Step-By-Step Guide To The Full Accounting Cycle

What Is The Full Accounting Cycle?

The full accounting cycle, otherwise known as “bookkeeping,” is a big part of owning and running any business.

The accounting cycle steps follow a process to make sure your records are balanced, up-to-date, and correct. From your first monetary transaction, you need to follow the accounting cycle steps in order. [1]

The accounting cycle steps have to be repeated each month. Usually, it is aided by accounting software and digital charts so you don’t miss anything in the full accounting cycle. If you do, your financial statements might come out wrong. You might need to recalibrate your company’s accounting cycle steps. Then you’ll start the accounting cycle over again for the next month!

Steps In The Full Accounting Cycle

Use this list of accounting cycle steps in proper order below:

Step 1: Identify Transactions

The first step in the accounting cycle is finding and labeling all your financial transactions once your books have been closed for the prior month. That’s when the organization part of the full accounting cycle kicks into gear.

Transactions in the full accounting cycle can include generating invoices, categorizing receipts, and labeling bills. It can also include writing expense reports and payroll for your employees. Once you’ve identified these transactions, code them correctly to the proper account. Then it is time for step two in the full accounting cycle.

Step 2: Record Journal Entries

Now that you’ve found, coded, and labeled your transactions for the month, the next step of the accounting cycle starts. Record them in a journal, log, or accounting software system. Remember that if you are doing this part manually to keep your records separated out across journals, including:

• Sales
• Purchases
• Cash Receipts
• Cash Disbursements

Next, transfer the balance details from the journals over to your company’s general ledger (G/L). It is recommended to utilize computer accounting software for this step in the full accounting cycle.

Step 3: Posting And Adding Entries To the General Ledger

Post the total amounts from your journals or logs into your company’s general ledger so they can officially be added to your business’ accounting books. Many accounting software programs do this automatically, saving you one of the steps of the accounting cycle.

Step 4: Unadjusted Trial Balance

It’s important to follow the accounting cycle steps in order because it can save you many headaches along the way. Here’s an example of one way it does that: running a trial balance. Your general ledger calculates where each account currently stands, either with a credit or debit in the balance column.

Test runs let you see if the proper accounts in your general are matching up. This can be found in the credits or debits from the initial records. If they are uneven, return to your journals or logs to find the error. Once identified, redo the accounting cycle steps in order up to this point.

Step 5: Adjusting Journal Entries

Reconcile your company’s monthly bank statement. After that, you’ll be adjusting entries. Note expenses accrued for the month, including payroll. Add any depreciation or late entries on file at this point in the full accounting cycle.

Don’t worry if a few imbalances or inconsistencies pop up. This is common and the reason why it’s important to follow the accounting cycle steps in order.

Step 6: Prepare An Adjusted Trial Balance

You need the most up-to-date balance for your general ledger. To do that, run an adjusted trial on balance at this point in the full accounting process. Once it’s finished crunching the numbers you’ll be able to see how your general ledger’s accounts are all adding up.

Step 7: Run Financial Statements

Now use your adjusted trial balance to generate your small business’ end of the month financial statement. This must include these three reports:

• Balance Sheet
• Income Statement
• Cash Flows Statement

Other reports can be included if needed, but these three are essential for completing the accounting cycle steps properly.

Step 8: Closing The Books

The full accounting cycle is almost done! Zero out the balances between your small business’ expense with the revenue for the month and you’ve finished. This zero balance will carry over onto the next month’s books. It records the length of time for which the expenses and revenues are being documented.

Step 9: Begin The Next Accounting Cycle

What is the last step of the accounting cycle? Restart the accounting cycle by following the steps in order for the next month.

Congratulations! You made it through the full accounting cycle and completed all the steps. 

Highly recommend that you take a moment to pause before the next full accounting cycle. Use this time to plan for next month or organize any files. You can also review your company’s calendar and start to map out the upcoming weeks, including the next full accounting cycle.

In the long run, the full accounting cycle steps save you time and money. When you are a small business, you can’t afford to lose either one of those.

Frequently Asked Questions