Key Takeaways:
- The accounting cycle streamlines financial processes, ensuring accuracy and efficiency and aiding decision-making.
- By converting raw data into insightful reports, the cycle facilitates well-informed decisions and regulatory compliance.
- Cloud accounting software automates the cycle, saving time, reducing costs, and enhancing accuracy in financial reporting.
The accounting cycle enables businesses to make well-informed decisions, converting unstructured financial data into insightful reports. Every stage of the cycle is crucial because it guarantees compliance with rules and provides an extensive overview of the company’s economic activity.
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While handling each process manually can be time-consuming and prone to errors, automation increases productivity and reduces hazards. Accounting tasks involve 29% of high-tech automation! Companies can now handle finances more efficiently, allowing employees to focus on strategic initiatives.
Understanding the accounting cycle is essential for better financial management. Let’s examine the eight accounting cycle steps in detail.

Use accounting software to automate repetitive tasks and streamline the accounting cycle steps. Also, regularly update and reconcile accounts in the accounting process to ensure accuracy and compliance.
What Is The Accounting Cycle?
The accounting cycle is a systematic process for documenting, evaluating, and revealing a company’s financial activities. During these stages, bookkeepers meticulously record their company’s financial transactions in a journal and carefully review entries to ensure accuracy and balance.
The process ends with the creation of financial statements and the official closing of accounts for the given period. This cyclical process recurs annually, reflecting the ongoing operations of an effective company.
Now that you know the accounting cycle definition, let’s proceed to the steps of the accounting cycle.
Interesting Read: What is an Integrated Accounting System?
What Are The 8 Steps In The Accounting Cycle?
The order of accounting cycle begins with the careful documentation of every business transaction. It ends with the creation of a detailed report that outlines the activities of the organization over the specified cycle period.
Many businesses use accounting software to automate this cycle. The software allows accountants to plan the accounting processing cycle dates and get results automatically, improving accuracy and efficiency.
Let’s discuss the eight accounting cycle steps.
Step 1: Identify Transactions
During the beginning of the accounting cycle, the main responsibility is to identify and examine all financial transactions that take place during the accounting period, including purchases, payments for debts, sales proceeds, and payments from customers.
It is a crucial phase in which every transaction that affects the company’s financial position needs to be carefully reviewed. Furthermore, this process is necessary for businesses involved in continuous invoicing, procurement, bill payout, payroll management, and revenue collection.
The identification of transactions, which is common throughout the whole accounting cycle, is the basic component of this first stage. It is crucial to ensure that every transaction is accurately recorded in the company’s ledgers.
Step 2: Record Transactions In A Journal
The next step is to carefully record every financial transaction chronologically using journal entries, whether you use physical ledgers or accounting software. Point-of-sale technology integration simplifies the preliminary stages, but businesses still need to monitor their expenditures closely.
The choice between accrual and cash accounting essentially determines when transactions are recorded. Interestingly, accrual accounting requires that revenues and costs be recorded simultaneously at the point of sale to guarantee proper matching.
Conversely, cash accounting requires that transactions be recorded upon cash receipt or disbursement. Maintaining a complete balance sheet, income statement, and cash flow statement requires recording two entries for every transaction in accordance with double-entry bookkeeping principles.
Step 3: Posting
Journal entries are recorded and approved before being moved to the general ledger. A general accounting ledger is the all-inclusive archive and summary of all financial transactions broken down by account. After being recorded as a journal entry, a transaction is properly assigned to the relevant account in the general ledger.

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This ledger provides an account-by-account analysis of all financial actions, allowing for careful monitoring of individual account financial statuses and circumstances. The cash account is one of the most noticeable entries in the general ledger and gives accounting information about the available cash reserves.
Step 4: Unadjusted Trial Balance
The trial balance reveals unmodified account balances and prepares the ground for further examination and analysis. This trial balance, which was initially “unadjusted,” identifies disparities that need to be corrected, like uneven debits and credits.

