The Accounting Cycle: Learn 8 Important Steps

The accounting cycle is an 8-step process used to manage a company’s bookkeeping throughout an accounting period. Accounting cycle periods will vary according to how, and how often, a company wants to analyze its fiscal performance. Some companies have shorter, internal accounting cycles of only a month, while others will maintain quarterly cycles. Regardless of the length of the accounting period, the 8 accounting cycle steps are the same.

The accounting cycle begins with the recording of all financial transactions throughout an accounting period and ends with the posting of closing entries for that accounting period.

With specific opening and closing dates for each accounting period, the cycle is used systematically throughout the period, providing an accurate, standardized and repeatable method of measuring and reporting business performance when comparing one period over another, for example monthly or quarterly. Once an accounting period closes a new one begins, and the process starts over again.

As a repeatable process, the accounting cycle is important because it can help to ensure that the financial transactions during a given accounting period are accurately recorded and reported. Some steps in the accounting cycle may be automated by accounting software, though some are still done manually. If steps of the process are overlooked, an accumulation of errors could pose some issues. Inaccurate bookkeeping and the inaccurate reports generated from incorrect data could be misleading to lenders or investors, who rely on having an accurate picture of a business’s financial health. Disorganized books could eventually lead to serious legal or tax liability consequences.

As mentioned, the accounting cycle is made up of 8 well-defined steps that lead to the accurate and timely documentation of a business’s financial performance during a particular accounting period.

These 8 steps are:

The first step in the accounting cycle epitomizes the importance of accurate recordkeeping. In this step, all of the company’s financial transactions are recorded. This includes every sale and any expenses that may have been incurred during the accounting period. To record sales, companies may link their accounting software to point-of-sale technology to automate this aspect of their recordkeeping.

For each transaction, a journal entry must be made. Small business accounting basics come into play here, and the company’s choice between an accrual or cash-based accounting system will dictate how transactions are recorded. Accrual accounting requires revenues and expenses to be matched and booked at the time of the sale, while cash accounting requires transactions to be recorded when cash is either received or paid.

To facilitate a fully developed balance sheet, income statement and cash flow statement, two entries must be made for each transaction. That process is referred to as double-entry bookkeeping.

In the company’s bookkeeping system, the general ledger provides a breakdown of all accounting activities by account. When a transaction is recorded, it should be posted to an account in the general ledger, such as the cash account, which provides a detail of how much cash is available, thereby providing a means for bookkeepers to monitor financial positions and statuses by account.

Once the accounting period has ended and all transactions have been identified, recorded and posted to the general ledger, a trial balance is carried forward for testing and analysis. This is a kind of self-diagnostic step, intended to see if all the numbers match up – ensuring that the total credit balance and total debit balance are equal – and to catch mistakes that may have been made in the first 3 steps.

In the fifth step, a worksheet is created and analyzed to ensure that debits and credits are equal. If discrepancies are spotted, adjustments will need to be made during this step. When using the accrual accounting method, adjusting entries may need to be made for the purpose of revenue and expense matching.

In this step, a bookkeeper will make adjustments, and record them as journal entries where necessary.

Having made all of the necessary entries and adjustments for the accounting period, the company can generate its financial statements. For most businesses, this includes an income statement, balance sheet and cash flow statement. Collectively, these financial reports provide the most accurate snapshot of the company’s financial health for the accounting period.

At the end of the accounting period, the books are closed. In this step, the accounting period is officially ended. The closing financial statements generated provide a concise report for the company’s leadership to analyze and compare its performance with that of other accounting periods. Preparations can now be made to begin the cycle over again for the next accounting period.

It’s important for management to establish timeframes for accounting cycles to maintain organization and achieve the level of analysis their business model and established organizational goals demand. Most companies want to know how they’re doing on a monthly basis, while some focus on quarterly results.

Regardless of the length of the accounting period, bookkeepers establish the opening and closing dates for the period and manage the accounting cycle accordingly, restarting the 8-step process at the beginning of each period. For example, if a company is measuring financial performance quarterly, the accounting period may open on January 1 and close on March 31. 

The accounting cycle and budget cycle are distinctly different in that one is backward-looking, while the other looks forward.

The accounting cycle records and analyzes transactions that have already occurred, using actual amounts for revenues and expenses. The budget cycle is forward-looking and is part of a company’s planning process, using the reporting generated in the accounting cycle to build a model that predicts future performance for a given period, typically a fiscal year.

Another difference between the cycles lies in who the information is intended for. The results in the accounting cycle are intended mainly for an organization’s external audiences, which may include lenders and investors. The budget cycle’s projections are intended strictly for internal use by company management.

Companies, their ownership and senior management teams benefit from the necessary accounting cycle in several ways as they strive to achieve uniformity, efficiency and a reliable means of analyzing financial performance.

In the area of efficiency, the steps in the accounting cycle function as a kind of checklist, representing boxes that can be checked as each step is completed. They provide a model for efficient accounting procedures, particularly for smaller businesses, in which owners may not have formal training in accounting but take on the bookkeeping duties in addition to their many other responsibilities.

Compliance is another area where the accounting cycle is beneficial. Companies of all sizes must file financial reports in compliance with federal regulations and tax codes. The accuracy and uniformity enabled by the accounting cycle and its steps allow any company to accurately calculate the taxes owed on the profits they generate and produce the necessary documentation.

The information produced by the accounting cycle allows businesses to measure their financial performance and conduct internal analyses at regular intervals corresponding with accounting periods. Accurate financial statement data enables a company’s senior management to make a broad range of decisions relative to financial strategies and budget forecasting.

If you have your sights set on career advancement in either accounting or finance, DeVry and our Keller Graduate School of Management can help you get started. Our suite of accounting degree and certificate programs offer a variety of ways to expand your knowledge or prepare to pursue your first credential in the field.

If you’re already a bachelor’s degree holder and want to continue your education or prepare to pursue roles that require an advanced degree, our Master’s Degree in Accounting and Financial Management can help you develop important skills in financial and managerial accounting, and corporate finance. Coursework in this master’s degree program covers topics like accounting theory and practices, decision making and ethics, technology and more.

By choosing an emphasis in CPA or CMA Exam Preparation, General Accounting or Finance, you can customize this flexible degree program with coursework that helps you focus your education toward your desired career pathway, and may even help you prepare to pursue relevant accounting certification exams.¹

You can earn your Master’s Degree in Accounting and Financial Management in as little as 1 year and 4 months on an accelerated schedule or follow a normal schedule and complete the program in 2 years and 2 months.² Classes start soon!