Accounting Cycle: 9 Steps of the Accounting Cycle Process

The accounting cycle is a bookkeeping process by which small businesses and large corporations alike take each individual credit and debit balance they accrue and transform them into an overall financial statement. Putting these accounting principles into practice helps appraise a company’s financial activities and render them intelligible overall.

Accurate bookkeeping is an essential practice for assessing the health of your business, both internally and externally. The financial statements created toward the end of the accounting cycle can help you measure the viability and durability of your business’s financial wellness in every arena.

If you follow the steps of the accounting cycle, you’ll have a clear-eyed perspective on the pain points and successes of your business as a whole—and so will regulators, lenders, and potential investors. If you don’t bookkeep with an eye for accuracy, you may struggle to see what needs fixing or what’s helping you grow.

The accounting cycle is the cornerstone of many managed accounting systems. Here are the nine steps in the accounting cycle process:

1. 1. Identify all business transactions. Identifying every single one of your business’s financial transactions (for example, the payment amount, the payee, and the reason for the payment) can ensure a smooth-running accounting process. From expense accounts to overall cash flow, having a laser-like focus on everything affecting your account balances can make your financial position intelligible to you.
2. 2. Record transactions. Recording transactions is an important step. Record transactions in chronological order as the transactions affect individual account balances—in alignment with the principles of accrual accounting. You can notate the affected accounts in a general record or use multiple discrete records for each account.
3. 3. Resolve anomalies. Record each transaction as both a credit and a debit in relevant accounts—called double-entry accounting. These T-accounts—so-called for the T shape created when you divide debits and credits under a specific heading—can make things easier when it comes time to finalize the closing entries of the accounting cycle.
4. 4. Post to a general ledger. Post all your financial information to an all-encompassing ledger account, including the total debit and credit balances for your business. This ledger keeps all your financial records in one place for easy reference. If you use accounting software, most programs will do this for you automatically. But business owners and their CPAs and bookkeepers can still fill out an accounting worksheet with pen and paper if they want to do so.
5. 5. Calculate your unadjusted trial balance. Your unadjusted trial balance is whatever output your general ledger gives you after you’ve input all the relevant information from the accounting process so far. This initial calculation—even if it’s imbalanced—is essential in determining how to get everything straightened out by the end of the financial accounting period.
6. 6. Resolve miscalculations. Review the ledger and journal entries line by line to see where any error or errors may have occurred. Adjusting journal entries where needed is necessary to generate an adjusted trial balance overall.
7. 7. Consider extenuating circumstances. This final balance should take into account tax deductions like depreciation, deferrals (money that doesn’t impinge on this specific accounting period because it was taken care of in the past), and anything that you will deal with in the next accounting period as opposed to this current one.
8. 8. Create a financial statement. As you finish adjusting entries and you reach the end of the accounting period, prepare a financial statement that includes your adjusted trial balance alongside all relevant individual income statements, balance sheets, and cash flow statements. This provides external entities—like banks and regulators—as well as your own internal financial review team with the most accurate picture possible of your business’ overall financial status.
9. 9. Close the books. Now that you’ve arrived at your post-closing trial balance, it’s time to take all the information from your temporary accounts—the ones affecting just this accounting period—and transfer that information into your permanent records—the ones reflecting your business’s status as a whole. At this point, the accounting cycle ends only to begin again with the next accounting period.

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