Maintaining accurate documentation of finances is not optional for any business, irrespective of its stature. However, many business owners do not clearly understand the cycle, which often leads to confusion regarding the necessity of the procedure. A professional bookkeeper does this for your company so that the accountants can analyze the data and help you make crucial business decisions accordingly.
This post is a step-by-step guide to the process for a better understanding of bookkeeping for small and medium start-ups.
What Is the Accounting Cycle?
The accounting cycle comprises eight steps and it is the bookkeeper’s responsibility to record every transaction accurately. These records are analyzed and processed by the accounts department. It is referred to as a cycle since it is a continuous workflow over the financial year. The steps of the cycle are as follows:
Any financial transaction related to your business starts the process. These include sales of a product or service, purchase of related supplies, financial activities related to your business, paying off loans, etc.
- Journal entries
The transactions are listed in the respective journals, and they are chronologically maintained. These journals are also known as “book of original entry” and are maintained by professional bookkeepers. This is the place where the transactions are going to be recorded first.
The transferring of the information from the journal to the ledger is referred to as posting. The entries are posted to the respective account which is impacted by the transaction, and it is the part of the general ledger. This also contains the summary of all the business accounts you have.
- Trial balance
This is periodically calculated throughout the financial year. It can be done on a monthly, or quarterly basis, depending on your company’s business practices. The trial balance is unadjusted and is a list of the accounts and their balance in a given time frame before the final statements are prepared annually. The debit balance is listed on the left column and the credit in the right in the general ledger, according to the order of the accounts. These amounts must match in both the columns.
As you calculate the trial balance, there will be instances when you will find the books are not in balance, that is, the amount entered in both the columns do not match. In this case, the errors must be investigated, adjusted, and tracked on a worksheet. A bookkeeper call attention to these discrepancies and the accounts department will have to work on it to find out the reasons why. The aim is to make the adjustments such that the actual financial position of the business and the reports are aligned as closely as possible.
- Journal entry adjustment
After adjusting the entries and posting them, many businesses prepare another round of trial balance from the general ledger. This is called the adjusted trial balance which shows all the entries along with the adjustments at the end of the accounting period. The results are the demonstration of the effect of all the adjustments and financial events through this period.
- Financial statements
Based on all the records and adjustments done over the period, financial statements, and balance sheets are created with the corrected entries. Certain bookkeeping software like QuickBooks can generate the statement as well though this is done by the accountant.
- Closing the books
The temporary balances available are reduced to zero to prepare the accounts for the next accounting cycle. The process empties the temporary accounts, and the money is deposited in a permanent account and the books for the revenue and expense accounts are closed for the specific financial year.
Tips for Better Bookkeeping:
Without the right bookkeepers, irrespective of the understanding you have on the subject, your finance is likely to fail. A reputed and efficient bookkeeping agency can save you from a lot of errors which can grow from minor errors in the finance records.
The following tips are useful when looking for a bookkeeper for a small or medium sized company.
- Plan your major expenses ahead of time so that you can plan the finance accordingly.
- Keep track of the transactions and keep your personal, business accounts and related cards separate.
- Ensure you have all the necessary documentation of the financial exchanges and ensure it is easily accessible to the bookkeepers.
- Do not exclude expenses like taxes, debts or any penalties from your budget plan. This will help the bookkeepers to give you a better overview as they will have the records of every minor transaction in their journals.
- Check the invoices yourself on occasion.
- Consult and hire a bookkeeper right after you launch your business to minimize the chances of major errors in the records right from the beginning.
- Invest in quality bookkeeping software like FreshBooks, Peachtree, Xero, Sago etc., as recommended by your virtual bookkeepers to keep the process smooth, flexible and accessible whenever you need.
The accounting cycle is successfully executed through joint efforts of the accounts department of your business and any professional bookkeepers you are hiring. Understanding the overall procedure is necessary for any business owner to have control over their finances and lead the business successfully.