Accounting Cycle – Definition

Cite this article as:"Accounting Cycle – Definition," in The Business Professor, updated September 19, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/accounting-cycle-definition/.

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Accounting Cycle Definition

An accounting cycle is the comprehensive process of identifying, analyzing, sorting, recording and crediting the payments made and received by a company or any other business entity during a specified period of time, referred to as the accounting period. An accounting cycle usually initiates with the occurrence of a transaction, and culminates in the inclusion of the transaction in the financial statements of the business. An accounting cycle typically includes all the accounts, journal entries, T Accounts, debits and credits of the business that correspond to the particular accounting period. Additionally, an accounting cycle may also employ accounting records such as general ledgers and trial balances.

A Little More on Accounting Cycle

An accounting cycle can be considered a holistic process that verifies the validity and compliance of financial statements such as cash flow reports, profit and loss statements, and balance sheets. Whereas manual accounting systems were the order of the day not too long ago, today’s accounting systems are largely computerized and managed by sophisticated accounting software. The accountant only needs to enter adjusting entries into the system in order for the software to provide an instantaneous and accurate set of financial statements. The accountant then reviews the statements and makes the necessary adjustments in order to obtain a set of revised reports. What’s more, the software prepares, records, and posts the closing entries and even reverse adjusts the designated entries.

Steps Involved in an Accounting Cycle

An accounting cycle starts with the initiation of a business event such as sale of inventory, purchase of raw materials and processing of lease payments.  The process typically comprises the following ten steps:

  1. Identifying, collecting and analyzing documents and transactions (a.k.a. business events).
  2. Recording the transactions in journals, i.e creating journal entries.
  3. Posting the journalized amounts to applicable T-accounts or ledger accounts in the general and subsidiary ledgers.
  4. Preparing an unadjusted trial balance from the general ledger. In certain instances, a worksheet may also be prepared.
  5. Analyzing the trial balance, and determining and recording end-of-period adjusting entries.
  6. Preparing an adjusted trial balance after posting adjusting journal entries.
  7. Preparing the financial statements using the adjusted trial balance.
  8. Recording and posting closing entries in order to close all temporary income statement accounts.
  9. Preparing a post-closing trial balance for the subsequent accounting period.
  10. Recording reversing entries in order to cancel temporary adjusting entries as applicable.

The Accounting Period

An accounting period is the duration during which an accounting cycle commences and completes; in other words, it is the specific period of time in which financial statements are prepared. Accounting periods vary widely from company to company, and are influenced by several different factors. Internal financial reports typically consider monthly accounting periods, while some businesses prefer to have four-week accounting periods, or 13 accounting periods per year. However, the annual period is by far, the most common type of accounting period. Accounting periods are crucial for investors since they enable them to compare the results of a company over successive time periods.

The General Ledger

The general ledger (GL) is a set of numbered records that holds information pertaining to all financial transactions within a business. While traditionally, all such transactions were recorded in a physical document, nowadays businesses predominantly use accounting software for the same purpose.

Reference for “Accounting Cycle”

https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounting-cycle/

https://www.accountingcoach.com/blog/accounting-cycle

https://www.investopedia.com › Investing › Financial Analysis

https://www.shopify.com/encyclopedia/accounting-cycle

https://www.myaccountingcourse.com/accounting-cycle

Academic research on “Accounting Cycle”

The end of a familiar inflation accounting cycle, Mumford, M. (1979). The end of a familiar inflation accounting cycle. Accounting and Business Research, 9(34), 98-104.

An intelligent tutoring system for the accounting cycle: Enhancing textbook homework with artificial intelligence, Johnson, B. G., Phillips, F., & Chase, L. G. (2009). An intelligent tutoring system for the accounting cycle: Enhancing textbook homework with artificial intelligence. Journal of Accounting Education, 27(1), 30-39. This paper describes an electronic tutoring system, developed using principles of artificial intelligence (AI), to help students learn the accounting cycle. Unlike other educational technologies, the tutoring system provides instruction and feedback that is tailored to each individual student and addresses not only problem-solving outcomes but also problem-solving processes. To assess the effectiveness of the tutoring system, we administered a pre-test and then required students in a sophomore accounting course to use either the tutoring system or their textbook as a reference when journalizing transactions for a homework assignment. We then administered a post-test. A pre-post analysis showed that the tutor group’s test performance increased approximately 27% points, whereas the textbook group’s test performance improved by only 8% points. Implications of these findings for instructors and researchers are discussed.

REVISITING THE USE OF A FUNDAMENTAL (ACCOUNTING CYCLE) PRACTICE SET IN INTERMEDIATE ACCOUNTING 1., Jones, K. T., & Roberts, B. (2005). REVISITING THE USE OF A FUNDAMENTAL (ACCOUNTING CYCLE) PRACTICE SET IN INTERMEDIATE ACCOUNTING 1. Journal of Accounting & Finance Research, 13(5). A common objective in using a fundamental (accounting cycle) practice set is to review and thus reinforce material covered previously in an introductory level financial accounting course. While certain studies have reported attempts to quantify the impact of using a fundamental practice set on such things as exam scores (Ott, Deines, and Donnelly 1988), the focus of this paper is on student perceptions of using an accounting cycle practice set at the beginning of the first Intermediate financial accounting course. The paper will include an analysis of surveys administered in this course at Southeastern Louisiana University over a seven year period and will thus provide an update of a previous study completed by the authors. The paper will also address the potential need for changes in the content (and form) of an accounting cycle practice set due to recent developments in the profession, the CPA exam, and accounting education in general. Finally, the authors will discuss alternatives to using a traditional practice set as well as important considerations in writing an original practice set

The Inflation Accounting Cycle: A British-Australian Comparative Perspective 1973–85, Burrows, G., & Rowles, T. (2010). The Inflation Accounting Cycle: A British-Australian Comparative Perspective 1973–85. International Review of Business Research Papers, 6(5), 1-19.

Accounting Cycle and the Development of Accounting Practices in Nigeria, Abdulrahaman, S. (2012). Accounting Cycle and the Development of Accounting Practices in Nigeria. Nigerian Chapter of Arabian Journal of Business and Management Review, 62(1084), 1-8. As business and public entities keep on expanding, there also the need foraccounting practices to keep to date as to meet the organizational objectives. Whateverdecision is to be taken by management such decision depend on how well accountingdata is collected, analyzed, summarized and interpreted. Accounting as an informationtool passes through six critical stages, which if care is not taken at any stage the aimsand objectives of the exercise can easily be jeopardized. The objective of the paper is toassess the stages and find out the six stages and analyzed the characteristic of each stage.In doing so secondary data including text books and journals are consulted. The studyfound that irrespective of whatever method employed,( human, mechanical or computer)human error is the central focus. The paper recommended that intensive accountingtraining should be given to accounting technicians. Similarly, the paper also recommendsthat accountants and accounting technicians should duly comply with accountingprofessional ethics.

Obstacles to the Perception of the Traditional Accounting Cycle in the Learning Process, Lamberg, E. (2012). Obstacles to the Perception of the Traditional Accounting Cycle in the Learning Process. Journal of Business Management, 161.

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