycle so as not to be fooled by his finance and accounting employees.

Then maybe a question will arise in your mind, then what should I understand about the accounting cycle.

The accounting cycle or often also called the basic accounting cycle is the activity of systematically collecting and processing accounting data in one accounting period.

Basically the accounting cycle of trading companies and service companies’ accounting cycles is the same, only the transactions are different.

For example, the recording of transactions in the accounting of a trading company is different from that of a service company.

To better understand the difference between trading and service company accounting, you can visit the following article.

A businessman should know about the concept of the accounting cycle so that he can more easily understand his company’s financial statements.

But in general it can be concluded that whatever type of business you are in, whether it’s a trading company, service company, manufacturing or so on, it is mandatory to know about the accounting cycle and also the existing accounting cycle chart, especially for your type of business.

10 Stages of the Accounting Cycle

In general, there are 10 stages of the accounting cycle that occur in the books of a business. What are the 10 stages, consider the following explanation:

1. Analyze Transactions

The first thing to do in the accounting cycle is the identification or analysis of transactions.

The recording system is usually in the form of a double entry where each transaction is recorded against the debit and credit financial position in the same amount. Each transaction recording will affect at least two bookkeeping accounts.

Also read Get To Know Debit And Credit Terms In Accounting.

2. Journalize

The second step is to record transactions into the journal according to the category. We know there are general journals and special journals.

A general journal is known as a journal only, which is usually the recording of transactions is entered into one account that is debited and one is credited.

Meanwhile, special journals are made to increase the efficiency of recording recurring transactions.

3. Posting to the Ledger

The third step in the accounting cycle is posting transactions that have been recorded in the journal to the general ledger.

In this ledger, each accounting account will record all transactions related to each account. To facilitate identification, each account will be assigned a code number.

4. Prepare the Trial Balance

Next, you must compile a trial balance. To make it, you just need to transfer the balance of each account in the general ledger to the trial balance.

Make sure the nominal debit and credit balances in the balance are balanced because if they are not balanced then you have to look for where the error occurred until the balance is not balanced.

5. Making Adjusting Journal

At the end of the period, sometimes we find transactions that have not been recorded or errors in recording. Well, this is where the adjusting journal function exists.

After being recorded in the adjusting journal, the transaction will then be transferred to the general ledger.

6. Creating a Trial After Adjustment

After moving to the general ledger, you can then create a trial balance after adjustments. The balance between assets and liabilities in the trial balance must be balanced.

7. Making Financial Reports

Financial reports are very important reports for company directors because with financial reports they can find out the company’s financial condition.

Financial reports also help directors make policies and strategies that must be carried out by the company. Before making financial statements, some people prefer to make a work sheet. This is done to simplify the process of making financial reports.

Some of the financial statements that must be in a business are:

Income Statement, which describes the company’s performance in a certain period.

• Capital Change Report, to see changes in capital that occur.

• Balance Sheet, to assess financial health, predict the state of cash flows in the future, and serves to analyze the liquidity and financial flexibility of the company.

• Cash Flow Statement, provides relevant information regarding cash out and cash in for the current period.

8. Make Closing Journal

Next, you can create a closing journal. This journal is only made at the end of the accounting period. The closed accounts are nominal and profit and loss accounts.

These types of accounts must indeed be zeroed so that they can be reused in the future for new activities.

9. Make a Reverse Journal

This step is actually optional. Reversing journals are created to simplify the procedure for recording certain transactions that occur repeatedly in the next period. Usually, this reversing entry is made at the beginning of the next period.

In this journal the reference is the adjusting journal. Where each transaction in the adjusting journal will be reversed. For example, a transaction that was originally a credit in the adjusting journal will become a debit in the reversing journal.

Also read Standard Costing – Know The Advantages, Types And Differences With Actual Costing.

10. Final / Initial Balance

After making closing entries, the next step is to make a final/beginning balance sheet. The contents of this balance is a list of account balances in the general ledger.

So it only contains permanent accounts. The purpose of making this balance sheet is to gain confidence that the balance is correct and balanced.

Thus an explanation of the 10 stages of the accounting cycle. How? You certainly understand about the accounting cycle, right? It will be easier to learn or understand an example of an accounting cycle if you directly practice it in your business.

It should also be noted that the accounting cycle cannot be separated from the basic concepts of accounting in the implementation of its recording.

Of course, the stages of the accounting cycle above are an integral part that cannot be ignored at each stage in the recording of the company’s books.

The ultimate goal of all these bookkeeping records is for the company to have valid and accountable financial statements. This will make it easier for the board of directors or business owners to control their business while taking the right policies.

All the technical records in the accounting cycle will be very inconvenient and take a long time if done manually.

Integrated accounting software is needed for these records so that financial reports and other supporting reports can be done practically and quickly. Another reason is to minimize errors that may often occur if done manually.

Choose online integrated accounting software so that it can be accessed anywhere and anytime without the risk of fear of losing data.

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