A comprehensive guide to the accounting cycle

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We all know that financial information has undeniable power. It is a global language that speaks frankly and tells the story of every company and institution. In this evolving financial world, eyes are busy searching for skilled individuals and specialists who are able to understand this language and translate it skillfully. Here comes the role of the accounting cycle as an essential tool for developing our understanding of money and its management. It’s like a real-life simulation of a company’s beating heart, recording every financial beat that comes in and out, which reflects the flow of money and financial transactions and contributes to monitoring and analyzing vital financial data. There will be no other place more important for learning the financial language and effective accounting than this course. So follow this article with us, in which we will explore many aspects of the accounting cycle, its basic elements, and how to apply it correctly.

Excerpt

The accounting cycle consists of several basic steps that ensure that accounting operations are carried out correctly. Therefore, establishments should pay attention to the stages of this cycle and implement them carefully, starting from knowing the financial transactions to recording them in the journal.

What is the accounting cycle?

It is a series of sequential steps that are followed by institutions and companies to record and document financial transactions and prepare final financial statements. It aims to provide a clear and comprehensive picture of the facility’s financial situation and enable decision-makers to make the correct economic and financial decisions.

Automating this cycle through cloud accounting software is important in the modern era, as this software offers integrated solutions to manage all aspects in an easy and efficient way. If you run your own organization or work in the accounting department, using a cloud accounting program, such as Qoyod, can have a significant impact on the efficiency and accuracy of daily accounting operations and the preparation of final financial statements.

Objectives of the accounting cycle

The accounting cycle has multiple, interconnected objectives that contribute to maintaining the integrity and effectiveness of the accounting system in the facility, and its objectives include the following:

Comprehensive access to financial information

This cycle aims to provide a general framework that allows a comprehensive review of the various financial statements of the facility, including recording and processing financial transactions correctly and effectively and preparing the necessary financial statements, such as the balance sheet and income statements, in addition to cash flows.

Providing information to third parties

The accounting cycle plays a crucial role in providing external parties with accurate and reliable financial information. These parties include tax authorities, investors, financial institutions, and government agencies, and by providing detailed financial reports and data, the accounting cycle can help these parties understand and evaluate the entity’s financial position and make appropriate decisions.

Supporting the administrative decision-making process

It also contributes to providing financial statements and analytical reports that support administrative decision-making, as managers and decision-makers in the facility can rely on this information to evaluate the facility’s performance, identify strong and weak points, identify opportunities and challenges, and take the necessary actions to achieve the specified goals.

Fraud prevention and error correction

This cycle constitutes a system of verification and review that helps detect errors and potential fraud. By having strict internal monitoring and control procedures, the risk of casual error and potential fraud is reduced. Thus, the accounting role enhances confidence in financial information and the overall credibility of the facility.

The basic pillars of the accounting cycle

The basic pillars of the accounting cycle include several important steps for recording and tracking the facility’s financial transactions in an accurate and organized manner, which can be summarized as follows:

Recording transactions in the journal

The journal is an essential tool for recording all the company’s financial transactions, as it records the financial amounts entered and disbursed on a daily basis. This helps in tracking and documenting all financial operations.

Recording transactions

After transactions are recorded in the journal, they must be recorded in the appropriate accounts. Specific accounts are assigned for each type of transaction, which facilitates the process of classification and accounting analysis of financial information.

Posting transactions to the ledger

After recording the transactions, they move to the ledger, and the ledger is a central record that contains details of the financial institution’s accounts, as transactions are recorded in the ledger according to the specified accounts. This helps in tracking and analyzing balances.

Preparing the trial balance

The trial balance is prepared based on the information recorded in the ledger, as it reflects the credit and debit balances of each account and helps in analyzing and evaluating the financial performance of the facility.

Stages of the accounting cycle 

The accounting cycle is essential to the success and continuity of any facility, as this vital work consists of eight main steps that serve as the basis for correct accounting operations, which are as follows:

Knowledge of financial transactions

This first step in the cycle is the most important, as we must collect and monitor all financial transactions in one place, whether they are invoices sent to customers or sales recorded in a specific file.

This step may take time and effort, but it is necessary to obtain accurate financial numbers, and we must point out that establishments that use cloud accounting programs, such as Qoyod, can easily overcome this problem, as they can access all their financial data quickly and at any time.

Record data in a journal.

The journal is an accounting tool that records the facility’s financial transactions, whether daily, weekly, or even monthly. In this book, the accountant uses the double entry method to record transactions, which means an increase on one end and a decrease on the other end.

For example, if you buy furniture for your office, your bank account balance will decrease because you used this account to make the purchase.

