The Accounting Cycle: Explanation and Steps That Need to Be Done

The accounting cycle in a company can be interpreted as a series of activities to identify, analyze, and record every financial journey as long as the company is running.

Generally, this process is carried out within one year, then at the end of the year the output of the process is reported to the company. This accounting process repeats itself to create a flow known as the Accounting Cycle.

Here's a further explanation.

Definition of the Accounting Cycle

The accounting cycle is clearly defined as an iterative process of identifying, analyzing and recording all accounting activities in an organization. This accounting activity cycle takes place within one year.

During this period, all accounting principles, rules, methods and techniques were applied to record all accounting activities of the company. As a rule, this cycle begins at the beginning of the year when the book opens and ends with closing entries.

This accounting process will continue and repeat as long as the company is still active. This turns the process into a cycle. Having this cycle helps solve this problem for business owners.

Stages of the Accounting Cycle

As a cycle, the accounting process also has various stages that must be passed one after another. The purpose of this cycle is to provide appropriate accounting information to support the decision-making process. To achieve this goal, the phases of the accounting cycle are as follows:

Transaction Identification

Identifying each transaction is the first step in this cycle. This identification work must be done properly by an accountant, and this can be done by recording all the transactions that occur.

Recorded accounting transactions are all transactions that directly affect changes in the company's financial position and are evaluated objectively. Transactions carried out also require proof of transactions so that they can be identified.

Evidence of this transaction can be in the form of receipts, invoices, notes, or other evidence that is considered valid in the world of accounting. Therefore, accounting transactions must use transaction evidence that can be recorded and identified by an accountant, especially those related to changes in the company's financial position.

Transaction Analysis

After the identification stage, the auditor must analyze transactions in terms of their impact on the company's financial position. The company's accounting system always works with double bookkeeping.

This means that all accounting transactions affect the debit and credit financial position and must be in the same amount. Mathematically, accounting usually uses a formula.

Assets = Liabilities + Equity when analyzing and calculating transactions that occur. For example, the company received a cash investment of IDR 1.000.000, tools and equipment of IDR 500.000.

IDR 1.500.000,00 in cash, supplies and equipment, so that the transaction can be analyzed. This addition represents an increase in the company's capital of IDR 1.500.000 - because all of these transactions are part of the company's capital.

Recording Transactions in Journals

After the accounting department performs transaction analysis, the next step is to record all transactions in the financial journal. In accounting, a journal is defined as a time series record of transactions that occur. The process of entering this information is called journalizing.

In the journalizing process, each transaction is divided into two
debit and credit. These recordings can be made in a public diary.

Records must be continuous and complete without losing transactions. Until then at the end it has the same amount of debits and credits.

Ledger Posts

Once recorded in the journal, the accountant inputs all transactions to the general ledger. In general, the general ledger can be interpreted as a collection of accounting accounts that contain information about certain assets recorded during a certain period of time. A company must have various ledger account lists.

Each account in the ledger is assigned a specific code number. The aim is to facilitate the identification process in the journal.

In addition, accountants can easily review or view transaction references recorded in the general ledger.

Preparing Trial Balance and Adjusting Journal

The next step in the accounting cycle carried out by the accountant is to prepare a trial balance and make adjusting entries. The trial balance contains a list of the balances of each account in the general ledger for a certain period.

When writing a trial balance, the general ledger balances must be combined and remain the same. If under certain circumstances it turns out that the transaction was not recorded or the trial balance is incorrect, the accountant is required to make a correcting entry.

The making of this adjusting journal is periodic and the process is the same as a general journal. After being recorded in the adjusting journal, the results of the financial statements become real.

Preparation of Adjusted Trial Balance and Financial Statements

The next stage in the accounting cycle is the preparation of an Adjusted Trial Balance and Financial Statements. Adjusting trial balance is made based on the trial balance book that has been made before taking into account the Adjustment Journal.

These balances are divided into assets and liabilities according to their status. Then arranged until the total balance of both is equal. What needs to be considered in preparing this Adjusted Trial Balance is that the total balances in Assets and Liabilities are the same.

If not, there will be an error in the calculation and the financial report cannot be prepared. This Financial Statement is prepared after the total balance of Assets and Liabilities in the Trial Balance book is equal.

In the Financial Statements, several reports are prepared, such as profit and loss reports, reports on changes in capital, cash flow statements, and balance sheets that calculate liquidity, solvency, and flexibility. Next, the accountant enters the final stage, namely making a Closing Journal.

Compile Closing Journals

The final stage of this cycle is the preparation of closing entries by the accountant. Closing entries are made at the end of the accounting period by closing nominal or profit and loss accounts. To close two accounts, you can do this by making the value of the account zero.

The purpose of closing this account is to verify flow at the source during the current billing period. Once the account is complete, you can use this closing journal to measure the activities that occurred during that period.

Subsequent periods help closing entries to restart at the next journal cycle.

Compile Balance Sheet and Reversing Journal

The stages of the accounting process cycle for the previous period can be completed by making closing entries. The process of creating a trial balance and reversing journal entries is optional and can be executed or not.

In this phase, the trial balance contains the perpetual account balances of the general ledger accounts after closing entries. Reversing journals are designed to facilitate the process of recording certain transactions, especially those that are always repeated.

That is a simple explanation of the accounting cycle that you must understand. Hopefully this information opens your basic insights!