What is an Accounting Cycle?

What is an Accounting Cycle?

You may perceive the accounting cycle as a series of events which play an essential role in determining, documenting, and analysing the information about the transactions a company has made. When each accounting period has ended, the accountant of the company should aggregate those transactions into the company’s financial statements (Also see How Do Accountants Carry Out the Accounting Process?). Keep in mind that the accounting cycle is the main event the accounting department needs to deal with always. In this article, the main focus will be on the main parts of the accounting functions, which comprises the accounting cycle.

Determining the activity that results in a transaction

In the accounting process, this is the first thing you should do, and it involves determining the things that caused the transaction. As an instance, the activities which cause a transaction includes offering services to customers, selling products to customers, purchasing materials (Also see Accounting for Expenses), as well as receiving payments.

Preparing the business documents about the transactions

These business documents may include supplier invoices, customer invoices, petty cash voucher, cash receipts, and so on (Also see How to Differentiate Invoice and Receipt?). As these documents provide you with the initial information about those transactions, they play a role as the source documents.

Determining the accounts that the transactions have affected

As what the double-entry bookkeeping system has stated, a single transaction will affect at least two accounts. Hence, before the accountant records the transaction, they need to determine which accounts the transactions have affected.

Documenting the transactions into the suitable documents

At this stage, the accountant needs to document the accounting details in the particular journals, for example, sales journal, cash receipts journal, cash disbursement journal and so on, Then, they need to transfer these records to the company’s general ledger (Also see What are the Differences Between a Trial Balance and a General Ledger?) later. Also, you may post these transactions into the general ledger directly.

Preparing the preliminary trial balance

When an accounting period has ended, you have to generate the preliminary trial balance. In this process, you should list the debit balances in the left column whereas, in the right column, you should list down the credit balances. Keep in mind that the sum of the debit and credit sides should be the same.

Preparing the adjusted trial balance

After getting the preliminary trial balance done, you have to check if there is any mistake (Also see Errors That You May Commit When Recording Business Transactions), and if there is, you should do corrections by using the adjusting entries. The adjusted trial balance should be able to show the financial position and the results of the operations of the company.

Preparing the financial statement by using the adjusted trial balance

When you have done the adjusted trial balance, you can generate your company’s financial statements now, which include:

  • Balance sheet
  • Profit and loss statement
  • Statement of retained earnings
  • Statement of cash flows
  • The required accompanying disclosures

Closing the books for the reporting period

At this stage, you need to transfer all the balances in the temporary accounts into the income summary account, followed by the retained earning accounts of your company.

If you have an in-depth understanding of the accounting cycle, then you can make sure that you or your accountant have completed all the required accounting tasks efficiently. Another choice you may consider is to use a bookkeeping service in Singapore so that the professionals can solve these problems for you.

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