Accounting automation

Understanding the accounting cycle process: A step-by-step guide

Apr 05, 2024

The accounting cycle is a fundamental process in the field of accounting, allowing businesses to systematically record, analyze, and report their financial transactions. This cycle consists of seven essential steps that help maintain accurate financial records and provide valuable insights into a company's financial health. 

Accountants play a crucial role in this process, ensuring that financial statements are prepared with precision and integrity.

Below, we will delve into each step of the accounting cycle, providing a comprehensive guide for beginners to understand its significance and implementation.

What is the accounting cycle?

The accounting cycle in accounting refers to the series of steps that accountants follow to record, process, and summarize the financial transactions of a business during an accounting period.

It begins with the identification and analysis of business transactions and ends with the preparation of financial statements. The cycle is critical as it helps businesses maintain accurate and up-to-date financial records, assess their financial performance, and make informed decisions. 

What are the 9 steps of the accounting cycle?

Generally, people might think that there are only 7 steps in the accounting cycle. But to be precise, there are 9 major steps in the accounting cycle process:

1. Identify and analyze business transactions

In this section, you will learn about business transactions and explore the various types, such as revenue, expense, asset, liability, and equity transactions. Understanding these transaction types is vital for proper classification and recording.

We will also discuss the process of documenting and organizing transaction information efficiently.

Understanding business transactions

A business transaction refers to any activity that involves the exchange of goods, services, or resources, resulting in a measurable financial impact on a company's financial position. It could be a purchase, sale, payment, receipt, loan, or any other financial activity that can be recorded in the accounting system.

Type of business transactions

Business transactions are classified into five categories based on their nature: 

a. Revenue transactions

This involves the income earned by the business from its primary operations, such as sales revenue, service fees, etc.

b. Expense transactions

Represents the costs incurred in the process of generating revenue, such as rent, utilities, wages, and supplies.

c. Asset transactions

Involves the acquisition, disposal, or depreciation of assets, including cash, inventory, equipment, and property.

Suggested read: What is amortization in accounting, and how is it calculated?

d. Liability transactions

Relates to debts and obligations owed by the business to external parties, such as loans, accounts payable, and accrued expenses.

e. Equity transactions

Includes transactions that affect the owner's equity, like capital contributions, dividends, and retained earnings.

Documenting and organizing transaction information

Once the business transactions are identified and analyzed, they need to be properly documented and organized. Accountants use source documents, such as invoices, receipts, and bank statements, to record each transaction's essential details accurately.

2. Record transactions in a journal

A general journal is a primary tool for recording business transactions.

Here, you will learn the purpose of the journal and its format, which typically includes four columns: date, account title, description, and debits/credits. We will also explore the concept of debits and credits and why they must always balance.

Introduction to general journal

A general journal, also known as a book of original entries, is a chronological record of business transactions. It serves as a central repository for all financial events before they are classified and summarized into the ledger accounts. The journal helps in maintaining a clear audit trail and provides a historical reference for all transactions.

Format of a general journal entry

A typical journal entry consists of four columns:

a. Date

The date on which the transaction occurred.

b. Account titles

The names of the accounts affected by the transaction, with debited accounts listed before credited accounts.

c. Description

A brief explanation of the transaction.

d. Debit and credit amounts

The monetary values of the transaction, with debits on the left side and credits on the right side.

Here's an example of a general journal entry table with a few transactions:

Explanation of the transactions above:

On July 1, the company received cash of ₹10,000 from sales. This transaction increases the Cash account.

On July 2, the company purchased inventory on credit, adding to the Inventory account and creating a liability in the Accounts Payable account for ₹5,000.

On July 5, the company paid the office rent for the month, reducing the Cash account by ₹2,500 and recognizing the Rent Expense.

On July 10, the company billed a customer for services provided, increasing the Accounts Receivable account by ₹8,000.

On July 15, the company paid the electricity bill, reducing the Cash account by ₹1,200, and recognizing the Utilities Expense.

On July 20, the company received a payment of ₹6,000 from a customer, decreasing the Accounts Receivable account.

On July 25, the company paid off the credit purchase from July 2, reducing the Accounts Payable account by ₹5,000.

On July 30, the company paid employee salaries, reducing the Cash account by ₹3,500, and recognizing the Salary Expense.

On July 31, the owner withdrew ₹1,000 for personal use, decreasing the Cash account.

