The 8-step accounting cycle: A beginner’s guide

As a small business owner, you need a clear picture of your company's financial health. In fact, 71% of small business owners now use accounting software or apps to keep their finances in check. This starts with an understanding of the accounting cycle.

The accounting cycle is a series of eight steps businesses use to identify, analyze, and record financial transactions. Following these steps keeps your accounting organized and your financial decisions informed.

Easy-to-use tools and AI automation can help you manage each step of the cycle, but understanding the process first is helpful. Below are eight accounting cycle steps to get you started.

Step 1. Identify your transactions

The first step in the accounting cycle is to identify your business’s transactions, such as vendor payments, sales, and purchases. There are typically eight steps in the accounting cycle, though some companies may include extra steps depending on their internal processes. It's helpful to also note some other details to make it easier to categorize transactions.

Important information to identify includes:

• Transaction dates.
• Product prices.
• Amounts paid.

Bookkeepers or accountants are often responsible for recording these transactions during the accounting cycle.

While every step of the accounting cycle matters, this one sets the foundation. If you don't identify and track your transactions accurately from the start, every step that follows will be harder to get right.

Step 2. Record the transactions in a journal 

Once you identify your business’s financial accounting transactions, it's important to create a record of them. You can do this in a journal, or you can use accounting software to streamline the process. 

How you record transactions depends on your accounting method. Accrual accounting records revenues and expenses at the time of sale, while cash accounting records transactions when cash is actually received or paid.

To produce accurate financial statements at the end of the cycle, two entries must be made for each transaction—a debit and a credit. This process is referred to as double-entry bookkeeping.

A few things to remember when recording transactions:

• Maintain chronological order of transactions.
• Ensure credits and debits balance each other out when using double-entry accounting.
• Include important notes for the accountant for easier reconciliation.

You can connect with QuickBooks Intuit Expert Full Service Bookkeeping for answers to questions about automation, categorization, reconciliation, and more.* You can also rely on a QuickBooks AI accounting agent to automatically categorize transactions and spot potential errors, helping you keep your books accurate and up to date.

To produce accurate financial statements at the end of the cycle, two entries must be made for each transaction—a debit and a credit. This process is referred to as double-entry bookkeeping.

A few things to remember when recording transactions:

• Maintain chronological order of transactions.
• Ensure credits and debits balance each other out when using double-entry accounting.
• Include important notes for the accountant for easier reconciliation.

You can connect with QuickBooks Intuit Expert Full Service Bookkeeping for answers to questions about automation, categorization, reconciliation, and more.* You can also rely on a QuickBooks AI accounting agent to automatically categorize transactions and spot potential errors, helping you keep your books accurate and up to date.

Step 3. Post transactions to the general ledger

The next step in the accounting cycle is to post the transactions to the general ledger. Think of the general ledger as a summary sheet where all transactions are divided into accounts. It lets you track your business’s finances and understand how much cash you have available.

Each account gives you a running view of your finances in that area. Your cash account, for example, shows exactly how much cash is available at any given time. Together, these accounts give you a complete picture of your business's financial position.

Step 4. Determine the unadjusted trial balance

Once posted to the general ledger, you need to balance all of your business’s transactions. Do this at the end of the accounting period, which can be monthly, quarterly, or annually, depending on the company. Known as the “trial balance.” This provides insight into your company's financial health and can help you identify any discrepancies in your bookkeeping.

The accounting cycle period can vary, but most businesses operate on a monthly, quarterly, or annual cycle. A common choice is a 12-month accounting period, either a calendar year or a fiscal year, depending on your reporting needs.

Step 5. Analyze the worksheet

The next step is worksheet analysis. Use a worksheet to balance your company’s debits and credits. If you have debits and credits that don’t balance, you have to review the entries and adjust accordingly.

Note that if you use accrual accounting, this is also where you'll identify any adjusting entries needed to make sure revenues and expenses are matched to the right period.

Here are a few sheet analysis tips to help keep your books accurate:

Step 6. Adjust journal entries

Before you create your financial statements, you need to make adjustments to account for any corrections for accruals or deferrals. These adjustments are recorded as new journal entries—not changes to existing ones.

For example, if a salary or bill was incurred during the accounting period but not yet paid, you'll need an adjustment to make sure it's recorded in the right period. Because it was originally logged as accounts payable when the cost occurred, an adjustment removes the charge and places it where it belongs.

