In this article
You might like
No items found.
See the latest spending trends for 25k+ companies on Ramp

Benchmark your company's expenses with Ramp's data.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Spending made smarter
Easy-to-use cards, spend limits, approval flows, vendor payments —plus an average savings of 5%.1
|
4.8 Rating 4.8 rating
Error Message
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Get fresh finance insights, monthly
Time and money-saving tips,
straight to your inbox
|
4.8 Rating 4.8 rating
Thanks for signing up
Oops! Something went wrong while submitting the form.
Ready to partner with Ramp?
Time is money. Save both.
Ready to partner with Ramp?
Time is money. Save both.
Ready to partner with Ramp?
Time is money. Save both.
Table of contents
This post is from Ramp's contributor network—a group of professionals with deep experience in accounting, finance, strategy, startups, and more.
Interested in joining? Sign up here.

The accounting close cycle is a series of steps to validate, record, and report financial transactions. They’re done on a monthly basis, though some steps (i.e. Step 8 at the end of this article) are only done annually.

The goal of the accounting cycle is to generate financial statements that are accurate and prepared in a timely manner. The following steps may look a little different based on the accounting software used; however, across industries or companies, the accounting cycle will look fairly similar.

Step 1: Collecting and analyzing financial data

The first step in the accounting cycle involves collecting and analyzing financial data. This data will eventually need to be entered into the financial system. The financial data ranges from invoices, email correspondences, or legal agreements.

This stage is incredibly valuable as it sets the foundation for the ultimate accuracy and completeness of the full accounting cycle. All of the remaining steps are based on the information that's collected. For example, the invoices that are gathered from vendors that list the cost to be paid and the related dates contain all of the relevant data that will make up the financial statements.

TIP
Opt for automated tools and software to streamline data collection, as there’s a greater risk of error when collecting data manually.

Step 2: Recording transactions in journals

Journals serve as a fundamental tool in accounting, and it’s the detailed log that records transactions. In this second step, accountants take the financial data collected from the first step and enter it into the financial statement software. This is done by posting individual journal entries that each represent different transactions.

It’s important to understand that transactions can be entered in different ways. For example, an account payable module may help create the entries needed to record invoice transactions, while a general ledger module would help with recording transactions.

TIP
Accounting software can verify the validity of your entries, including whether debits and credits balance, whether invalid chart fields are being used, or whether the period is incorrect.

Step 3: Posting journal entries to ledgers

Ledgers are used to summarize transactional data within accounting systems. They’re used to aggregate all of the journal entries posted in the previous step, and there’s different types of ledgers. For example, the accounts payable example mentioned above uses the accounts payable ledger. This means that all accounts payable transactions are added together, then summarized.

The ledger is important because since it aggregates and organizes data, it offers a comprehensive overview of a company's financial position. In order to prepare its general ledger, a company must do the preceding two steps; without having collected accurate financial data and having posted journal entries to reflect that data, a company wouldn't be able to aggregate its data into a ledger. 

TIP
Make sure you’re done posting all entries for the period before closing the month; your general ledger won't roll correctly if periods linger and entries are retrospectively posted.

Step 4: Preparing trial balance

Step four in the accounting process involves preparing a trial balance. A trial balance is a statement that lists all the general ledger accounts and their respective debit or credit balances. It’s important to note that a trial balance shows all of the account balances as of a specific date.

To prepare a trial balance, you have to gather the balances from each ledger account and organize them into a two-column format, with debit balances on the left and credit balances on the right. This process allows accountants to detect errors in recording transactions and to verify the entire set of records at a very high level. 

TIP
The trial balance is a reconciliation tool, so leverage technology to find discrepancies or inconsistencies. You can also repeat steps 1 through 4 as many times as you need before closing an accounting period.

Step 5: Adjusting entries

Adjusting entries are usually needed to account for certain types of transactions. These entries are made at the end of an accounting period to update account balances, mainly to reflect accruals or deferrals.

Common examples of adjusting entries include recognizing accrued expenses, prepaid expenses, accrued revenues, and unearned revenues. Accountants will post these entries if they need to prepare financial statements under the accrual method but not the cash method.

TIP
Choose software that either (a) allows for custom set-up of recurring entries or (b) leverages algorithms to automatically adjust ledger balances.