Debits and credits in a journal entry

Debits and credits are the foundational principles of double-entry accounting. They are used to record the dual effects of a transaction on the accounting equation. In a journal entry, debits represent increases in assets and expenses and decreases in liabilities and equity. 

On the other hand, credits indicate increases in liabilities and equity and decreases in assets and expenses. The total debits and credits in a journal entry must be equal to maintain the accounting equation's equilibrium and ensure accurate financial reporting. 

3. Posting to the general ledger

After recording transactions in the general journal, the next step in the accounting cycle is to post them to your company’s general ledger. The general ledger is a collection of individual accounts that shows the changes in each account caused by the business's transactions. It serves as the central repository for all financial transactions, categorized systematically based on a chart of accounts.

Organizing accounts in the general ledger

The chart of accounts is a listing of all the accounts used in a company's accounting system. It provides a systematic framework for classifying and organizing accounts based on their nature and function. The chart of accounts typically consists of a numerical or alphanumeric code that uniquely identifies each account. This makes it easier to locate and reference.

For example, a simplified chart of accounts could include:

a. Assets

i. 1010 Cash

ii. 1020 Accounts Receivable

iii.1030 Inventory

iv. ...

b. Liabilities

i. 2010 Accounts Payable

ii. 2020 Loans Payable

iii. ...

c. Equity

i. 3010 Owner's Capital

ii. 3020 Retained Earnings

iii. …

Transferring journal entry information to the ledger

To post journal entry information to the ledger, accountants cross-reference the journal entries with the corresponding account numbers in the chart of accounts. For each journal entry, the accountant locates the affected accounts in the ledger and updates their balances accordingly.

For instance, if a journal entry records a credit sale to a customer, the accountant will identify the "Accounts Receivable" account in the general ledger, then post the credit amount from the journal entry into the credit column of the "Accounts Receivable" account in the ledger.

Maintaining account balances in the general ledger

Each account in the general ledger maintains its balance through debits and credits. Debits and credits represent increases and decreases in account balances, respectively. When posting a journal entry to the ledger, the debit and credit amounts are added or subtracted from the account's current balance, resulting in an updated balance.

For example, if a company purchases inventory on credit and records a journal entry with a debit to "Inventory" and a credit to "Accounts Payable," the accountant will increase the "Inventory" account's balance by the amount of the inventory purchased and increase the "Accounts Payable" account's balance by the same amount.

The balances of all ledger accounts should be verified regularly to ensure they reflect the company's financial position accurately. Accountants can use trial balances to check the accuracy of the ledger balances and detect potential errors.

4. Preparing the unadjusted trial balance

The unadjusted trial balance is a critical step in the accounting cycle as it provides a summary of all the ledger accounts and their respective balances before any adjustments are made. Its purpose is to ensure that total debits equal total credits, which is essential for the accuracy and integrity of financial statements.

Listing accounts and balances in the trial balance

To prepare an unadjusted trial balance, accountants extract the ending balances of all accounts from the general ledger. The trial balance is formatted with two columns, one for listing the account names and the other for displaying their respective balances.

For example, a simplified unadjusted trial balance could look like this:

Verifying debits and credits equality in the trial balance

The fundamental principle of double-entry accounting is that total debits must always equal total credits. Therefore, the unadjusted trial balance should have equal debit and credit amounts. If there is any discrepancy between the two totals, it indicates an error in the accounting records that need to be identified and resolved.

Accountants thoroughly review the trial balance to ensure that all ledger entries have been accurately posted, no transactions have been omitted, and there are no arithmetic mistakes in the calculations.

In case of a discrepancy, accountants must investigate and rectify the errors before proceeding to the next steps in the accounting cycle. Common errors include posting to the wrong account, recording incorrect amounts, or omitting a transaction altogether.

By preparing the unadjusted trial balance, businesses can ensure the accuracy of their accounting records and use it as a starting point for making necessary adjustments, ultimately leading to the preparation of the adjusted trial balance and financial statements.

5. Recording adjusting entries

Adjusting entries are necessary to accurately report a company's financial position and performance. Here you will learn what it means to define adjusting entries and discuss the different types, including accruals, deferrals, and estimates. This section will also cover how adjusting entries impact financial statements.

Definition and purpose of adjusting entries

Adjusting entries are accounting entries made at the end of an accounting period to ensure that the financial statements accurately represent the company's financial position and performance. These entries are necessary to properly match revenues with expenses and recognize changes in assets and liabilities that occurred but were not recorded during the regular course of business.

