The Importance of Not Missing a Step in the Accounting Cycle
The accounting cycle is the chain of activities that businesses and organizational entities perform to track transactions and consolidate financial information of a specific accounting period. It is performed in a 10-step sequence that culminates in the presentation of detailed financial statements.
10 Steps of the Accounting Cycle
The 10 steps are:
- Analyzing transactions
- Entering journal entries of the transactions
- Transferring journal entries to the general ledger
- Crafting unadjusted trial balance
- Adjusting entries in the trial balance
- Preparing an adjusted trial balance
- Processing financial statements
- Closing temporary accounts
- Preparing post-closing trial balance
- Reversing entries.
As the bookkeeping website Bench reports, each step must be completed before the next step is started, to ensure that all financial transactions are properly recorded.
Steps are Dependent
You cannot afford to miss a step in the accounting cycle because accounting processes and procedures are dependent on each other, and each prior activity is a prerequisite for the succeeding task. The accuracy of the succeeding task is dependent on the accuracy of the immediate preceding activity and all the other previous activities before it. Activities along the accounting cycle are serially linked, so that a succeeding activity can only be performed after the completion of a preceding activity. For example, as Accounting Tools reports, you can only prepare the adjusted trial balance after adjusting entries in the unadjusted trial balance. Skipping any of the steps in the accounting cycle would create serious flaws in the entire financial reporting process.
Steps Ensure Information is Disseminated
All the steps of the accounting cycle are critical in facilitating the systematic dissemination of different aspects of financial information as they become due. This enables the management team to draw important decisions about the progress of business activities at different stages of the accounting cycle. It also ensures that any inaccurate information is detected and corrected before and after the production of financial information. The adjustment of entries in the trial balance is based on the accuracy of information processed in the prior stages of the accounting cycle.
Allows for Accurate Monitoring
Temporary accounts – that is, expenses, revenues and dividends accounts – must be zeroed out and their balances transferred to the retained earnings account during the closing process. However, the retained earnings account does not update automatically when expenses, revenues and dividends are posted to their respective ledger accounts. This means that retained earnings remains dormant until the closing process when it must be updated to reflect changes in the temporary accounts. Missing any of the steps in the accounting cycle would derail the monitoring of transactions, the tracking of ledger accounts and the updating of respective accounts during the closing process.
Smooth Transition Between Periods
Each of the steps in the accounting cycle contributes towards smooth transition from one accounting period to another. The closing process sets the general ledger ready for the new accounting period. Omitting any of the steps distorts the accuracy of opening balances for the subsequent accounting period. For example, whereas the temporary accounts are zeroed out during the closing process, real accounts are carried forward to the subsequent accounting period. Real accounts are balance sheet items that include assets, stockholders’ equity and liabilities accounts. The real account must balance after the closing process, a status that is confirmed by the post-closing trial balance.