Willingly or unwillingly, all entrepreneurs have to follow the financial norms set by the government. Setting up a specific accounting cycle will help prevent any last minute dashes to meet a financial deadline.
Initially, setting up an accounting cycle for your business can be tricky due to the sheer number of financial transactions you need to keep a track of. But, by maintaining a regular accounting cycle, you can ensure that all your accounting books remain updated before the financial year ends.
You can follow these steps in order to set a specific accounting cycle for your small business.
Design a chart
You may have already carried out some basic research about many financial activities and transactions related to your business. If not, then you should look to get started with the process. Based on your research develop a chart of accounts mentioning all the necessary details about your accounting and bookkeeping system.
This chart should include all the necessary details about where and when all the company’s account details have been filed. You must design it in such a way that it is easily understandable and you can easily refer to it as and when required.
Save the source document
The source document acts as your primary reference point to refer to any/all transactions conducted by your business. It acts as historical evidence of every transaction conducted by your business. It becomes essential to transform this evidence into a journal entry as quickly as possible.
Canceled cheques, purchase orders, invoices, and other business documents are some of the files that are counted as source documents.
Making Journal Entries
When you kick-start your business with a financial transaction, the very next step entails making a journal entry of the same in your account books. Some companies follow a single entry process while most others follow a dual entry accounting process.
In a dual entry process, you need to make two entries in your books which is a debit from and a credit to the suitable account.
Prepare a Ledger
Preparing a general ledger account is a significant part of the entire accounting process for any business. In fact, details of various transactions are traced from journal entries and transferred to the general ledger in the form of a summary.
This means that even a minor error in a journal or ledger entry can change the status of your final balance sheet. This is why business owners prefer to make entries on a regular basis so that they do not miss out on entering any important transaction into the journal.
Next, you will have to prepare a trial balance. A trial balance is a simple process of totaling/balancing the debit and credit from the ledger.
This balancing ensures that you have recorded all transactions correctly during a particular accounting period.
Trick to make adjusting entries
Adjusting entries is a task carried out in your journal towards the end of the accounting session. Entries are adjusted in order to adjust revenues and expenses, recorded in the sequence of their occurrence within that specific period.
Generally, the following terms are used in order to adjust entries- prepaid expenses, depreciation, and accrued revenues. It is important to be careful while making adjustments because they can have a huge effect on your monthly balance.
The Financial Statement
When you move towards the end of the accounting cycle you have to prepare a financial statement. A couple of statements have to be prepared before you prepare the final statement.
For example, you need your journal and ledger in order to draft an income statement, while the income statement is used to prepare the statement for retained earnings. Similarly, the statement for retained earnings is used to prepare the balance sheet and the balance sheet is needed for the cash flow statement.
The Closing entries
Entries which are made at the end of the accounting cycle are termed as closing entries. These are made to set off the balance of the temporary accounts so that you can begin the next accounting year from a zero balance.
But, not all accounts get closed in the current year because some of them are carried forward. Accounts like expense, revenue and drawing accounts are the ones that get closed. While assets, liabilities and owner’s equity accounts do not get closed and their ending balances are carried forward to the start of the next accounting period.
For example, if you have acquired additional finance from an alternative business lending company in this accounting year, the entry of this transaction gets carried forward to the next accounting year as well.