The primary purpose of adjusting entries is to adhere to the accrual basis of accounting, which requires revenue recognition when earned and expenses recognition when incurred, regardless of cash flow.

Types of adjusting entries

a. Accruals

i. Accrued revenues

Recognizing revenues earned but not yet received in cash or recorded in the accounts. For example, services rendered but not yet billed to customers.

ii. Accrued expenses

Recognizing expenses incurred but not yet paid or recorded. Examples include salaries owed to employees and utility bills for the current period.

b. Deferrals

i. Prepaid expenses

Adjusting entries are made to recognize expenses paid in advance and allocate them to the appropriate accounting period. Common prepaid expenses include insurance premiums and prepaid rent.

ii. Unearned revenues

Adjusting entries are used to recognize revenues received in advance, which are yet to be earned by providing goods or services. For instance, advance payments from customers for future services.

c. Estimates

i. Depreciation expenses

Since fixed assets like machinery and equipment lose value over time, adjusting entries allocate a portion of their cost as an expense to reflect their usage during the period.

ii. Bad debt expenses

To account for the possibility of uncollectible accounts receivable, adjusting entries estimate the bad debts and record them as expenses.

Updating financial statements with adjusting entries

a. Income statement adjustments

Adjusting entries impact the income statement by recognizing revenues and expenses that were not previously recorded. Accruals and deferrals adjust the revenue and expense accounts, respectively, to match them with the relevant period. This ensures that the income statement provides a more accurate representation of the company's profitability.

b. Balance sheet adjustments

Adjusting entries also affect the balance sheet by updating asset, liability, and equity accounts. For example, prepaid expenses are moved from the asset section to expenses, and accrued expenses are added to liabilities. These adjustments ensure that the balance sheet presents a true picture of the company's financial position.

6. Preparing the adjusted trial balance

This step involves updating account balances with adjusting entries and verifying the accuracy of the adjusted trial balance. We will discuss the reconciliation between unadjusted and adjusted trial balances to ensure that all necessary adjustments have been made correctly.

Updating account balances with adjusting entries

To prepare the adjusted trial balance, accountants incorporate the adjusting entries into the general ledger. Each adjusting entry is posted to the respective ledger accounts, and the balances are updated accordingly.

a. Incorporating adjusting entries into the general ledger

Accountants take the adjusting entries made earlier and post them to the appropriate ledger accounts. For instance, if there was an adjusting entry for recognizing accrued revenues, the accountant would update the relevant revenue account with the corresponding amount.

b. Adjusted account balances calculation

The adjusted trial balance includes all accounts from the general ledger with their updated balances after considering the adjusting entries. The adjusted balances reflect the accrual basis of accounting, providing a more accurate representation of the company's financial status.

Verifying the accuracy of adjusted trial balance

a. Comparing adjusted trial balance to unadjusted trial balance

The adjusted trial balance is a significant step in the accounting cycle as it allows accountants to verify the accuracy of the adjusting entries. By comparing the adjusted trial balance to the unadjusted trial balance, accountants can identify any discrepancies or errors that need to be addressed.

b. Identifying and correcting adjusted trial balance errors

If discrepancies are found between the adjusted trial balance and the unadjusted trial balance, accountants must investigate and rectify the errors. Common reasons for discrepancies include incorrect adjusting entries, posting mistakes, or data entry errors.

Ensuring debits and credits equality in the adjusted trial balance

a. Balancing debits and credits

Like the unadjusted trial balance, the adjusted trial balance should have equal total debits and credits. This verifies that all transactions have been accurately recorded and that the accounting equation (Assets = Liabilities + Equity) remains in balance.

b. Reconciling debits and credits

If the debits and credits do not balance, accountants must review the adjusted trial balance and identify the errors. The goal is to make sure that every financial transaction has been accurately accounted for, ensuring the integrity of the financial statements.


The adjusted trial balance serves as the foundation for the preparation of financial statements, including the income statement, balance sheet, and statement of cash flows.

7. Prepare financial statements

Financial statements provide a snapshot of a company's financial performance. This section will help you learn about the preparation of the income statement, statement of retained earnings, and balance sheet, explaining the calculations and elements involved.

Income statement preparation

a. Gathering revenue and expense information

To prepare the income statement, accountants gather revenue and expense information from the adjusted trial balance. Revenue accounts, such as Sales Revenue and Service Fees Earned, show the total income generated during the accounting period. Expense accounts, including Cost of Goods Sold, Rent Expense, and Salaries Expense, represent the costs incurred to generate that revenue.

b. Calculating net income or net loss

The income statement's primary purpose is to determine the company's net income or net loss for the accounting period. Net income is calculated by deducting total expenses from total revenues. If total expenses exceed total revenues, it results in a net loss. Conversely, if total revenues exceed total expenses, it results in a net income.

