What Is the Accounting Cycle and Why Is It Important to Your Business?
In my last blog, we learned that accounting is used to identify, record, analyze and reconcile your company’s financial information. We looked at the importance of accurately capturing and recording financial transactions. Today I want to introduce you to the concept of the accounting cycle.
The purpose of the accounting cycle is to ensure that all the financial transactions happening in your business are accounted for and properly balanced. The accounting cycle separates this process of identifying, recording, analyzing, and reconciling your company’s financial information into regular periods of time. This cycle may by monthly, quarterly, annually or even daily. As a business owner, you will select the period of time which best suits your need for timely financial information.
Based on the transactions recorded as part of the accounting cycle, financial statements such as cash flow reports, profit and loss statements, and balance sheets can be prepared. Once all the business accounts have been balanced, they are closed out for that period and new ones are created for the next accounting period.
Balancing your books is based on the accounting equation, Assets = Liabilities + Owner’s equity. This basic accounting equation, also called the balance sheet equation, represents the relationship between the assets, liabilities and owner's equity of your business. This process of accounting is known as double entry accounting. What this means is that every time you enter a financial transaction, both sides of the accounting equation must be in balance.
Understanding what to debit and what to credit to achieve this balance can be very confusing. Fortunately using a good accounting software package such as QuickBooks Online makes this process easy. You simply enter your transactions into the proper place and the software balances the equation for you. Why not let the helpful experts at BookSmart Accounting & Finance show you just how easy this process can be.