Importance of the Accounting Cycle

by Luanne Kelchner; Updated September 26, 2017

Organizations use accounting methods to track and analyze financial transactions and monitor the company’s money. Managers use the financial information accounting provides to make decisions for the company. The accounting cycle is a series of activities accountants use to record transactions, post to the general ledger, make adjustments, close the books and prepare financial documents.

The Accounting Process

In the accounting process, daily transactions are posted in separate journals, such as a cash-receipt journal or a sales journal. Accountants transfer the information from daily journals into a general ledger for the organization in a series of debits and credits. The general ledger contains information such as accounts payable and accounts receivable as well as other accounts the organization uses to track and analyze financial data. The process also includes adjustments to the general ledger that are not recorded in journals, such as taxes. The final stage in the accounting cycle, or process, is closing the books. The revenue and expenses for the organization are accounted for, and the profit is transferred to the owner’s equity account. At the end of the accounting cycle, the accounts are brought to zero before beginning the next cycle. From this information, the organization can prepare financial statements. Financial statements provide a summary of all transactions and accounting activity during the accounting cycle.

Management Decision Making

Management uses the information gathered in the accounting cycle to plan for the company’s future. Financial statements provide an indication of the company’s financial health, which allows the manager to make sound decisions to move the company forward.

Investment Decisions

Potential investors or current stockholders monitor the information on the financial statements to help make decisions regarding investments in the organization. Investors analyze the financial strengths and weaknesses of the business to help them make decisions in their own investment portfolios.

Government Agencies and Banks

Banks make lending decisions based on the information contained in financial statements. The information provides the lender with a clear picture of the company’s ability to repay the loan. Accountants use the information from financial statements to prepare tax documents and report financial information to the government.

About the Author

Luanne Kelchner works out of Daytona Beach, Florida and has been freelance writing full time since 2008. Her ghostwriting work has covered a variety of topics but mainly focuses on health and home improvement articles. Kelchner has a degree from Southern New Hampshire University in English language and literature.