Statement of retained earnings preparation

a. Determining opening and closing retained earnings

The statement of retained earnings begins with the opening balance of retained earnings from the previous accounting period. This opening balance represents the cumulative earnings that have not been distributed to shareholders as dividends.

The closing balance of retained earnings is calculated by adding net income (or deducting net loss) from the current period to the opening balance of retained earnings and subtracting any dividends declared during the period.

b. Calculating changes in retained earnings

The statement of retained earnings also shows any changes in retained earnings due to adjustments, corrections, or other factors that affect the company's retained earnings balance.

Balance sheet preparation

a. Listing assets, liabilities, and equity

The balance sheet presents a snapshot of the company's financial position as of a specific date. It lists the company's assets, liabilities, and equity. Assets include current assets such as cash, accounts receivable, and inventory while non-current assets include property, plant, and equipment.

Liabilities encompass current liabilities like accounts payable, and short-term debt. Non-current liabilities include things like long-term debt and deferred tax liabilities. Equity includes the owner's capital and retained earnings.

b. Balancing assets, liabilities, and equity

The balance sheet must adhere to the accounting equation: Assets = Liabilities + Equity. Therefore, the total value of assets must equal the combined value of liabilities and equity. This ensures that the balance sheet is balanced and accurately reflects the company's financial position.

8. Closing the books

Closing entries are essential to reset temporary accounts for the next accounting period. In this section you will learn about the purpose of closing entries, the distinction between temporary and permanent accounts, and the process of closing revenues, expenses, and income summary accounts.

Purpose of closing entries

a. Definition and objectives of closing entries

Closing entries are an essential part of the accounting cycle that helps prepare the accounts for the upcoming accounting period. The primary objectives of closing entries are to transfer temporary account balances to permanent accounts and reset temporary accounts to zero for the new period.

b. Temporary and permanent accounts distinction

Temporary accounts include all revenue and expense accounts that are closed at the end of each accounting period. They represent the company's financial performance for a specific period.

On the other hand, permanent accounts include asset, liability, and equity accounts whose balances are carried forward from one accounting period to another. They represent the company's ongoing financial position.

Closing temporary accounts

a. Closing revenues to income summary

The first closing entry involves transferring the balances of all revenue accounts to the Income Summary account. This process consolidates the revenue amounts earned during the period into a single account.

b. Closing expenses to income summary

Similarly, the balances of all expense accounts are closed by transferring them to the Income Summary account. This step consolidates the total expenses incurred during the period.

c. Closing income summary to retained earnings

After all revenue and expense accounts are closed to the Income Summary account, the next step is to transfer the Income Summary's balance to the Retained Earnings account. If the Income Summary shows a net income, it will increase the Retained Earnings. If it shows a net loss, it will decrease the Retained Earnings.

Determining net income or loss

a. Calculating net income or loss

The Income Summary account's balance after all revenue and expense accounts are closed represents the net income or net loss for the period. A positive balance indicates a net income, while a negative balance indicates a net loss.

b. Transferring net income or loss to retained earnings

Finally, the net income or net loss is transferred from the Income Summary to the Retained Earnings account. This adjustment updates the Retained Earnings account to reflect the impact of the current period's financial performance.

By completing the closing entries, the temporary accounts are reset to zero, ready to accumulate transactions for the next accounting period, and the Retained Earnings account is updated to include the current period's net income or loss.

9. Preparing a post-closing trial balance

The post-closing trial balance ensures the accuracy of permanent account balances after the closing process. We will identify permanent accounts, extract their balances from the general ledger, and prepare a post-closing trial balance to verify that debits and credits are equal.

Identifying permanent accounts

a. Permanent vs. temporary accounts

In the accounting cycle, accounts are classified as either permanent or temporary. Permanent accounts, also known as real accounts, are those whose balances carry forward from one accounting period to the next. They include asset, liability, and equity accounts. Temporary accounts, on the other hand, are closed at the end of each accounting period to start the next period with a clean slate. They include all revenue and expense accounts.

b. Identifying permanent account balances

To prepare the post-closing trial balance, accountants need to identify and extract the balances of all permanent accounts from the general ledger. Permanent account balances are the ones that remain after the closing entries have been made, and they represent the company's ongoing financial position.

