Accounting Cycle
Summary Definition: A standardized process businesses use to record and report financial transactions over a specific accounting period.
What is the Accounting Cycle?
The accounting cycle is a step-by-step process businesses use to identify and summarize financial information during a specific accounting period. It ensures all entries, from initial transaction to general ledger posting to final financial statement, are systematically handled before closing the books.
Key Takeaways
- The accounting cycle is a consistent framework and procedure for accurately recording and reporting financial data within a specific period.
- Understanding each step of the accounting cycle process ensures an organization’s financial integrity, regulatory compliance, and informed decision-making.
- Despite the required time and resources, accounting cycle use supports operational efficiency while laying the foundation for effective spend management and planning.
Why Does the Accounting Cycle Matter?
The accounting cycle guides organizations through each step of recording and reviewing financial transactions. Such consistency is essential for preparing reliable trial balances, accurately adjusting journal entries, and presenting a clear picture of a company’s financial position.
A structured cycle of accounting steps also supports compliance efforts by building a transparent audit trail. This, in turn, reduces the risk of errors or oversights and streamlines the close process for finance professionals and spend management teams.
Accounting Cycle vs. Budget Cycle
Both the budget and accounting cycle processes support financial clarity, but by focusing on different timeframes:
- The accounting cycle looks backward, capturing and organizing actual financial transactions from a defined period to produce accurate reports.
- A budget cycle, conversely, looks forward by forecasting revenues, estimating expenses, and allocating resources for future periods.
In other words, one reflects what has happened, while the other estimates what is to come.
Although they serve different purposes, the two cycles work hand in hand. Accounting cycle information can enhance the accuracy of budget planning, while the budget can help identify discrepancies between business expectations and actual outcomes.
This comparison (a.k.a. reconciliation) is how businesses make sure their financial performance matches their plans and investigate any issues needing attention.
What Are the Steps in the Accounting Cycle?
While each company’s specific process may vary, most include at least the following accounting cycle steps in order. Timing is a crucial factor — some steps occur continuously as transactions happen, while most are reserved for the end of the accounting period to finalize and close out the books.
| Steps of the Accounting Cycle | Accounting Cycle Explanation | Frequency of Use |
| Identify Transactions |
The first step in the accounting cycle is to record all financial transactions that affect the business, including sales, business expenses, purchased assets, or incurred liabilities.
|
Continuously
|
| Record Transactions |
Log each transaction, as it occurs, in a chronological log (i.e., the journal) using the double-entry system (i.e., record every transaction as a debit for one account and a credit for another). Purchasing new equipment, for example, would be a debit in a standard Expenses account and a credit in the corresponding Assets account.
|
|
| Post to the General Ledger |
Posting is the third step in the accounting cycle. Transfer journal entries to the general ledger and sort each entry by account information (e.g., liabilities, income, assets, etc.).
|
|
| Prepare an Unadjusted Trial Balance |
Summarize every account’s information into a single report (a.k.a. trial balance) to check for discrepancies and ensure the total debits are equal to the total credits.
|
End of Period
|
| Adjust Journal Entries | Record any necessary adjustments (e.g., accruals, deferrals, or depreciation) to reflect a more accurate financial position. | |
| Prepare an Adjusted Trial Balance | Recalculate the account balances in an updated report to confirm everything remains in sync. | |
| Generate Financial Statements | Produce the income statement, balance sheet, and cash flow statement using the adjusted trial balance’s data. | |
| Close the Books | Wrap up the period by zeroing out temporary accounts (e.g., revenues and expenses) and preparing for the next accounting period or fiscal year. |
Accounting Cycle Benefits and Burdens
Accounting cycle procedures provide a structured, consistent framework for recording, tracking, and analyzing transactions. This, in turn, provides several advantages, each of which is essential for supporting informed decision-making and resource allocation:
- Increased transparency and visibility into organizational spending
- Stronger internal controls over financial data
- Enhanced financial reporting accuracy
- Reduced risk of financial errors or fraud
However, the reliance on vigilant data entry can make accounting cycles time-consuming and overly complicated (e.g., adjusting entries and trial balances) for smaller organizations with limited accounting expertise.
In such cases, using dedicated accounting software or partnering with an elite accounts payable service provider can alleviate those burdens by streamlining accounting cycle steps and calculations.
Close Books Faster with Touchless AP
Traditional AP processes are riddled with manual data entry, delays, and compliance risks. Airbase by Paylocity’s AI-powered AP Automation handles everything — from invoice capture and GL coding to vendor payments and reconciliation — giving finance teams control, accuracy, and time back to focus on strategic work.