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It is a summary of single-entry and double-entry bookkeeping, in which credits and debits should ideally match. It examines the accuracy of recorded transactions. With accounting software, this report gives stakeholders the ability to make adjusting entries to address disparities, strengthening the organization’s financial integrity.
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Step 5: Worksheet
The crucial fifth step in the accounting cycle is the review and correction of entries. It involves examining debits and credits from several accounts and combining them into a single spreadsheet to identify any anomalies or disparities. If the numbers don’t add up, a bookkeeper or accountant must conduct an in-depth review to correct entries in the journal.
Companies must use the features built into accounting software that speed up the process of detecting, assessing, reconciling, adjusting, and consolidating items. Businesses should perform monthly balance sheet account reconciliations, a tedious process that involves comparing bank statements to the general ledger cash account.
Listing all outstanding payments, pending deposits awaiting clearing, and accounting for bank service costs are all part of the cash reconciliation process.
Apart from cash, careful balances also include receivables, aged journals for accounts payable, and a variety of assets and liabilities, like inventories, fixed assets, prepaid assets, accrued liabilities, retained earnings, and owner’s equity in relation to the general ledger.
Step 6: Adjusting Journal Entries
This stage is a continuation of the two preceding stages. Any mistakes made need to be fixed and reported as journal entries that represent changes to previously recorded information.
Additionally, it includes manual adjustments like reconciling items found during the reconciliation process or accruals for expenses incurred but not yet recorded in the accounts payable system before posting to the general ledger.
When needed, these modifications are documented in journal entries. These adjusting entries, which deal with accruals and deferrals, are vitally posted to the accounts at the end of the accounting period.
As part of the accounting control process, once updating entries have been made and posted to the general ledger, the overall debit and credit balances must match. An adjusted trial balance report can be created and examined in order to carry out this balance verification.
Step 7: Financial Statements
Financial statements can be prepared after account balances have been rectified and adjustments made. These statements function as complete financial documents that summarize the activities and results of a business over a given period, usually on a monthly or quarterly basis.

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The income statement, balance sheet, and cash flow statement are the three essential financial reports. Once the adjustment entries are finished, these statements are prepared as part of the seventh process step.
The creation of the cash flow statement, income statement, and balance sheet is made easier by accurate balances. Whether monthly or yearly, customized financial reports are made to produce statements relevant to the accounting period. Quarterly summaries can be displayed with flexibility in many accounting systems.
The Securities and Exchange Commission (SEC) requires publicly traded companies to provide quarterly financial reports. Financial statements are carefully reviewed and approved by management before being distributed.
The key financial statements of a business include statements of cash flows, income statements, balance sheets, and owner’s equity statements. The balance sheet adheres to the accounting equation: assets minus liabilities equals owner’s equity.
Step 8: Closing
When the accounting cycle ends, closing the books is the last step that sets the boundaries of the accounting period. To avoid the books’ rollover into subsequent periods, it involves adjusting temporary accounts on the income statement, like revenue and expenses, to zero balances.

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Closing statements are then provided, which provide valuable information for period performance analysis. After closure, the cycle starts over with a fresh reporting period.
Balance sheet accounts remain, reflecting the company’s current financial situation, but revenue and cost accounts are reset to zero in preparation for the next accounting cycle.
To verify balanced ledgers at year-end, a post-closing trial balance report is produced.
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How Does The Accounting Cycle Work?
The accounting cycle is a systematic structure intended to maintain accuracy and consistency in financial reports. By combining traditional methods with computerized accounting systems, the risk of mathematical errors has dropped significantly.
Nowadays, accounting software has simplified the accounting cycle, reducing the need for human involvement and the risk of mistakes that come with manual processes.
Accounts receivable/accounts payable specialists, thorough bookkeepers, or seasoned accountants—all of them—are responsible for documenting financial transactions, closing out accounts for the specified period, and creating financial statements while following processes for internal control and assigning roles to guarantee an efficient division of duties.
Final Words
The eight-step accounting cycle streamlines financial health, relieving busy entrepreneurs and bookkeepers alike. It ensures consistency, accuracy, and efficient analysis of financial performance by removing uncertainty in accounting processes through a structured method.
By automating and streamlining every step—from the creation of journal entries to the production of full financial statements that show the profitability, net income, and financial stability of the company—cloud accounting software transforms the accounting cycle. It reduces manual labor, speeds up processes, and gives companies confidence when it comes to book closures.
The accounting cycle involves systematic steps for financial recording and reporting, ensuring accuracy. In contrast, the budget cycle focuses on planning and allocating financial resources to achieve strategic goals.
The accounting cycle is important for accurate financial reporting, informed decision-making, and streamlined processes. It ensures compliance, consistency, and efficiency in managing a company's financial activities.
Accounts receivable/accounts payable specialists, bookkeepers, or accountants are responsible for performing the accounting cycle, ensuring accurate financial records, and facilitating efficient financial reporting processes.
An accounting cycle example is a business owner who gathers financial data, logs it in a journal, transfers it to the ledger for each account, performs an unadjusted trial balance, makes the required corrections, performs an adjusted trial balance, creates financial statements, and completes account closures.

Pratiiek Mavani is a seasoned professional in accountancy, taxation, audit, and finance, boasting over 16 years of industry expertise. He specializes in conducting audits for diverse entities including banks, optimizing their core processes through cost management and budgeting. With a focus on income tax and GST, he has represented various clients in cases and appeals concerning direct and indirect taxes across different levels.