Understand the Accounting Cycle to Understand Your Business

It would be nice if keeping track of your business’ financials was as easy as invoicing a client and collecting the money for that invoice, but the truth is there’s much more to it than that. In reality, each transaction for your business goes through an eight-step cycle. I know that sounds like a lot, but if you really want to understand your business, you need to understand this accounting cycle.

In this article, I break down each step of the cycle so you can have a clear understanding of what’s involved in each step, as well as how it fits into the whole process. Let’s get started.

1) Identify and Analyze Transactions

As much as we all like to see invoices getting paid (money coming in), it’s important to understand that invoices are just one type of financial transaction you need to identify and analyze in your business. You also need to identify and analyze your expenses, any loans you took out for your business, any debt payments you made, as well as any assets you may have bought during the accounting period.

2) Post Transactions

This part is best done at the same time you’re doing Step 1. All your transactions need to be recorded in your accounting software. If you have recurring transactions, you can set those up in your accounting software to be posted automatically every time they recur, which is a great way to save yourself (or your bookkeeper) some time.

3) Calculate an Unadjusted Trial Balance

At the end of each accounting period, whether it’s weekly, monthly, or quarterly, you need to calculate an unadjusted trial balance for each account. This is when you total up all the money that came in through your business and all the money that went out and see how much you have left over. Most accounting software will do this for you, which makes your job that much easier.

4) Check for Errors (and Fraud)

It’s always important to check your work, and never more important than when you’re dealing with your company’s financials. Checking all your transactions for errors is when you make sure each transaction in your accounting software and in your bank account all line up. Most accounting software does this for you if you accept online payments. If you are also accepting checks or cash payments, you’ll need to make sure those get recorded in your accounting software.

Any deposits from your bank account that are not listed in your accounting software need to be investigated immediately. It could just be a mistake, but it’s also a red flag for fraud.

5) Create and Produce Financial Statements

Now that you’ve recorded all your business transactions, it’s time to put all that data together into a balance sheet, an income statement, and a cash flow statement. These reports are crucial to understanding where money is coming from in your business and where it is going. Again, most accounting software does this for you, but you have to be proactive about running and looking at those reports so you can make better business decisions.

By now you should have a clear idea, not only of what the accounting cycle is but why it’s so important to maintaining a healthy business. That said, understanding the accounting cycle and having the time to go through the entire process each month or quarter is a different matter entirely. If you’d rather focus on other areas of your business while letting someone else handle your accounting cycle, it might be time to call in a Bookkeeping Doctor. You can book your FREE consultation here to get started.