We often learn about the accounting cycle in first-year business school, an eight-step process that defines how companies should manage financial record-keeping to ensure timely, accurate reporting and reduce the risk of financial fraud. Sometimes called the "record to report", the accounting cycle concept is a convenient way to talk about accounting as a business function. But this doesn't provide a complete picture of the accounting process: There may only be eight steps, but they're steps that accounting staff must perform thousands of repetitive, manual and tedious tasks to complete.
1. Identify transactions - The accounting cycle begins by identifying financially relevant business transactions, meaning any transaction that involves the collection of payment or disbursement of funds. Gathering this information involves working with people in multiple departments from Sales, Procurement, and HR, which may require the accounting team to access various systems. Relevant data comes in numerous formats, including vendor billing details, employee petty cash reports, bank statements and other documents.
2. Record transactions in the journal - The next step is to capture these transactions in the company's journal. Once, journal entries were handwritten. Today, however, most organisations use a computerised journal, which may be as simple as a spreadsheet. What hasn't changed is the amount of effort required to record journal entries, especially when transaction details are stored in many different systems or exist only on paper. Getting information into the accounting system requires manual data entry, a tedious and time-consuming process that increases the risk of accounting errors.
3. Post transactions to the general ledger - Once approved, journal entries are posted to the ledger. This may also be done manually, with accounting staff posting each entry separately. This laborious process is standard with entry-level accounting packages and can be prohibitively time-consuming when processing thousands of transactions.
4. Produce unadjusted trial balance - As the end of the accounting period approaches, the finance team runs a trial balance to see if all transactions were recorded correctly and to ensure the accounts balance as of the period end date. Some accounting systems make this difficult by requiring companies to use long, complex account codes if they want to track costs, sales and other transactions by department, location or different reporting segments.
5. Review worksheet - When accounts don't balance — which may often happen for some companies (by some of the accounting systems!) — the accounting team must figure out the source of the problem. Since the closing task tends to be done at the month-end, there is much pressure to finish the job ASAP. To make the book accurate, the accountant must review thousands of accounts manually, which takes lots of time.
6. Enter adjustments - In addition to correcting errors, accounting may need to create adjusting entries to record deferrals, accruals and non-cash expenses like depreciation. These entries are generally recorded according to a set schedule. For instance, a company may pay its annual insurance premium at the beginning of the year and then record the expense in equal increments over twelve months. Because excel spreadsheets are frequently used to keep track of these schedules, data entry errors and calculation mistakes are significantly risky.
7. Prepare financial reports - Once adjustments are made and account balances are corrected, the accounting department can finally produce financial statements. Companies sometimes go through several report iterations, with managers requesting minor changes before finalising numbers. Accounting software with limited reporting options can make it challenging to format financial reports to meet all the needs of all stakeholders for various purposes.
8. Close the accounting period - The last step is closing the books. Best-in-class companies can accomplish this within three or four days after the end of the period. Research shows that over 50% of companies take more than four days to close their books. The closing can take six or more days for companies with limited automation which may cause a delay of information and leads to misjudgement of the situation with financial damage.
Manual processes are time-consuming and labour-intensive, putting a strain on accounting resources. They increase the risk of errors, delay reporting and extend the close process. Automating the accounting cycle saves time, improves data accuracy and reduces the risk of reporting delays.
NOVA delivers various cloud accounting solutions for startups, SMEs, and MNCs to listed companies ready to begin moving from entry-level accounting software and spreadsheets to an automated end-to-end accounting solution. This saves valuable time and increases the efficiency of accounting staff by eliminating time and labour-intensive error-prone tasks, which include:
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