Do not forget that the journal takes care of all financial transactions taking place in the facility, regardless of their type, and this may include selling a service to a customer for a certain amount or purchasing office furniture for another amount.

Example

  • If we buy in cash some purchases in the amount of 60,000 Saudi riyals.
  • Then one of the goods was sold to customers for SAR 100,000.
  • You purchased goods from suppliers for 50,000 riyals.
  • Merchandise was also sold for cash in the amount of 200 thousand riyals.
  • You paid rent in cash in the amount of 20,000 riyals.

All of this shows that there is an increase and a deficiency account. So you would record according to the double entry in the journal as follows:

debt Credit Statement entry number
60000 60000 From purchases to cash 2
100000 100000 From customers to sales 4
50000 50000 From/suppliers to/payable notes 6
200000 200000 From cash to sales 8
20000 20000 From rent to cash 10

After recording all the financial transactions that occurred daily, the first step of the accounting cycle is well completed.

Migrate data from journal to ledger

Transferring data from the journal to the ledger is one of the pillars of the basic accounting cycle. In this step, all financial data recorded in the journal is transferred to the ledger. This requires setting a date for each financial entry to know its timing and nature. It is preferable to use the ledger found in accounting programs. Due to its ease and flexibility in customization.

In the previous journal, you could open a cash account as follows:

From/purchases 60000

 

To/sales 200000

 

From or rent 20000

 

   

 

Balance relay 120000

 

   

 

  80000

 

  200000

 

    Transferred balance 120000

 

 

Preparing and building the trial balance

The trial balance is collecting the financial balances and dividing them into two parts: credit and debit, and they must be equal, but if they are not equal, this indicates that errors have occurred either in recording the entries in the journal or while posting them to the ledger, which gives a clear picture of the facility’s financial position during the accounting period.

The trial balance can be prepared either quarterly or semi-annually, depending on the volume or desire of the business. See the following example to make it clearer:

the account Debt Credit
Cash 30000  
The machines and the equipment 80000  
Buildings 150000  
Payment papers   5000
Revenues   240000
Rental income   15000
Total 260000 260000

Knowledge of Adjusting Entries

Adjusting entries include posting or uploading revenues and expenses for each financial period separately and include making tax settlements, making deferrals, making dues, and also settling any missing transactions, so you must know Adjusting Entries to ensure the balance of financial transactions.

Preparing the trial balance after adjusting entries

After adding adjusting entries to the trial balance, it must be prepared again, as this is one of the basic pillars of the accounting cycle to ensure its completion, as the credit and debit must be equal in the balance, and if this does not happen, the cause must be known and treated. Because the correct trial balance can be used to prepare important financial statements,.

Preparing important financial statements

At the end of the accounting period, three main financial statements must be prepared: the income statement, the financial position statement, and the cash flow statement.

Closing accounts 

When the accounts are closed, the financial balances are liquidated, settled, and transferred to permanent financial records, as the accounts of revenues, expenses, income, and financial position for the previous fiscal year are closed. Once the accounts are closed, the new fiscal year begins with zero, and the process begins again.

However, there are some accounts that are not closed and always remain open, and they include: assets and liabilities. Assets and liabilities accounts are kept open because they are permanent accounts, and they continue to affect the financial results of the facility over the years.

By closing the accounts, the accounting records are cleansed, the facility is prepared to begin a new accounting cycle, and closing procedures are applied to ensure the balance of the financial records and to provide an accurate picture of the facility’s financial position at the end of the fiscal year.

 

Conclusion

We find that the accounting cycle plays a vital role in the success of any financial or commercial system, as it is the guarantee that achieves the flow of financial information in an accurate and transparent manner and provides the necessary tools to make the right strategic decisions. This cycle also provides mechanisms for control and monitoring, which helps to discover potential imbalances and financial manipulation, and thanks to it, companies and institutions can rely on accurate financial information to achieve growth and sustainability. With the development of technology, this cycle is witnessing continuous development as digital solutions and artificial intelligence are adopted in accounting processes, and thus this contributes to improving work efficiency and reducing errors, which saves more time and effort to focus on activities. The other strategy So understanding the accounting cycle and implementing it correctly is essential to the success of any business.

 

We must pay this cycle the necessary attention and provide the necessary resources to constantly improve and develop it. Also,  do not forget to try the integrated cloud accounting program Qoyod, as you can test all the stages and procedures of this cycle with ease and accuracy. It is worth noting that the program also offers to all its clients: electronic invoice systems as well as point-of-sale systems, stores, customers, and so on.

 

After knowing what the accounting cycle is and its basic pillars, try Qoyod now for free for 14 days, and let’s go together to discover the magic and power of this course in turning financial numbers into an interesting financial story.

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