The accounting cycle is a set of steps that involves recording, categorizing, and calculating financial transactions in a systematic manner. Typically, a company would synchronize the accounting cycle with the due dates of their respective filing deadlines. Usually, a bookkeeper would manage the accounting cycle, which may involve various procedures depending on the company. Nevertheless, every transaction from its occurrence to the production of financial documents is tracked during the accounting process.
By following the accounting cycle procedure, a company can accurately prepare its financial statements at the end of the fiscal year. This process helps a company to systematically record their business events, and present them to others through financial statements. If you require assistance with accounting or cannot afford an in-house accountant, do not hesitate to engage the services of an accounting firm in Singapore.
Why Is the Accounting Cycle Vital?
The accounting cycle is a crucial aspect of running a business as it provides a comprehensive understanding of the company’s performance. By breaking down complex financial information into clear categories and step-by-step calculations, accountants and bookkeepers can achieve greater accuracy.
How does the Accounting Cycle Works?
The accounting cycle process may vary depending on the reporting (Also see Do Your Company Need Interim Reports?) needs of the company. However, some of the essential procedures include:
Identification and Analysis: This involves identifying receipts, invoices, and other documents to analyze transactions and their impact on accounts.
Recording: Every transaction is entered in a journal using a debit or credit system, either single or double-entry. If a cash-accounting (Also see Differences Between the Accrual Basis and Cash Basis of Accounting) system is used, transactions are entered when money is paid or received.
Making Corrections: Journal entries are adjusted to account for any necessary corrections, such as prepaid or accrual expenses.
Generating Financial Statements: Financial statements are produced once all entries have been adjusted.
Closing Books: The accounting cycle concludes with the closing of the books, which involves closing expenditures and income to the income summary account, closing the income summary account to the owner’s capital account, and closing withdrawals to the owner’s capital account.
Upon completion of the accounting cycle, the resulting financial reports provide the business owner with insights into cash flow (Also see Tips to Preserve Cash Flow and Maximize Profits) and available funds. This information enables the business owner (Also see How a Good Accountant will Help Your Business to Grow and Save You Money?) to make informed decisions regarding financial operations.