Step 6: Preparing an adjusted trial balance

Assuming adjusting entries are made, accountants usually re-run a trial balance (called an adjusted trial balance). This step isn't needed if no adjusting journal entries are made. This step entails preparing an updated trial balance that now contains all of the transactions for the entire period.

TIP
Don’t complete step 6 unless you know you’re done with your accounting period. Once you move to generating final financial statements, it’s more complicated to revert back to prior steps.

Step 7: Generating financial statements

The ultimate goal of the accounting cycle is to prepare financial statements. The main financial statements consist of the income statement, balance sheet, and statement of cash flows. These reports offer a comprehensive overview of a company's financial performance.

The financial statements are prepared by taking the 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). 

TIP
Seek software platforms that not only generate externally-friendly financial statements but custom, internally useful reports more suitable for management and decision-making.

Step 8: Closing entries

At the end of each fiscal year, closing entries are made to reset the revenue and expense accounts to zero. This is usually done automatically by an accounting system.

This process involves transferring the balances of revenue and expense accounts to a temporary summary account. Then, that temporary summary account is adjusted to retained earnings. Note that this last step is only done at the end of the fiscal year; this step isn’t done at every month-end. 

TIP
Make sure this was done correctly by checking what your revenue and expense balances were at the start of the year. Unlike balance sheet accounts, each income statement account should start at $0.

Wrapping up: Navigating the accounting cycle steps

The accounting cycle encompasses a series of sequential steps designed to ensure the accuracy, completeness, and reliability of the financial reporting process. Beginning with identifying/recording transactions and ending with preparing financial statements and rolling year-end accounts, the accounting cycle is repetitive month-over-month.

Because of this process, users of the financial statements (both internal management and external stakeholders) can have greater confidence that the reports have been prepared correctly.

Accelerate up the accounting cycle with Ramp

Say goodbye to tedious data entry at the end of the month; Ramp Bill Pay harnesses AI to extract invoice details and learns your coding habits, making bill processing quicker, more accurate, and significantly more efficient.

Strengthen your financial controls instantly by minimizing fraud and payment errors—Ramp intelligently identifies duplicate invoices, automates approval routing, and ensures 2-way matching with purchase orders.

With Ramp, you can consolidate all payment methods onto one platform, catering to both domestic and global vendors with options like check, card, same-day ACH, or international wire.

Try Ramp for free
Error Message
 
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Director of Growth, Ramp
Luke is a growth marketer responsible for Ramp's contributor network. Prior to Ramp Luke has run growth and marketing teams at LogRocket, Tervela, and Acquia. Luke also consults on dozens of pre-seed, seed, and series A startups on their go-to-market strategies.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

FAQs

How The Second City expedited expense management and gained financial control with Ramp

“Just do it:” How Bratjen Construction Modernized Processes, Saved Time, and Improved Accuracy with Ramp

“Prior to Ramp, we had a handful of cards that our owners and leadership had access to, but it was more of a trust based system. Ramp has allowed us to give cards to more people, but the controls in Ramp ensure that the cards are used properly.”
Michael Irvin, Director of Operations, Bratjen Construction

How MAGNA-TILES® implemented a corporate card program, reduced stress, and prepared to build with Ramp

"In my day-to-day, Ramp helps me resolve things quickly and expedite month-end close. From an overall holistic business standpoint, we now have the ability to quickly scale as we add new users. It’s kind of crazy how quickly things have grown here, and Ramp has been a great partner for us in that growth.”
Tim Borse, Assistant Controller, MAGNA-TILES

How Eventbrite streamlined processes and improved UX with Ramp

"The Ramp dashboard easily shows how many cardholders are paying for the same subscription. Now the procurement team has the information they need to negotiate a corporate package.”
Laura Moreno, Sr. Manager, Global AP, Eventbrite

How Boys & Girls Clubs of America improved efficiency, gained visibility over spend, and regained lost time with Ramp

How Evans Hotels saved time and gained spend visibility with Ramp

“Ramp has been a big win for us when it comes to transparency and visibility. If the executive team wants to dig into spend at a property or review purchases the teams are making, we can have that information really quickly and are confident it’s accurate.”
Caryn Fink, Director of Accounting, Evans Hotels

How Ramp became KIPP Nashville’s biggest financial win

"There was no fire drill for the beginning of the school year this year, because the schools had a process. Ramp will ingest the line items automatically, so no more manual import. It’s made the process so much easier."
Carey Peek, CFO, KIPP Nashville Public Schools