Verifying permanent account balances

a. Extracting permanent account balances from the general ledger

Accountants review the general ledger to extract the ending balances of all permanent accounts. This involves identifying asset accounts (e.g., Cash, Accounts Receivable, Inventory), liability accounts (e.g., Accounts Payable, Loans Payable), and equity accounts (e.g., Owner's Capital, Retained Earnings) that have not been affected by the closing entries.

b. Preparing a post-closing trial balance

The post-closing trial balance is a listing of all permanent account balances after the closing process. It provides a summary of the permanent accounts and serves as a final check to ensure that all temporary accounts have been closed correctly and that the accounting equation (Assets = Liabilities + Equity) is in balance.

Ensuring debits and credits equality in the post-closing trial balance

a. Balancing debits and credits

Similar to the unadjusted and adjusted trial balances, the post-closing trial balance must have equal total debits and credits. This means that the sum of all permanent account debit balances must be equal to the sum of all permanent account credit balances.

b. Reconciling debits and credits

If the debits and credits in the post-closing trial balance do not balance, accountants must carefully review the entries to identify any errors or omissions. Common errors may include incorrectly recorded amounts, missed entries, or transposition errors.

The post-closing trial balance ensures that all temporary accounts have been closed properly and that the company's permanent account balances accurately represent its financial position after the closing process. Once the post-closing trial balance is verified and the debits and credits are equal, the company's accounting records are ready to start a new accounting period.

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What are reversing entries?

Reversing entries are accounting entries made at the beginning of a new accounting period to reverse the effects of certain adjusting entries made in the previous period. These entries effectively undo the original adjustments, simplifying the accounting process and avoiding duplication of adjustments in subsequent periods.

What is the purpose of reversing entries?

Reversing entries serves several important purposes that enhance the accuracy and efficiency of the accounting process.

Simplify the accounting process

By automatically reversing certain adjusting entries, the accounting process for the new period becomes more straightforward. It eliminates the need to manually reverse previous period adjustments, reducing the risk of errors and saving time for accountants.

Avoid duplication of adjustments

Without reversing entries, some adjusting entries might be mistakenly repeated in the new period. Reversing entries ensures that only the necessary adjustments are recorded for the specific period, avoiding duplication and potential inaccuracies.

Ensure accuracy in financial reporting

Reversing entries helps maintain accurate financial records by providing a clean starting point for the new period. This ensures that only the relevant adjustments are recorded in the current period, leading to more precise financial reporting.

Suggested read: Paperless expense reporting to streamline expense management

Facilitate period end closing procedure

With reversing entries, the closing process for the previous period becomes more streamlined. It allows accountants to close the books more efficiently and focus on the current period's financial transactions.

Improve comparability of financial statements

Reversing entries enhance the comparability of financial statements across periods. By eliminating the effects of certain adjustments, the financial statements for the current period are more comparable to those of previous periods.

You might also be interested to read: All you need to know about cash flow statement

Eliminate deferrals

Reversing entries eliminate deferral adjustments made in the previous period. For example, reversing an accrued revenue entry will record the revenue in the new period, accurately reflecting the current period's revenue and expenses.

Reversing entries plays a crucial role in the accounting cycle by simplifying the process, ensuring accuracy, and enhancing the comparability of financial statements. They facilitate timely and efficient financial reporting while eliminating deferrals from previous periods.

By understanding the purpose and benefits of reversing entries, businesses can optimize their accounting practices and produce reliable financial information.

What is the importance of the accounting cycle in financial reporting?

The accounting cycle is of paramount importance in financial reporting as it provides a structured and systematic framework for recording, organizing, and summarizing financial transactions.

This ensures that financial statements accurately represent a company's financial position and performance, making them invaluable for decision-making, compliance, and other critical aspects of business operations.

1. Accurate and reliable financial information

The accounting cycle's methodical approach ensures that all financial transactions are accurately recorded and properly classified. This leads to the generation of reliable financial information that stakeholders, including investors, creditors, and management, can trust for making informed decisions such as budgeting and fund allocation for future business activities.

2. Compliance with accounting standards

Following the accounting cycle ensures that financial reporting is compliant with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).

Consistency in accounting practices enhances the comparability and reliability of financial statements across different periods and companies. These uniform statements help in the analysis of the long-term performance of the business. 

3. Timely reporting

The accounting cycle sets a specific timeframe for each step, promoting the timely completion of financial statements.

