accounting cycle

accounting cycle

The Importance of the Accounting Cycle

1. Introduction

This paper presents the results of a literature review of the accounting cycle and its influence over a company’s operations. The objectives of this research were to analyze the importance of the accounting cycle, the influence of financial statements over a company’s short-term decisions, and the use of financial information by a company’s management team. Data was collected between June 2013 and January 2014 through research in textbooks, scientific databases, and other publications. The obtained result shows that the accounting cycle produces essential information to carry out a company’s daily tasks. Financial statements are the key result of the accounting cycle. Classified as highly important, they are used continuously by business managers when making operational decisions. In order to assist them, the accounting information generated through the accounting cycle needs to be reliable, relevant, and sufficiently timely.

Business managers are responsible for making financial decisions about a company’s operations on a day-to-day basis. However, in order to carry out these duties, managers require the assistance of an accounting department to ensure their decisions produce the maximum benefit for a company. One way in which the accounting department provides support is by processing the accounting cycle, which is designed to accumulate all of the financial record-keeping activities in a single accounting period. The accounting cycle is important because it creates key financial statements to help managers monitor a business’s financial condition and meet their operational goals.

2. Steps of the Accounting Cycle

Identify and record the first step of the accounting cycle in the process of recording financial statement data. The first step in the cycle is to analyze each transaction that has an economic impact on the company and decide which accounts will be affected. It is necessary to identify when a transaction occurs and what the transaction accomplishes—the exchange of assets, debts, or services. This process in identifying transactions is recognized in a double-entry system where for each transaction debits and credits are recorded for each account. Each transaction must maintain the basic accounting equation. After the economic event or transaction has been identified and analyzed, we can record our information in the accounting records. The process of recording consists of entering the amount, date, and the accounts debited for each transaction. A chronological record of transactions is necessary if we are to use the data to prepare financial statements, as required by GAAP (Generally Accepted Accounting Principles).

This chapter discusses the accounting cycle. The term cycle refers to the sequence of procedures beginning with the occurrence of a transaction in the course of a business operation, the bookkeeping process, and completion of a full set of financial statements. The bookkeeping process includes the recording of the following items: (1) the name of the accounts affected in a transaction, (2) the specific amount to be debited or credited to each account, and (3) the date of the transaction. After all transactions have been recorded, the next step in completing a full set of financial statements involves analyzing the recorded data. For example, at the end of a period, the data recorded should be classified into accounts and a trial balance is prepared. At the end of the year, adjusting and closing entries are made. This is the stage where data become financial statements.

3. Benefits of Following the Accounting Cycle

The accounting cycle’s aim is to deliver meaningful data necessary for decision-making. The task then becomes one of ensuring that all participants who may use a business enterprise’s performance measurements can rely on each other’s inputs and basis for measurement. Meaningfulness comes from using the sophisticated disciplinary safeguards of transaction recognition, measurement, interpretation, and disclosure, the “inherent integrated safety device” originally envisioned by Paton and Littleton. Useful accounting communicative notions may not well serve their primary purpose shortening the accounting cycle at the expense of reliability, interpretation, and being continually inclusive. The disciplinary silos of accounting work need to ensure other silos are included and supported.

To appreciate the importance of the accounting cycle, we should also recognize that we have long debated how to record financial transactions and also how to analyze, validate, interpret, and report all measurements or descriptions of an organization’s financial status and performance. The accounting discipline has developed many supporting techniques and notations to ensure that decision-makers—especially those involved with the business enterprise—gain the most meaningful notions from accounting data. This notion of the “most meaningful notions” comes from Chambers noting that the accounting cycle is the “anchor” underpinning for all of accounting. He advised that the accounting cycle not be abandoned in the name of timeliness, though some argue that the present hurry is necessary to meet the demand for enabling accounting to provide good stewardship.

4. Common Challenges in the Accounting Cycle

Whoever has the records and structures has documentable evidence which does not change with time, does not fade, does not diminish with the individual who holds the things which remain consistent for the determination of the realities or values of the unique economic occurrences. In fact, the document similarities may be assumed to be issued during the transaction of business among stakeholders engaged in transactional activities, that could use the files to verify the information provided by their partners. Documentation, however, may generally apply to the records of transactions produced in numerous departments (correspondence, contracts, invoices, and other international), generated by accounting monitoring systems and economic events that are stored in figures and handled in the form of auto-tuned data on financial statements. Periodically, though, it is the financial rates, at the conclusion of the financial summary, which provide a relation of continuous balance and period past, to emphasize the essential financial fluctuations in the business transactions under discussion.

The complexities faced by the accountant, be it challenging, especially in the detection and resolution of operating errors, design weaknesses, missing documents, flaws in ownership. Misstatements, late entries, and errors are a few of the difficulties facing accountancy. A misstatement is the particular kind of mistake which not only includes mistakes but also the intentional or unintentional exclusion of the transaction or other occurrence, double counting of the transaction or other happenings, mistakes of theory or accounting methodologies, the error in the estimation of values and disclosure of misguided information on economic possibilities. Misstatements may also occur due to misunderstanding, error of application concerning accounting principles, procedures, terminologies, and deviations from the inherent objectives of determining economic interests. The challenges listed to date involve the inaccuracies, mistakes, or gaps in the documents required being listed in the process of applying the accounting cycle.

5. Conclusion

Further, the information produced by accounting provides meaningful criteria for decision making. This is what managers use to measure and assess performance and efficiency, and this in turn provides incentives for efficiency. Without accounting, businesses are just performing activities with no resources better measured on efficiency. In other words, accounting is the means to an end; it provides a language and a set of procedures that allows people to measure and model economic activities. From the shareholder’s perspective, accounting is reported and provides information necessary for this individual to make good, rational, and reasonable long-term decisions. When making a decision, one hopes for a return from one’s investment in terms of profit, and to gain this informed advantage for decision-making, one needs good accounting.

Even when a business owner is not an accountant, the accounting process is still a crucial part of the business. The accounting cycle is a systematic process that provides useful information for different end users. The information provided through the accounting cycle is used by managers, who use it to make important business decisions and to measure business performance by preparing financial statements and annual reports that follow International Financial Reporting Standards. If you are in business, it is important to have a good understanding of what accounting is and how it works. This is because it is the language of business through which we communicate important information about what we do in that particular business. It, therefore, provides a benchmark for comparison.