One of the fundamental parts of a company is accounting and, for this activity to be properly managed, the accounting cycle is of great importance. And it is that, the accounting of a company is divided into cycles, that is, it is subject to certain periods of time in which the activities of a business and their impact on productivity are recorded.
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What is the accounting cycle?
The accounting cycle is a period in which a company records chronologically and with totally reliable data each of the transactions it has carried out.
These data are reflected in the respective daily book in order to analyze, carry out and prepare the corresponding financial information. This cycle is also known as the accounting process or registry flow.
This activity is made up of each step that is followed from the time an accounting event occurs until it is entered into the system. Usually, these accounting cycles are for a period of one year, although there are companies with monthly, quarterly or semi-annual accounting cycles.
This serves, above all, to have all the registered information within reach and to know the evolution of the business since the beginning of the year. Thus, decisions can be made and possible negative data or imbalances compensated.
What are the steps in a business accounting cycle?
This accounting process consists of a series of steps to record the operations of a company. It is much easier to reach the end of the cycle with correct data by being able to move between the different stages of an accounting cycle.
The stages of an accounting cycle are 9, from the moment a transaction occurs until the recording of said transaction in the financial statements takes place.
Balance of the initial situation
When starting the activities in its respective sector, every company has a certain heritage, assets and liabilities. These data must be reflected in an initial balance sheet, which will coincide with the balance made at the closing of the previous cycle.
Therefore, these data are used to compare them with the last ones and check the variations throughout the accounting process.
When starting out, the first thing to do is a first entry of the year . It is known as the opening entry and is where all account balances settled and zeroed out at the close of the last cycle are recorded. Therefore, a new period is started from scratch.
Register of operations
To obtain reliable results, throughout this accounting cycle or registration flow, the company must write down each financial operation that has been carried out.
This stage includes losses, gains, debits or credits, and other accounting exercises. In fact, each of these operations is called in a special way when reflected in accounting.
In this exercise or income statement that is developed at the end of the cycle, the expenses and income must appear to obtain an accounting result.
But, you have to take into account that, for example, days can go by since a deposit is made and it is actually charged. Thus, income and expenses are divided into two groups .
- Income and expenses that have already been accrued or carried out, but have not been collected or paid.
- Contrary to the previous point, in this second group are the income and expenses that have been accrued or made and have also been received or paid.
Prior adjustments before the closing of the accounting cycle
Before finalizing the accounting process, what is known as adjusting entries is carried out.
During this stage, the records are reviewed to correct errors, accumulate operations, check possible insolvencies, reflect deterioration or depreciation of value, among other related activities. The purpose of this phase is to eliminate or avoid possible errors.
This trial balance of balances and health is made in credit and debit. The objective of this operation is to reconcile accounting with the reality of the company.
In addition to being an essential process to close the annual financial year, it is also advisable to do it several times throughout the cycle. In this phase, errors and irregularities are identified, as well as other situations that have to be resolved in order to continue.
In this step, the profit and loss account is made. After including all the expenses of the company and adding all the income of the group, the results of the exercise are obtained.
At the end, all the accounts will be reset to zero, since it is recorded in the estate from that moment.
Closing of accounting
Next, the step to take is to make the closing entry for the year. It is very similar to the previous step, since the accounts must be settled and left at zero.
This closing serves to start with the opening entry of the following year, since it is about doing the same exercise but in reverse.
At the end of the year, it is mandatory to prepare the annual accounts and a management report in less than three months. You must also make a proposal for improvement.
Here you have to reflect the profit and loss, the total balance, the statement of cash flows, changes in equity and a report.
The importance of proper accounting management
Today, all companies have an area to carry out this process with the help of management software and the performance of professionals specialized in the area, such as the figure of the Financial Controller.
The purpose of the accounting cycle is to ensure that every transaction that has been carried out with the company is carried out correctly and accurately reflected in the financial statements.
Almost every financial movement, agreement with banks or lenders, requires financial monitoring, so it is important that all data is correctly distributed and reflected.
It is also necessary to have good accounting and proper documentation management to manage the financial health of the company.
The orientation of business decisions can be enhanced if this information is available and one is up to date with tax obligations.