Timely reporting is critical for meeting legal obligations, maintaining investor confidence, and providing relevant information to stakeholders for decision-making. It keeps all stakeholders informed and aware of the current status of the business and how it is performing.

4. Efficient financial analysis

By systematically organizing financial data, the accounting cycle streamlines the process of financial analysis.

Analysts can quickly assess a company's financial health, profitability, liquidity, and other performance metrics using the standardized information presented in the financial statements.

Different financial aspects derived from the statements can be used in standard financial formulas to determine the health of the business.

5. Internal and external decision-making

The financial statements prepared through the accounting cycle serve as essential tools for internal decision-making by management. They aid in evaluating business performance, setting budgets, and making strategic decisions.

Additionally, external stakeholders, such as investors and creditors, rely on financial statements to assess a company's creditworthiness and potential for investment.

6. Audit and assurance

The accounting cycle creates a clear audit trail for financial transactions, making it easier for auditors to verify the accuracy and completeness of the financial statements.

Audits provide an independent assessment of a company's financial records, adding credibility to the financial reporting process.

7. Historical comparison and trend analysis

The accounting cycle's regular recording and reporting of financial data allow for historical comparison and trend analysis. Businesses can assess their performance over time, identify patterns, and make necessary adjustments to improve financial outcomes.

Any common patterns that the business notices can also be used to forecast future occurrences so that the business can be prepared for them.

8. Legal and regulatory compliance

The accounting cycle ensures that financial statements comply with legal and regulatory requirements, such as tax laws and reporting regulations.

Accurate and reliable financial reporting is vital for avoiding penalties and maintaining the company's reputation in the market.

The accounting cycle is the backbone of financial reporting, providing a systematic approach to maintaining accurate and reliable financial records. Its significance extends beyond generating financial statements, as it influences decision-making, compliance, analysis, and audits.

Businesses that follow the accounting cycle diligently benefit from enhanced financial transparency, credibility, and informed decision-making, which are crucial for their long-term success.

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What are the common mistakes to avoid in the accounting cycle?

Maintaining accuracy and integrity in the accounting cycle is paramount for reliable financial reporting.

Avoiding common mistakes is crucial to ensure that the entire process—from recording transactions to generating financial statements—is error-free and compliant with accounting standards.

1. Data entry errors

Mistakes in data entry, such as transposing digits or misplacing decimal points, can lead to inaccurate financial records.

Regularly verifying the accuracy of data entry is essential to prevent such errors. Using some sort of software for data entry instead of relying completely on manual work can help reduce errors drastically. 

2. Lack of reconciliation

Failure to reconcile accounts, such as bank statements or accounts receivable, can result in discrepancies and errors.

Account reconciliation ensures that records match external statements and identifies any anomalies. You should make sure that account reconciliation is being done correctly and on a periodic basis to avoid inaccuracies.

3. Ignoring proper documentation

Inadequate documentation can hinder transparency and traceability. Properly documenting each transaction, including invoices, receipts, and contracts, is essential for auditing and resolving disputes.

Setting up submission policies and making it mandatory to provide necessary documentation can help make things more transparent. 

4. Incorrect journal entries

Errors in recording journal entries, such as incorrect debits and credits or incorrect account categorization, can distort financial statements.

Double-checking entries and using standardized templates can help prevent such errors. Automation software and payment tools can also help categorize expenses and transactions accurately. 

5. Lack of segregation of duties

Assigning multiple roles to a single individual increases the risk of errors or fraud going undetected. Implementing segregation of duties ensures that different individuals handle key aspects of the accounting cycle.

Delegating and distributing tasks will also improve the overall accuracy and efficiency of your finance and accounting team. 

6. Failure to follow proper accounting standards

Neglecting to adhere to accounting standards, such as GAAP or IFRS, can lead to non-compliance and inaccurate financial reporting.

Staying informed about accounting regulations and adhering to the best practices is essential. This will also make the audit process easier and faster for the auditor. 

7. Lack of review

The senior management and executives within the finance and accounting team must ensure that they conduct periodic reviews.

Failing to review financial records and reports before finalization can lead to overlooked errors. Regular reviews by experienced personnel help catch mistakes early and ensure accurate financial statements. 

8. Lack of expertise

Inadequate accounting knowledge and expertise can result in improper classifications, miscalculations, and misinterpretations of financial data.

Employing qualified accountants or seeking professional guidance is essential. Outsourcing to a specialized accounting firm might be a good option to try out. 

