The accounting cycle is merely a routine to follow to finalize your businesses books. Like any routine, consistency is the key to success. We will go over the 5 parts to the accounting cycle and how they can improve your financial statements.
- Beginning balance – This is the foundation of the accounting cycle. The beginning balances to all your accounts need a starting point. Starting with accurate information is imperative to getting accurate statements in the future. Think of it as starting your day with a good breakfast.
- Transaction for the period – This will be all your financial transactions for a period of time. This will be recording your income and expenses.
- End of period adjustments – Adjustments to the financial statements include any allocations that need to be made to spread out the value of something over time. These include but are not limited to depreciation and prepaid expenses.
- Financial Statements – This is the review process. Two things happen in this stage. One, abnormalities are spotted to ensure that every thing has been posted. Two, red flags are spotted that involve the financial security of your business.
- Closing balance – After the financial statements are reviewed and analyzed the books are closed and no further entries are made.
The cycle starts over the next month with closing balance becoming your new beginning balance.
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