Steps of Accounting Cycle.The accounting cycle has five phases, namely: fundraising, recognition, accumulation process, summarization and disclosure .
Universal Steps of Accounting Cycle
Capture – collection of data on acts and facts that affect the entity’s assets, as stated by Szuster et al (2008, p.33): “The capture involves the analysis of documents (laws, contracts, invoices, receipts, reports, processes etc.), as well as macroeconomic events that affect the entity ”.
Recognition – it is the moment of questioning in relation to the data of the acts and facts, for example, the first questioning to be carried out, consists of whether the captured data should be recognized.
Accumulation process – after data recognition, they must be organized in a database. To facilitate quick access to information, companies have adopted computerized accounting systems.
Summarization – is the act of transforming all data into accounting information useful to its users, such as the creation of financial statements and reports.
Disclosure – consists of the disclosure of accounting information to its users, either through widely circulated newspapers, through the entity’s website or any other means.
As a result, the entity prepares updated financial statements and reports for each fiscal year, thus, for each social period, entrepreneurs know how the company’s equity is found.
Summary;
The accounting cycle is a series of steps that a business must take to track its financial transactions and prepare accurate financial statements. The following are the steps involved in the accounting cycle:
- Collecting and analyzing data: The first step of the accounting cycle involves collecting all financial data from various sources and analyzing them to ensure accuracy and completeness.
- Recording transactions: Once the data is collected and analyzed, the next step is to record all financial transactions in a journal, which is a chronological record of all transactions.
- Posting to the ledger: The journal entries are then transferred to the general ledger, which is a book that contains all the accounts used by the company.
- Preparing an unadjusted trial balance: After all transactions have been recorded in the ledger, an unadjusted trial balance is prepared to ensure that debits and credits are equal.
- Making adjusting entries: Adjusting entries are made to correct any errors or omissions in the accounts, to accrue or defer expenses or revenues, and to record depreciation or amortization.
- Preparing an adjusted trial balance: An adjusted trial balance is prepared after the adjusting entries have been made.
- Creating financial statements: The financial statements (income statement, balance sheet, and statement of cash flows) are prepared using the information from the adjusted trial balance.
- Closing the books: Temporary accounts, such as revenue and expense accounts, are closed out at the end of the accounting period by transferring their balances to the retained earnings account.
- Preparing a post-closing trial balance: A post-closing trial balance is prepared to ensure that all temporary accounts have been closed and the accounting records are ready for the next period.
Stages of the accounting cycle
The life of a business is divided into accounting cycles or years and these, in turn, are divided into three stages: accounting opening, movement and closing .
– Opening: At the beginning of the activity, the company opens its accounting year and begins to make economic transactions that are collected in its accounting books, both in the obligatory and in the auxiliary ones.
– Movement: Record of transactions.
– Closing: At the end of an accounting period, the accounts are closed to determine the economic result for the year.
Importance of the accounting cycle
The importance of the accounting cycle lies in being able to see if the financial and equity data are correct, thus verifying the good health of the company.
