The accounting cycle
The stages of the accounting cycle: source document, journal entry, posting to the ledger, trial balance, adjusting entries, financial statements and closing, and how GoSoft automates each step.
The accounting cycle is the sequence of steps repeated every period —month or year— from the moment an operation happens until it shows up in the financial statements.
- List the stages of the accounting cycle in order.
- Explain what each stage produces and why.
- Recognize which stages GoSoft performs automatically and which need your review.
The stages
Source document. Every operation starts with a document: invoice, receipt, contract, bank statement, payroll. No document, no record.
Analysis and journal entry. You decide which accounts are affected and write the entry, in chronological order. In GoSoft each entry is a voucher.
Posting to the ledger. Movements are grouped by account to know each balance. GoSoft does it instantly: the ledger is computed from the vouchers.
Trial balance. All accounts are listed with their totals and balances to check that total debits equal total credits.
Adjusting entries. At period end you record operations that have no daily document: depreciation, provisions, accruals, FX differences, inventory adjustments.
Financial statements. With the adjusted balances you prepare the statement of financial position, income statement, statement of changes in equity and statement of cash flows.
Closing. Months are closed so nobody changes what was already filed and, at year end, income statement accounts are moved to equity. The new period starts with the opening entry.
Monthly and yearly
| Cycle | What is done |
|---|---|
| Every month | Record, reconcile banks, check accounting health, depreciate, prepare VAT books and returns, close the month |
| Every year | Year-end adjustments, annual financial statements, income tax, closing of results and opening of the next year |
Most countries in the Americas close on December 31, but there are exceptions. In Bolivia, for example, the closing date depends on the activity (March, June, September or December). Check your country page in Module 12.
The cycle in GoSoft
| Stage | In GoSoft |
|---|---|
| Document | Sales, collections, purchases, contracts, voucher attachments |
| Journal | Accounting vouchers (manual and automatic) |
| Ledger | General ledger, filtered by account, party, unit and cost center |
| Trial balance | Trial balance of totals and balances |
| Adjustments | Fixed asset depreciation, FX differences, recurring entries, manual adjustments |
| Statements | Financial statements with each country's official names |
| Closing | Month closing, year closing and opening entry |
Before closing each month, open Accounting health. It tells you whether there are unbalanced vouchers, lines without an account or balances opposite to the account's nature. Closing a "dirty" month multiplies the work later.
What is the first stage of the accounting cycle?
The source document: every operation must have a supporting document.
What is the trial balance for?
To check that total debits equal total credits and to review balances before preparing the financial statements.
Name two typical month-end adjusting entries.
Fixed asset depreciation and FX differences (also provisions and accruals).
Why are months closed?
So nobody changes operations in a period already reviewed or filed.