Do you feel overwhelmed by the demands of financial tracking and reporting? As a CFO or business owner, we understand that keeping accurate financial records is essential for making smart decisions and driving growth.
To ensure your books are balanced and reflect all financial activities, you need a clear and organized process. This is where the accounting cycle helps. It ensures every transaction is properly recorded, reported, and organized, giving you confidence and clarity in your financial decisions.
But what exactly is the accounting cycle, and how can you use it to benefit your business? Keep reading to learn about the eight-step accounting cycle process, and how to master it in detail.
The accounting cycle is a systematic process that tracks your business's financial transactions from start to finish during an accounting period. It ensures every transaction is recorded properly and that financial reports are accurate.
In Saudi Arabia, the accounting cycle is essential for complying with Zakat, Tax, and Customs Authority (ZATCA) regulations. This includes accurate VAT (Value Added Tax) submissions, proper invoicing, and meeting deadlines. Mastering the cycle helps you maintain financial accuracy, streamline processes, and avoid penalties.
While the accounting cycle is critical for financial health, it’s just one part of staying compliant with local regulations. Even if you use accounting software or AI tools, it’s important to understand the steps of the accounting cycle. For small businesses without advanced tools, knowing how to manage the cycle manually is especially helpful.
The accounting cycle's main purpose is to track all financial activities within a specific period, whether monthly, quarterly, or annually. It ensures that every transaction in or out of the general ledger is accurately reported.
While some steps in the cycle may require more effort, each is designed to help accountants or bookkeepers double-check their work. This is especially important in the final stages, where financial statements are prepared, and the books are reset for the next cycle.
By managing your accounting cycle effectively, you can analyze performance trends and plan for future growth with confidence. Understanding why it matters is only the beginning. Let’s explore how to execute the accounting cycle effectively.
Mastering the accounting cycle means understanding its core steps. Each phase builds upon the last, ensuring accurate, reliable financial records. Here’s how to execute it effectively:
The accounting cycle begins with identifying and categorizing every financial transaction. These include revenue from sales, expenses, loans, or investments—anything that impacts your financial accounts. The more detailed and accurate your records are, the better decisions you can make.
In Saudi Arabia, businesses must accurately record VAT-related transactions to ensure compliance with Zakat, Tax, and Customs Authority (ZATCA) regulations.
Example: Recording a SAR 10,000 sale with a 15% VAT means noting both the sale amount and the SAR 1,500 VAT in your records.
After identifying transactions, you record them as journal entries to organize your financial data. Each entry includes the accounts involved, the debit and credit amounts, and a description. Accurate journal entries ensure your financial records are both detailed and traceable.
Example:
A journal entry for a SAR 5,000 equipment purchase:
The debit reflects an increase in the Equipment Account, while the credit reduces your Cash Account. Proper categorization here lays the groundwork for accurate reporting.
Watch our Video to learn how journal entries are managed using HAL Accounting Software.
Next, transfer your journal entries to the general ledger. This step involves recording each transaction into its respective account, such as assets, liabilities, equity, revenue, or expenses.
The general ledger serves as the foundation for organizing and tracking financial activities, ensuring that all accounts are up-to-date and ready for further analysis.
Example: If you purchase office supplies worth SAR 1,000, they will be categorized under "Expenses" in the ledger, ensuring accurate reporting for audits and decision-making.
Generate an unadjusted trial balance to ensure that the total debits equal the total credits. If they don’t match, there may be an error in the journal entries or ledger postings that you need to correct. The trial balance also helps you check if all accounts are included and accurate.
Pro Tip: If your trial balance doesn’t match, check for duplicate entries, missing amounts, or transposition errors.
Worksheets help reconcile accounts and identify discrepancies. Adjustments for accrued expenses, deferred revenues, or depreciation align records with accounting principles.
Examples of Adjustments:
Pro Tip: Use spreadsheets or ERP systems like HAL ERP to streamline your worksheet preparation and reduce manual errors.
Adjusting entries ensures your financial records accurately reflect your business's financial position. These entries account for accruals (unpaid expenses) and deferrals (future revenues or expenses).
Example: If your business provides service in December but receives payment in January, an adjusting entry records the revenue in December to reflect the correct accounting period.
ERP systems can help automate depreciation calculations and entries once set up with the required asset details and depreciation methods. This saves time and reduces errors.
Once the adjusting entries are made, you can generate your financial statements. This includes:
These statements give you a clear picture of your financial health—showing where your money comes from, what you owe, and how much profit you’re making.
Example:
The final step is closing the books. This involves clearing out temporary accounts like revenues and expenses and transferring their balances to permanent accounts like retained earnings. This ensures your financial records are ready for the next accounting cycle, providing a fresh start for tracking new transactions.
Example: If your income statement shows SAR 500,000 in revenue and SAR 300,000 in expenses, the SAR 200,000 profit is transferred to retained earnings.
Despite its simplicity, the accounting cycle has its share of challenges. Let’s look at common issues and how to overcome them.
Here are some common challenges and how to overcome them:
While these challenges are common, there are strategies and tools to help simplify the process. Fortunately, tools like HAL ERP can help address these challenges. It can automate key tasks, from data entry to compliance checks. Let’s explore some tips to streamline your accounting cycle.
The accounting cycle doesn’t have to be complicated. Here are some practical tips to keep in mind:
By implementing these strategies, you’ll save time, reduce errors, and maintain accurate financial records.
Now, let’s explore how the accounting cycle differs from the budget cycle.
The main difference between the accounting cycle and the budget cycle lies in timing and purpose.
Manually managing the accounting cycle can be time-consuming and prone to errors. HAL ERP automates everything from recording transactions to generating financial statements, saving you time while improving accuracy. Designed specifically for Saudi businesses, it ensures seamless compliance with ZATCA regulations.
Key Features of HAL ERP:
The accounting cycle is the foundation of financial accuracy and compliance. Every step, from identifying transactions to closing the books, ensures your business stays financially secure and organized.
While the steps in the accounting cycle are usually the same for most businesses, you need to stay consistent if you decide to handle the process differently. That said, using automated accounting software like HAL ERP can help make the cycle more efficient and tailored to your needs.
Don’t let outdated processes hold you back. Ready to take control of your accounting cycle? Schedule a demo and discover how HAL ERP can streamline your financial management and drive your business forward!
