First-year business students often learn about the accounting cycle, 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,” or R2R, process, the accounting cycle concept is a convenient way to talk about accounting as a business function.
However, R2R doesn’t provide a full picture of the process: There may only be eight steps, but they’re steps that accounting staff must perform hundreds of repetitive, manual tasks to complete.
Accounting Cycle Steps
1. Identify transactions. The accounting cycle begins by identifying financially relevant business transactions, meaning any transaction that involves collection or disbursement of funds. Gathering this information involves working with people in multiple departments and may require the accounting team to access multiple systems. Relevant data also comes in many different formats, including vendor billing details, employee expense reports, bank statements and other documents.
2. Record transactions to the journal. The next step is to capture these transactions in the company’s journal. Once, journal entries were handwritten. Today, however, most organizations use a computerized 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 general ledger. This may also be done manually, with accounting staff posting each entry separately. This laborious process is common with entry-level accounting packages and can be prohibitively time-consuming when processing hundreds 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 that the accounts balance. Many 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 other category.
5. Review worksheet. When accounts don't balance — which happens often for some companies — the accounting team must figure out the source of the problem. Because this tends to be done at the end of the month, there is a lot of pressure to finish the task quickly, which is easier said than done. Accounting’s first responsibility is to ensure accuracy, and manually reviewing thousands of accounts takes time.
6. Enter adjustments. In addition to correcting errors, accounting may also need to create adjusting entries(opens in new tab) 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 spreadsheets are frequently used to keep track of these schedules, there is significant risk of data entry errors and calculation mistakes.
7. Prepare financial statements. Once adjustments are made and account balances are corrected, financial statements can finally be produced. Companies sometimes go through several report iterations, with managers requesting minor changes before numbers are finalized. Accounting software with inflexible reporting options can make it difficult to format financial reports to meet the needs of all stakeholders.
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 conducted by the American Productivity and Quality Center, however, shows that more than half of all organizations take more than four days to close their books. For companies with limited automation, closes can take six or more days.
Manual processes are time-consuming and labor-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.
NetSuite Automates the Accounting Cycle
NetSuite delivers a complete accounting solution(opens in new tab) for companies ready to begin moving from entry-level accounting software and spreadsheets to an automated end-to-end accounting solution that will eliminate error-prone, manual data entry and minimize the time and effort required to perform routine accounting tasks.
Automating the accounting cycle with NetSuite saves valuable time and increases the efficiency of accounting staff by eliminating time- and labor-intensive tasks. Capabilities NetSuite provides include:
- A centralized repository of financial and operational data that gives accounting staff visibility into every business transaction.
- Rules-based transaction matching and auto-posting journal entries(opens in new tab) that minimize the risk of errors by reducing the need for manual data entry.
- Automated schedules to ensure that depreciation, amortization, deferrals and accruals are recorded consistently and applied to the appropriate cost centers
- Simplified accounts payable with automated invoice scanning and general ledger code assignment, three-way invoice matching and automated payment.
- Flexible reporting tools that make it easy to develop custom layouts to meet the requirements of different stakeholders.
To learn how NetSuite saves time, reduces risk and improves the timeliness and accuracy of financial reports, join our webinar: Automate and Accelerate Your Accounting Cycle.(opens in new tab)