Financial statements are essential for your business as you can not secure loans, sell your business, or plan expenses without them. These statements are produced through the accounting cycle. So, to run your business smoothly, many employers require an ongoing cycle of tasks. This cycle consists of multiple steps that are designed to turn all the financial information of a company into financial statements.
Therefore, this blog will let you know about this cycle in four simple steps.
Talk to one of our chartered accountants in Croydon about the online accountancy services we provide. We are just a click away! If you are confused about accounting cycle, then feel free to contact us!
What is an Accounting Cycle?
It is a comprehensive process of recording, processing, and summarising/reporting the financial activities of a company. This process begins after the initial business transaction and concludes with the closing entries of FS (financial statement). A bookkeeper is in charge of overseeing the process from beginning to end.
Why is Accounting Cycle Useful for Your Company’s Finances?
This cycle can benefit you in various ways, regardless of whether you’re a tiny business or use cash accounting systems. First, it ensures that your balances are accurate by informing you that you haven’t missed anything during the procedure. Second, it displays your company’s true financial status.
Moreover, this cycle assists you in properly categorising and adjusting the transaction. It ensures that you and your accountant get a comprehensive and precise picture of the financial stability of your company.
The Four Simple Steps of the Accounting Cycle
The following are the four simple steps of it.
This cycle starts with financial transactions. It could be your company paying its suppliers, a client paying an invoice or only external costs for new equipment. You need to record all the amount of money your employer pays or receives because it contributes to the entire company’s financial status.
2) Record Transactions
After transactions, the next step is to record these transactions in a journal of the company, including the description, value, and date. It is the first entry point for any transaction. In order to easily refer back and review, the entries should be made in chronological sequence.
After this, these records will be moved into the general ledger. They will be grouped into accounts and categorised by the transaction type over there. The compilation of all the financial transactions for a company over a period of time is the main objective of a general ledger.
Accounts have to be balanced at the end of your accounting period. To create a total balance for every account, all the debits and credits should be sum up together. If these numbers do not balance, it will be up to your bookkeeper to identify and remove the errors.
4) Financial Statements
At last, these balances are utilised to produce the financial statement for the accounting year. It contains the cash flow statement, balance sheet, and income statement that are used to finish the cycle and close the accounting year. The balance sheet is carried over to the next accounting year, whereas income and expenditure accounts are closed.
For business owners who do not have an accounting or bookkeeping background, the accounting cycle can be challenging. Therefore, we suggest you employ a professional accountant to handle everything for you. In addition, you can better use your time, energy, and resources on other aspects of your business if you hire a professional.
Our accountants at CruseBurke are qualified and cost-effective! We save your time, money, and stress by handling all your finances and business problems in no time! So, allow us to do this at an affordable package!
Disclaimer: This blog contains general information about the above-mentioned cycle.