The standard accounting cycle is the steps that guide a standard of conduct for creating and maintaining a detailed and accurate ledger, whether on paper or in a computer program.
Keep the financial documents needed to track transactions that work around the ledger. At the heart of ledger maintenance is a process known as the accounting cycle. It is a systematic series of steps that support the collection, processing, and reporting of financial data. While there are many versions of the accounting cycle that cover more detail, the general (standard) process includes the five main steps needed to ensure the integrity of a company's accounting process.
An accounting system must ensure that the accounting cycle is fully and properly implemented, then it acts as part of the internal control system and eliminates risks for the business.
The following five-step standard accounting cycle #
1. Analyze and accurately determine the nature of the transaction #
The cyclical nature of the accounting process starts with transactions and this can be anything that affects your company's financial position. At a minimum, any company should collect:
- External transactions such as exchanges with other companies
- Internal transactions such as inter-departmental exchanges
- Anything else that is financially relevant and measurable
Although these are economic transactions of a financial nature, each transaction is made with deep legal context involved. For example, how is a transaction recorded as a sale transaction, assuming you have delivered the goods but have not yet collected the money, what type of transaction is this? Determining the type of transaction determines how it is recorded in the accounting system, and therefore determines the reported outcome and all subsequent information derived from it.
2. Record in the diary #
Recording transactions is a procedure known as logging. This is a chronologically recorded transaction list of the transactions identified during the analysis period. The double entry accounting system records each transaction as a four-part entry. These parts are:
- Account and debit amount
- Account and credit amount
- Day trading
- Description of the transaction
Every transaction is represented as both debit and credit, this is called double entry.
Double entry is the recording in at least two accounts to reflect the arising economic transactions in accordance with the effects that the transaction causes on the accounting objects.
The reason is that each economic transaction arising in an enterprise is always related to at least two accounting objects, each accounting object is allowed to open a separate account for monitoring, so each economic transactions that arise will involve at least two accounts. Therefore, double entry, also known as double entry, is actually a method of recording the amount of an economic transaction into related accounts based on the economic content of the transaction.
3. Summary by accounting account #
In the days of the pen-and-paper accounting system, the journal served as a working copy of the ledger. These days, it is common for this aggregation to be an automated function at the end of the day or some other financial period, performed by an accounting software application.
However, this is also a step that both implementers and managers need to know because it will be useful when examining and using data. Some cases are as follows:
- For units with large volume of transactions such as retail, e-commerce, etc., it is not always necessary to review the entire transaction log, now the manager only needs to see the total number of daily transactions along with the transaction log. a kind.
- When a parent company maintains separate sets of books for each subsidiary. In this case, the total accounts from the subsidiaries are transferred to the parent company's account.
4. Prepare unadjusted balance sheet #
Because double entry accounting has a debit and a credit done for every transaction, these amounts should always match. When it doesn't, it indicates an issue that then needs to be tracked down. These comparisons are called trial balances. Unadjusted trial balances may arrive before late transactions or bug fixes are made.
The adjusted trial balance reflects all financial activities that occurred during the period during which the final procedures were performed.
5. Prepare Financial Statements #
Upon completion of the adjusted trial balance, financial statements for an accounting period (month - quarter - year or a custom period) are generated. These reports vary, depending on the period and the reports requested. Representing the completion of one accounting cycle, the ledger accounts are reset to zero in preparation for the next cycle, starting over with transaction analysis.