Accounting Cycle

Reviewed by Sujaini | Updated on Feb 01, 2023


What is the Accounting Cycle?

The accounting period is a systematic process in which a company's accounting activities are identified, analysed, and documented. It is a regular 8-step procedure that begins when a transaction takes place and ends with it being included in the financial statements.

Main steps in the eight-step accounting process include recording journal entries, uploading to the general ledger, measuring trial balances, changing entries, and producing financial statements.

How the Accounting Cycle Works?

The accounting process is a systematic collection of guidelines to ensure that the financial statements are correct and compliant. Computerised accounting systems and the standardised accounting period process have helped to reduce mathematical errors.

Today, most software completely automates the accounting cycle, resulting in less human intervention and manual processing related errors.

Steps of the Accounting Cycle

Take a look at the eight steps of the accounting cycle:

  1. Identify Transactions
  2. Record Transactions in a Journal
  3. Posting
  4. Unadjusted Trial Balance
  5. Worksheet
  6. Adjusting Journal Entries
  7. Financial Statements
  8. Closing the Books

Timing of the Accounting Cycle

The accounting process is started and completed within an accounting period, the time of preparation of the financial statements. Accounting periods vary and depend on several factors, but the annual period is the most common form of the accounting period. Lots of transactions occur and are recorded during the accounting cycle.

Financial statements are generally prepared at year-end, as specified by the regulations. Public agencies are expected to file the financial statements by specific dates. Hence, their accounting cycle revolves around the times necessary for reporting.

The Accounting Cycle vs Budget Cycle

The cycle of accounting varies from that of the budget process. The accounting process focuses on past events and guarantees accurate documentation of the recorded financial transactions.

Alternatively, the budget cycle is related to future operating performance and forward transaction planning. The cycle helps in the creation of knowledge for external customers, while the budget process is used mainly for internal management.

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