Accounting Cycle — Complete Guide The accounting cycle is a systematic process for recording and reporting an entity’s financial transactions over an accounting period. It ensures accuracy, consistency, and that financial statements fairly present a business’s financial position. Modern accounting software automates many steps, reducing manual errors. Key takeaways
* The accounting cycle typically comprises eight steps, from identifying transactions to closing the books.
* It ensures accurate recording and preparation of financial statements.
* The cycle usually operates within an accounting period (commonly an annual period) and may be tied to regulatory reporting deadlines.
* Small businesses or sole proprietors may use a simplified process, while most organizations follow the full cycle.
The eight steps of the accounting cycle
1. Identify transactions
Recognize events that have financial impact (sales, purchases, payments, receipts). Explore More Resources
2. Record journal entries
Enter transactions chronologically in the general journal using double-entry bookkeeping.
3. Post to the general ledger
Transfer journal entries to ledger accounts to accumulate activity by account. Explore More Resources
4. Prepare an unadjusted trial balance
Summarize ledger balances to confirm total debits equal total credits.
5. Create a worksheet (optional)
Analyze balances to identify required adjusting entries and correct discrepancies. Explore More Resources
6. Make adjusting journal entries
Record accruals, deferrals, depreciation, and other period-end adjustments so revenues and expenses are recognized in the correct period.
7. Prepare financial statements
Use the adjusted trial balance to produce the income statement, balance sheet, statement of retained earnings (or equity), and cash flow statement. Explore More Resources
8. Close the books
Close temporary accounts (revenues, expenses, dividends) to retained earnings, then prepare a post-closing trial balance. The cycle then restarts for the next period.
When to run the accounting cycle The cycle is performed within each accounting period. Common cadences:
Monthly or quarterly for internal management and monitoring.
Annually for statutory financial statements and tax reporting.
Public companies and regulated entities often align cycles with reporting deadlines and disclosure requirements. Explore More Resources
Accounting cycle vs. budget cycle
* Accounting cycle: Focuses on historical events—recording what already occurred and producing financial statements for external and internal users.
* Budget cycle: Forward-looking—planning expected revenues, expenses, and resource allocation for future periods. Primarily an internal management tool.
Why the accounting cycle matters
* Ensures financial records are complete and accurate.
* Produces reliable financial statements for stakeholders and regulatory compliance.
* Supports better decision-making through clear financial information.
* Provides an audit trail and internal control structure.
Benefits
* Consistent method for recording transactions.
* Reduced risk of missed or duplicated entries.
* Easier preparation of reports, tax filings, and audits.
* Automation through accounting software increases efficiency and reduces errors.
Who performs the accounting cycle
* In larger organizations, accounting staff or finance departments handle the cycle.
* Small businesses or sole proprietors may perform the tasks themselves or outsource to an accountant or firm.
* Software vendors and cloud-based platforms frequently automate many routine steps.
Bottom line The accounting cycle is a fundamental framework that turns individual transactions into meaningful financial statements. Following the cycle—whether manually or via software—helps businesses maintain accurate records, meet reporting obligations, and make informed financial decisions.