What is the 'Accounting Cycle'
The accounting cycle is the name given to the collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements. Additional accounting records used during the accounting cycle include the general ledger and trial balance.
BREAKING DOWN 'Accounting Cycle'The accounting cycle is a methodical set of rules to ensure the accuracy and conformity of financial statements. Computerized accounting systems have helped to reduce mathematical errors in the accounting process, but the uniform process of the accounting cycle also helps reduce mistakes. The accounting cycle is highly automated in accounting software. Most transactions are entered using specific modules -- accounts payable modules for invoices received -- and the software performs balancing checks.
Steps of Accounting Cycle
An organization begins its accounting cycle with the recording of transactions using journal entries. The entries are based on the receipt of an invoice, recognition of a sale or completion of other economic events. After the company posts journal entries to individual general ledger accounts, an unadjusted trail balance is prepared. The trial balance ensures the total debits equals the total credits in the financial records. At the end of the period, adjusting entries are made. These are the result of corrections that need to be made as well as results from the passage of time. For example, an adjusting entry may accrue interest revenue that has been earned based on the passage of time.
Upon the posting of adjusting entries, a company prepares an adjusted trail balance followed by the financial statements. An entity closes temporary accounts -- revenues and expenses -- at the end of the period using closing entries. These closing entries transfer net income into retained earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits match.
Timing of Accounting Cycle
The accounting cycle is started and completed within an accounting period. The period is a predetermined range of time including each month, each quarter and each fiscal year. The transactions are added during the accounting cycle, while the remainder of the accounting cycle is typically completed towards the end of the accounting period. Public entities are required to submit financial statements by certain dates. Therefore, their accounting cycle revolves around reporting requirement dates.
Accounting Cycle Vs. Budget Cycle
The accounting cycle is different than the budget cycle. The accounting cycle focuses on historical events and ensures financial transactions that have already been incurred are reported correctly. Alternatively, the budget cycle relates to future operational performance and planning for transactions that are yet to have occurred. The accounting cycle assists in producing information for external users, while the budget cycle is mainly used for internal management purposes.