Question

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Why is the accounting cycle important to a business? Evaluate the significance of the accounting cycle in terms of its practical relevance for businesses.

Answer 1

The accounting cycle is a standard practice in financial accounting that allows an organization to record and calculate its financial activities. The cycle consists of a number of steps, each of which relies on earlier steps to collect data and organize it in a meaningful way. Small businesses, which lack full-time accounting departments, rely on the accounting cycle to establish methods for financial accounting that fit within their budgets and give owners clear views of their changing positions in competitive markets.

Compliance
An accounting cycle enables the financial accounting that businesses need to perform to be in compliance with federal regulations and tax codes. The government requires companies of all sizes to disclose their financial results and pay taxes on their profits, which they must calculate on their own. The accounting cycle ensures accuracy and uniformity among companies, making the market fairer for competition and making information available to interested parties.

Efficiency
For any business with accounting needs, the accounting cycle provides a model for efficient accounting procedures and ongoing processes. The cycle consists of steps, meaning that it functions as a checklist. As one step is completed, accountants use the cycle to determine which actions to perform next. This is of particular benefit to a small business, which may rely on its owner to handle much of the day-to-day accounting in addition to other duties.

Internal Analysis
Within a business, the need for an accounting cycle extends to the necessity of analyzing internal financial performance. Some steps of the accounting cycle, such as analyzing, journalizing and posting transactions, occur on an ongoing basis. Others, such as preparing and adjusting trial balances, occur only at the end of the cycle and provide the financial statement data that a company's leaders use to make decisions about future spending and financial strategies going forward.
Time Management
Accounting cycles allow accountants to manage their time based on fiscal periods, such as years and quarters. By comparing the cycle to a calendar, an accounting team can set realistic goals for completing each step in the process in order to have financial statements ready on time. The accounting cycle also perpetuates itself, ending with steps that prepare an accounting team to perform the same process again for the next fiscal period.

The accounting cycle is the holistic process of recording and processing all financial transactions of a company, from when the transaction occurs, to its representation on the financial statements, to closing the accounts. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business.
The accounting cycle incorporates all the accounts, journal entries, T accounts, debits, and credits, adjusting entries over a full cycle.



Steps in the accounting cycle

#1 Transactions
Transactions: Financial transactions start the process. If there were no financial transactions, there would be nothing to keep track of. Transactions may include a debt payoff, any purchases or acquisition of assets, sales revenue, or any expenses incurred.

#2 Journal Entries
Journal Entries: With the transactions set in place, the next step is to record these entries in the company’s journal in chronological order. In debiting one or more accounts and crediting one or more accounts, the debits and credits must always balance.

#3 Posting to the General Ledger (GL)
Posting to the GL: The journal entries are then posted to the general ledger where a summary of all transactions to individual accounts can be seen.

#4 Trial Balance
Trial Balance: At the end of the accounting period (which may be quarterly, monthly, or yearly, depending on the company), a total balance is calculated for the accounts.

#5 Worksheet
Worksheet: When the debits and credits on the trial balance don’t match, the bookkeeper must look for errors and make corrective adjustments that are tracked on a worksheet.

#6 Adjusting Entries
Adjusting Entries: At the end of the company’s accounting period, adjusting entries must be posted to accounts for accruals and deferrals.

#7 Financial Statements
Financial Statements: The balance sheet, income statement, and cash flow statement can be prepared using the correct balances.

#8 Closing
Closing: The revenue and expense accounts are closed and zeroed out for the next accounting cycle. This is because revenue and expense accounts are income statement accounts, which show performance for a specific period. Balance sheet accounts are not closed because they show the company’s financial position at a certain point in time.