9. Poor cash flow management

Neglecting cash flow management can lead to liquidity issues, affecting a company's ability to meet financial obligations. Effective cash flow forecasting and management are crucial for financial stability.

To better manage your cash flow, a business can use payment tools like corporate credit cards so that they have a better cash flow balance.

What is the difference between accounting cycle vs operating cycle?

The accounting cycle refers to the sequence of steps that a company follows to record, classify, and summarize financial transactions. It encompasses the entire process of maintaining accurate financial records, from identifying business transactions to preparing financial statements.

The operating cycle, on the other hand, is a concept focused on the time it takes for a company to convert its resources—such as inventory—into cash through its operational activities. It represents the period starting from the purchase of raw materials or inventory to the collection of cash from the sale of finished goods.

The 4 stages of the operating cycle

1. Inventory conversion

This stage involves the time it takes for a company to convert raw materials into finished goods. It includes processes such as production, assembly, and quality control.

2. Accounts receivable conversion

In this stage, the focus is on the time required to convert credit sales into cash. It considers the time it takes for customers to pay their outstanding invoices.

3. Accounts payable conversion

Here, the emphasis is on the time it takes for a company to pay its suppliers for goods and services received on credit. It represents the period between receiving goods or services and making payment.

4. Cash conversion

The cash conversion stage calculates the time it takes for a company to convert its investments, such as accounts receivable and inventory, into cash.

It combines the previous stages to determine the overall time needed to complete the operating cycle.

Understanding the operating cycle is crucial for effective working capital management, as it provides insights into how efficiently a company utilizes its resources to generate cash flow.

On the other hand, the accounting cycle ensures accurate financial reporting by systematically recording and processing transactions through various accounting steps.

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What is the difference between accounting cycle vs budget cycle?

A systematic sequence of steps that a business follows to record, categorize, and summarize its financial transactions is known as the accounting cycle. Accounting cycle steps include activities such as identifying business transactions, journalizing them, posting to the general ledger, preparing trial balances, making adjusting entries, and ultimately producing financial statements. The accounting cycle ensures the accurate representation of a company's financial position and performance.

Conversely, the budget cycle involves the process of creating, implementing, and monitoring a budget for a specific period. A budget is a financial plan that outlines a company's anticipated income and expenses.

The budget cycle includes setting budget goals, estimating revenues and expenses, creating the budget, monitoring actual performance against the budget, and making necessary adjustments.

In essence, the accounting cycle focuses on the chronological recording and reporting of financial transactions, while the budget cycle revolves around planning and managing financial resources to achieve specific goals.

Both cycles are integral to effective financial management, with the accounting cycle providing a historical record of financial activities, and the budget cycle enabling proactive planning and control of financial operations.

How to automate the accounting cycle?

Automating the accounting cycle using expense management software is a strategic move that streamlines financial processes, enhances accuracy, and increases overall efficiency. By leveraging technology, businesses can reduce manual effort and human error while gaining real-time insights into their financial operations.

Here's a step-by-step guide on how to automate the accounting cycle using expense management software:

1. Select the right expense management software

The first thing you must do to automate and make your accounting cycle process more efficient is to choose a reputable expense management software that aligns with your company's needs and integrates well with your existing financial systems.

Look for features such as receipt capture, expense categorization, and integration capabilities.

2. Capture expense receipts digitally

Don’t make your employees store all expense receipts physically to submit later for reimbursements. This is a tedious and clunky process. Instead, utilize the software's mobile app or web interface to capture expense receipts digitally.

This eliminates the need for paper receipts and ensures that all necessary documentation is securely stored.

3. Categorize and classify expenses

Automated software allows expenses to be categorized and classified accurately based on predefined criteria. This ensures consistency and reduces the risk of misclassification.

For reimbursement claims, an expense management system is capable of analyzing a receipt to determine the expense category. In case it is a corporate card expense, it is much easier for the system to identify the category as the expenses are tracked automatically.

4. Automated expense submission and approval

Employees can submit expenses electronically through the software. Automated workflows route expense reports to the appropriate approvers based on predefined rules, expediting the approval process.

Through this process, you can make sure that all payments are authorized and verified so that you can sync them with your accounting tool. 

5. Real-time expense data integration

Expense management software can seamlessly integrate with accounting systems, ensuring that expense data flows in real-time to relevant accounts and cost centers. Administrators can set up custom sync and export periods according to their needs.

For example, you might set the sync to happen every night at midnight to ensure that the next day both platforms have the same data regarding expenses.

