6 Important Steps in the Accounting Cycle

Business owners do not start their businesses to spend hours doing accounting. Yet, they must know the basics of accounting and bookkeeping if they want their business to thrive. In this case, it's about the accounting cycle. Or you can call it “the bookkeeping cycle”.

The accounting cycle has 6 steps; if followed correctly, your financial records will be more accurate and reliable. Every dollar that enters and leaves your company will be well-recorded during this cycle. As you learn more about the accounting cycle steps, you can worry less about keeping track of the money and more about building your business.

TABLE OF CONTENTS

What is the accounting cycle and is it crucial?

6 Important Steps in the Accounting Cycle

Step 1: Identify the transaction

Step 2: Record transactions in a journal

Step 3: Post to the general ledger

Step 4: Create a trial balance.

Step 5: Create financial statements

Step 6: Closing the books

Final thoughts

What is the Accounting cycle and is It Crucial?

The Accounting Cycle converts raw financial data into firm financial statements. It covers recording transactions, preparing financial statements, and closing books. When you're done with your books for the year, the cycle starts again.

This full accounting cycle ensures a consistent and well-organized accounting process. Business owners may rely on these accounting practices to boost productivity, secure assets, and generate more accurate financial reports.

6 Important Steps in Full Accounting Cycle

Step 1: Identify the Transaction

The accounting cycle begins with: transactions. Every transaction involving your company must be recorded appropriately. These day-to-day transactions occur when you buy something from the supplier or sell something to a customer.

Since step 1 is about keeping records, it emphasizes the role of a bookkeeper, whose main job will be to keep track of all business transactions. Keeping track of transactions could be done manually before, but now many companies use accounting software for easier operation.

Example: A medical spa buys $1,000 worth of skincare products from a supplier, paid in cash.

>> Every accounting cycle starts when a financial activity happens. Here, the spa has spent money to purchase inventory it plans to resell. This is the “event” that triggers the recording process.

Step 2: Record Transactions in a Journal

The second step of the accounting cycle steps is to use journal entries for each transaction. Journal entries must be entered in full compliance with double-entry accounting guidelines (or double-entry bookkeeping). Every time a transaction takes place, debit and credit must be recorded in the journal.

A few things to keep in mind when recording transactions :

• Keep records in order

• Credits and debits must balance.

• Include notes to help the accountant reconcile.

• Accounting software makes it easy to keep track of all this information.

Example Journal Entry:

• Debit Inventory $1,000 (increase in assets)

• Credit Cash $1,000 (decrease in assets)

>> This is called a journal entry in double-entry accounting. One side goes up (inventory), the other side goes down (cash). Recording it here ensures there’s a paper trail for the transaction.

Step 3: Post to the General Ledger

A transaction should be posted to a general ledger account after it has been entered as a journal entry. The general ledger provides an account-by-account breakdown of all accounting activities.

This allows a bookkeeper to monitor account-specific financial positions and statuses. One of the most frequently referred to accounts in the general ledger is the cash account, which details the available cash.

 Example:

• In the Inventory account, add +$1,000.

• In the Cash account, subtract -$1,000.

>> Think of the ledger as a big book with separate “pages” for each account (cash, inventory, revenue, expenses, etc.). Posting moves information from the journal into the correct “page” so totals can be tracked.

Step 4: Create a Trial Balance

Fourth, transactions must be balanced at the end of the period. Depending on the business, the accounting period may be monthly, quarterly, or annual. The trial balance shows the company how much money is in each account and if there are any problems. No accounting method is perfect, so you'll almost always find discrepancies when balancing your books.

Example: At the end of the month, the trial balance might look like this:

• Inventory = $1,000 (debit)

• Cash = -$1,000 (credit)

  Total debits = $1,000 | Total credits = $1,000

>>The trial balance is like a checkpoint. It ensures that the accounting equation (Assets = Liabilities + Equity) is still balanced. If debits ≠ credits, there’s an error that needs fixing before moving on.

Step 5: Create Financial Statements

At this step, we take the trial balance and use it to make the balance sheet, income statement, and cash flow statement.

Example: Based on the trial balance:

• Balance Sheet: Inventory ($1,000) shows up as an asset. Cash shows the reduced balance.

• Income Statement: No revenue yet, since products haven’t been sold.

>> Financial statements turn raw data into useful information. At this stage, the spa’s owner can see that the business has invested $1,000 into inventory, which is important for planning cash flow and sales.

Step 6: Closing the Books

In the accounting cycle steps, the last step is for a company to close its books at the end of the day on the closing date. The closing statements give a report that can be used to look at how well things went over the period.

After closing, the accounting cycle starts over with a new reporting period. Usually, closing is a good time to file paperwork, plan for the next reporting period, and look over a schedule of upcoming events and tasks.

Example: At year-end, the spa closes temporary accounts (revenues, expenses). In this case, since products haven’t been sold, revenue = $0. The $1,000 inventory remains as an asset and carries over into the next accounting cycle.

>> Closing the books means resetting certain accounts to zero so the next cycle can start fresh. Permanent accounts (like assets and liabilities) stay on the books, while temporary ones (like revenue and expense) are cleared out.

Final Thoughts

In the capable hands of the Irvine Bookkeeping Team, your financial records will be in good shape. Our team of women is detail-oriented and will record all of your company's transactions and records precisely to provide you with the most reliable financial data.

Stop wasting time worrying about the books when we can do them for you. Set up a free virtual meeting with us to get the advice you need for your business.

Simplify the Accounting Cycle with Irvine Bookkeeping

While understanding the 6 steps of the accounting cycle is essential, applying them accurately can be overwhelming for business owners. At Irvine Bookkeeping, we specialize in helping small and mid-size businesses manage their books with accuracy, efficiency, and compliance.

✅ Handle everything from recording transactions to preparing financial statements.

✅ Use modern accounting software to reduce errors and save you time.

✅ Provide insights that help you make smarter business decisions.

Stop wasting time worrying about the books when we can do them for you. Set up a free virtual meeting with us to get the advice you need for your business.