What are the steps of the accounting cycle? 

The accounting cycle ensures that financial statements—such as the balance sheet, income statement, and cash flow statement—are accurate and reflect the company’s financial health.

Essential for small businesses, accountants, and business owners, the accounting cycle helps track performance, ensure compliance, and maintain reliable financial records. The cycle repeats at the end of each accounting period, whether monthly, quarterly, or annually, enabling businesses to analyze financial outcomes and prepare for the next accounting period.

What is the accounting cycle?

The accounting cycle is the process businesses use to record and process financial transactions and produce financial statements. This process begins when a financial transaction occurs and continues until the company’s accounts are closed and reset for the next cycle.

The cycle involves several key steps: Recording transactions, making journal entries, posting to the general ledger, adjusting accounts, and preparing the final financial statements.

Each step ensures that financial records are accurate and provide valuable insight into the company’s performance and financial position. The cycle is pivotal for maintaining financial transparency, making informed decisions, and staying compliant with accounting principles.

Steps of the accounting cycle

The accounting cycle is a multi-step process that ensures a company’s financial records are accurate and up to date. Each step plays a crucial role in maintaining financial health, from collecting and analyzing financial data to closing entries at the end of the accounting period. By following these steps, your business can generate reliable financial statements that reflect its financial performance and position.

1. Collecting and analyzing financial data

The first step includes gathering all relevant business transactions such as invoices, receipts, and contracts. The goal is to make sure all financial activities are accurately recorded and categorized.

Accountants review documents and financial records to identify and validate transactions that must be recorded. Examples include accounts payable and accounts receivable, along with any sales, expenses, or investments made during the accounting period in question.

2. Identifying transactions

Business transactions are the foundation of the accounting cycle. These transactions include sales revenue, asset acquisitions, debt payments, and expense recording.

For example, when your company purchases goods on credit, you record an accounts payable entry to reflect the liability. Similarly, payments made to vendors reduce accounts payable and are recorded as business transactions in the accounting system.

3. Recording journal entries

After you identify your transactions, you record them as journal entries. Each journal entry includes debits and credits, which must always balance according to double-entry bookkeeping principles. This step is vital for maintaining a general ledger that accurately reflects the company’s financial activities.

Double-entry accounting ensures that every transaction impacts at least two accounts, helping to balance the general ledger and providing a clear record of financial activities. For example, when accounts payable increase, you record that as a liability and offset it with the related expense or asset account.

4. Posting to the general ledger

Once you record your journal entries, you post them to the general ledger. This aggregates all financial transactions in individual accounts, such as assets, liabilities, and equity. The general ledger serves as your foundation for preparing accurate financial statements.

The general ledger provides a comprehensive record of all financial activities, allowing accountants to monitor the company's financial position at any given time. Accounts payable is an important liability account in the general ledger because it tracks what your business owes to suppliers.

5. Preparing the trial balance

At the end of the accounting period, prepare an unadjusted trial balance to ensure that the debits and credits recorded in the general ledger match. The unadjusted trial balance helps you verify the accuracy of your journal entries and pick up any discrepancies before you prepare the final adjusted trial balance.

A properly balanced trial balance ensures the integrity of the financial data and helps you highlight errors before you go on to the next steps. For example, an accounts payable imbalance might mean you made a mistake when recording your business transactions.

6. Using a worksheet

Track discrepancies and identify entries to adjust with a worksheet. If your trial balance doesn’t match, make adjustments to balance your books and comply with accounting principles.

Your worksheet helps you organize what to fix, from accruals and prepaid expenses to depreciation. That allows you to be sure your financial statements accurately reflect your business's financial performance. You can also adjust your accounts payable if you missed or misrecorded any invoices.

7. Adjusting journal entries

Make further adjustments at the end of each accounting period to account for things such as accruals, deferrals, and depreciation. This matches revenues and expenses to the correct accounting period, in keeping with accrual accounting principles.

For example, record accrued expenses, such as unpaid wages, or unearned revenue, such as deposits for services not yet performed, for accuracy’s sake. If you’ve incorrectly recorded any accounts payable, you may need to adjust here, too.

8. Preparing financial statements

The ultimate goal of the accounting cycle is to prepare your financial statements. These include:

• Income statement: This shows your company’s net income or net loss for the period
• Balance sheet: This provides a snapshot of your assets, liabilities, and equity
• Cash flow statement: This details your company’s cash inflows and cash outflows.

You prepare your financial statements by taking your adjusted trial balance and incorporating the ledger accounts and balances into a specific report format. That format, along with the rules on how journal entries are recorded,) is usually dictated by Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

9. Completing closing entries

At the end of each accounting period, closing entries reset temporary accounts, such as revenues and expenses, to zero. An accounting system usually handles this automatically.

This ensures the income statement reflects a specific period’s financial performance while the balance sheet continues to reflect your company’s ongoing financial position. Review any remaining balances in accounts payable for accuracy after closing and before the new period begins.

Here’s an easy-to-scan accounting cycle summary:

Accounting cycle fundamentals

You must grasp basic accounting principles for a smooth accounting cycle. Key principles include:

• Accrual accounting: Recognizes revenues when earned and expenses when incurred, regardless of cash flow
• Revenue recognition: Ensures you record revenues when they’re earned, not when you’re paid
• Matching principle: Matches expenses to revenues they help generate for accurate net income

Ramp up your accounting cycle

The accounting cycle ensures that financial records are accurate, timely, and compliant with accounting standards. By following each step—from transactions to closing entries—you can generate reliable financial statements that offer valuable insights into your financial performance and position.

Ramp’s automation streamlines the cycle, saving time and reducing errors. At the end of each accounting period, you can monitor your company’s financial health and make informed decisions for the future.

Ramp Bill Pay harnesses AI to extract invoice details and learns your coding habits, making bill processing quicker, more accurate, and significantly more efficient.

Ramp also strengthens your financial controls and minimizes fraud and payment errors. It identifies duplicate invoices, automates approval routing, and ensures two-way matching with purchase orders.

‍Learn more about what Ramp can do for you.