The Importance of Not Missing a Step in the Accounting Cycle
Each of the 10 steps in a complete accounting cycle is vital to producing accurate financial statements. The cycle consists of a chain of activities that businesses must perform in a specific order during each reporting period: transaction analysis, journal entries, transferring journal entries into the general ledger, creating an unadjusted trial balance, entering trial balance adjusting entries, preparing an adjusted trial balance, financial statement preparation, closing temporary accounts, preparing a post-closing trial balance and making reversing entries.
Missing a step in the accounting cycle can throw the entire cycle off-balance because each step in the cycle -- and the accuracy of each step -- is sequentially significant. Steps one through three must be performed sequentially throughout the reporting period while steps four through 10 are performed in order at the end of each period. Regardless, each succeeding step can only be performed after completing the immediately preceding step. For example, you can’t transfer journal entries to the general ledger without first entering transactions in the journal. In addition, inaccuracies within a step will cause entries or tasks in all further steps also to be inaccurate.
Small-business owners typically don’t rely solely on month-end financial statements to get important information about the business’s financial activities. Instead, business owners most often frequently require information such as the balance in accounts receivable or payable in making business decisions. Failing to analyze transactions, record journal entries and transfer entries to the general ledger on a regular schedule throughout the month will result in decisions being made on incorrect information. It also prevents incorrectly entered information from being detected and corrected before the reporting period ends.
Steps four through 10 are essential for correctly closing the reporting period. Missing any step in the reporting portion of the cycle -- or any preceding steps -- can upset transaction monitoring, information tracking in ledger accounts and the updating of individual accounts during the closing process. For example, closing processes functions to update retained earnings and reset temporary accounts. If any preceding steps are missing, the four-step process of closing the revenue account and expense accounts to an income summary account, then closing the income summary and dividends account to a retained earnings account can’t take place as required.
Each step in the accounting cycle is vital to ensuring a smooth, accurate transition from one reporting period to another. Missing any of the steps causes inaccuracies in the opening balances for the next reporting period. For example, steps in the closing process set up the general ledger for the new reporting period. While temporary accounts are zeroed out during the closing process, balance sheet account balances -- including assets, liabilities and owner’s equity -- are carried forward to the next reporting period. These accounts must contain an accurate balance after the closing process, which can only be confirmed by completing a post-closing trial balance.