An accounting cycle is often described as a process of identifying, analyzing, and recording business transactions of a company. An accounting cycle includes the following steps:
- Identifying and analyzing business transactions
- Recording business transactions in journals
- Posting journal entries to accounts in the company’s general ledger
- Preparing a trial balance before adjustments
- Recording adjusting entries to rectify the balance of accounts
- Preparing a trial balance including adjustments
- Preparing financial statements
- Recording closing entries
Purpose of the Cycle
The purpose of the accounting cycle is to ensure that all the money coming in or going out of an entity is accounted for. However, errors are frequently made when recording entries, leading to a trial balance that is incorrect and needs to be adjusted. The most common reasons for account imbalance include the following:
- Posting a transaction to the wrong account
- Forgetting a transaction
- Posting a transaction as a credit instead of debit, or vice versa
- Posting the wrong amount
- Duplicate postings
The error can easily be corrected once it is discovered.
Timing of the Accounting Cycle
The accounting cycle is started and completed within a financial/ accounting period, the time in which the financials are prepared. Accounting periods vary and depend on a lot of different factors. However, the most important type of accounting period is the annual period.
At the end of an accounting period, financial statements are prepared, which in most cases is required by regulations. Public entities as well as private entities are required to submit their financials by certain dates. Therefore, it can be said that the accounting cycle revolves around the dates of reporting requirements.