6. Automated expense reimbursement

Once expenses are submitted by the employees and approved by their respective managers, the software automates reimbursement processes.

Employees receive their funds directly through electronic transfers, eliminating manual reimbursement procedures where finance teams had to deal with lengthy expense reports and employees had to wait for weeks to receive their funds.

7. Financial reporting and analytics

Expense management software provides robust reporting and analytics capabilities. Generate customized reports, visualize spending patterns, and gain insights into expense trends for informed decision-making.

This particular aspect of financial management software aids the finance and accounting team in their overall budgeting and funds allocation. 

8. Compliance and policy enforcement

Configure the software to enforce company expense policies and compliance standards. Automated alerts can flag potential policy violations, reducing the risk of non-compliance.

By issuing corporate cards for your employees, you can also set custom spending limits on each card to ensure that there is no overspending by any employee or department. 

9. Continuous monitoring and auditing

Automated systems enable ongoing monitoring of expense data. So rather than manually having to check for any errors or realizing them too late, the software will spot them for you so that you can take immediate action.

Auditing tools can identify anomalies, errors, or suspicious activities, promoting data accuracy and integrity. 

The bottom line

The accounting cycle can be a difficult process to deal with and complete on time without any errors. So to do so, you will need all the help you can get. This is where a comprehensive expense management system like Volopay comes into play. 

Volopay helps your finance and accounting team to track, monitor, and control all business expenses through a centralized expense management platform. Its automation features help in eliminating repetitive manual tasks that would have taken a lot of time. This in turn also reduces the amount of errors to almost zero. 

Your accounting cycle process will also be made easier thanks to the fact that you can integrate any accounting software with Volopay to sync and export all your expense data automatically. Volopay also has native integrations with some of the leading accounting tools in the market such as Netsuite, Xero, Quickbooks, Tally, MYOB, Zoho Books, Deskera, and more!

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FAQs on accounting cycle

What is the difference between a journal and a ledger?

A journal is an initial record where individual transactions are first recorded in chronological order. It includes details like dates, accounts involved, and transaction amounts.

The ledger, on the other hand, is a summarized collection of all accounts where transactions are posted from the journal. It provides a consolidated view of account balances and is organized by account type.

What are the 7 steps of the accounting cycle?

The 7 steps of the accounting cycle are

a. Identify and analyze business transactions

b. Record transactions in a journal

c. Post transactions to the general ledger

d. Prepare the unadjusted trial balance

e. Record adjusting entries and prepare the adjusted trial balance

f. Prepare financial statements

g. Close the books by recording closing entries and preparing a post-closing trial balance

What is a journal in accounting?

A journal is a chronological record of individual financial transactions. It serves as the first entry point where transactions are initially recorded before being posted to the general ledger.

Journal entries include details such as dates, accounts affected, transaction descriptions, and debit/credit amounts.

What is a ledger entry?

A ledger entry is a record of a transaction posted from the journal to a specific account in the general ledger. It includes the date, description of the transaction, and debit and credit amounts.

Ledger entries provide a summary of the changes to individual accounts over time.

What is debit and credit in accounting?

Debit and credit are fundamental concepts in accounting. Debit refers to the left side of an account, while credit refers to the right side. In double-entry accounting, every transaction affects at least two accounts.

A debit increases asset and expense accounts while decreasing liability and equity accounts. Credit has the opposite effect, increasing liability and equity accounts while decreasing assets and expenses.

What is in the trial balance?

The trial balance is a list of all account balances from the general ledger. It includes the ending balances of both debit and credit accounts.

The trial balance is used to ensure that total debits equal total credits, which is a key step in verifying the accuracy of the accounting records.

Is trial balance a journal?

No, the trial balance is not a journal. While both the trial balance and the journal are components of the accounting cycle, they serve different purposes.

The trial balance is a summary of account balances, aiming to ensure the accuracy of the ledger, while the journal records individual transactions in chronological order.

What is a chart of accounts?

A chart of accounts is a structured list of all the accounts that a company uses in its accounting system. Each account is assigned a unique code and description.

The chart of accounts provides a framework for organizing financial transactions and helps in categorizing and reporting financial information.

What is a soft close?

A soft close is a method of closing temporary accounts, such as revenue and expense accounts, before the formal end of an accounting period. It involves making preliminary closing entries to update these accounts while still allowing for adjustments.

The purpose of a soft close is to facilitate financial reporting and analysis before the final closing entries are recorded.