Step 7. Create financial statements

Once your adjusting entries are complete, an adjusted trial balance is prepared to confirm everything is accurate before generating your formal financial statements. From there, you can produce the three key reports that reflect your business's financial health:

• Balance sheet: A summary of a company’s financial position on a specific date, created by subtracting assets from liabilities to determine equity. This is different from an income statement, which reflects how a company performed over a period of time, not on a specific date.
• Income statement: A report of a business’s profit or loss over time. Typically, an income statement is created monthly or annually by subtracting expenses from revenues to determine net income or profit.
• Statement of cash flow: A record of a company’s cash inflows and outflows over time, separated into operating, investing, and financing transactions. The ending balance in the cash flow statement must equal the company’s cash balance on the balance sheet.

Step 8. Close your books

After you complete your financial statements, you can close the books to reset your accounts and prepare for the next accounting period. 

Here’s what closing your books typically looks like in practice:

• Close revenue and expense accounts. This zeros out temporary accounts like revenue and expenses, starting the next period with a clean slate.
• Transfer net income or loss. Any net income or loss is transferred to retained earnings, a permanent account on the balance sheet that carries forward.
• Run a post-closing trial balance. This confirms all temporary accounts have been zeroed out and your permanent account balances are correct.
• Lock the period. In accounting software like QuickBooks, you can close the period to prevent accidental changes to finalized records.

This means your books are up to date for the accounting period and mark the start of the next accounting cycle. Then, you begin the accounting process all over at step one.

Accounting cycle vs. budget cycle: What’s the difference?

While the accounting cycle and budget cycle are related, they serve different purposes. The accounting cycle looks backward, so it records and reports what has already happened financially in your business. The budget cycle looks forward, helping you plan and allocate resources for the future.

Both cycles often run on similar timeframes, but they're used for different decisions.

What are the benefits of the accounting cycle?

A consistent accounting cycle keeps your books organized and gives your business a stronger financial foundation. Some of the key benefits include:

• Reduce errors: Following the same steps each cycle can help reduce the likelihood of mistakes arising from a disorganized approach.
• Save time: A well-defined process can help simplify your bookkeeping, freeing you to focus on running your business.
• Stay compliant: A consistent process can help make it easier to meet accounting standards and any regulatory requirements your business faces.
• Gain full visibility: Every transaction is documented and traceable, helping you spot cash flow problems or opportunities before they become bigger issues.
• Make informed decisions: Reliable financial statements can help give you, your lenders, and your investors a clear and accurate picture of where your business stands.
• Track performance over time: Applying the same process each period can make it easier to spot trends and plan ahead.

Tips for successfully managing the accounting life cycle

Completing the accounting cycle can be time-consuming, especially if you don't feel organized. Here are some tips to help streamline the bookkeeping process and save you time.

Know your timing

Whether your accounting period is monthly, quarterly, or annually, timing is crucial to implementing the accounting cycle properly. Mapping out plans and dates that coincide with your accounting deadlines will increase productivity and results.

Troubleshoot errors quickly

Identifying and solving problems early in the accounting cycle leads to greater efficiency. It is important to set proper procedures for each of the eight steps in the process to create checks and balances to catch unwanted errors.

Modify the process to fit your needs

There is no one-size-fits-all solution for accounting practices. Each industry, company, and team operate differently. You might find early on that your system needs to be tweaked to accommodate your accounting habits.

Set your team up for success

If you have a staff, give them the tools they need to succeed in implementing the accounting cycle. This could mean providing quarterly training on best practices, meeting with your staff each cycle to find their pain points, or equipping them with the proper accounting tools. The better prepared your staff is, the more efficient they can be.

Try accounting software to lighten the load

Tools such as QuickBooks Online can help streamline the accounting process. Access to Intuit Experts make it even easier to manage your company’s finances.* There are many tasks that you can automate through a business accounting platform. 

QuickBooks also offers an AI accounting agent designed to take repetitive tasks off your plate. The AI agent can automatically categorize transactions, flag potential errors, and surface insights to help you make smarter financial decisions.

Spend more time growing your business

As your business grows, so will your accounting needs. Creating an accounting process may require a significant time investment. Setting up an effective process and understanding the accounting cycle can help you produce financial information that you can analyze quickly, helping your business run more smoothly.

You can connect with Intuit Experts for bookkeeping help. They can provide guidance, answer questions, and teach you how to do tasks in QuickBooks, so you can stay organized and be ready for tax time.* Increase your business expertise—without adding to your payroll.