Recording business transactions is part of bookkeeping. And bookkeeping is the first step of the “Accounting Cycle”: a process designed to take in raw financial information and spit out accurate and consistent financial reports.
1. Identify and analyse transactions
Gather and sort source documents (raw financial data) of your business such as invoices, receipts, bank statements etc
2. Post transactions to the accounts
Record all raw financial data we gathered in step one into the correct general ledger accounts. Accountants normally call the process as data entry (ie. processing double entry, Debit and Credit).
3. Reconcile accounts
Compare account balances between two sets of records for accuracy and sort out any discrepancy, generally reconciliations are performed for bank, vendor, customer and intercompany accounts. Eg. matching our recorded bank transactions with actual bank statement.
4. Prepare adjusting entries
Make adjustments for prepayments, accruals, non-cash transactions and tax for accounting purposes.
5. Prepare final trial balance
Generate a final trial balance, a 2-column list showing debit and credit balances of all your business’s general ledger accounts. The trial balance is a self-check to determine that total of all debit values equals the total of all credit values, and any difference indicates an error in one of the accounts.
6. Prepare financial statements
From the trial balance, organise and compile the financial information into financial statements.
The accounting cycle is all about the process of turning raw financial data into accurate and consistent financial reports, to drive decision making. And yes, it involves tons of work and knowledge. An accountant can take care of the accounting cycle for you so you can focus on what you do best.
