The Accounting Cycle Explained: 5 Simple Steps

The accounting cycle is a must-know for all bookkeepers. It divides the entire process of a bookkeeper’s work into multiple steps. Though accounting software can help, small business accountants working on the books with less technical support should still know and use these processes manually. 

While other versions of the accounting cycle cover more detail, in this article, we’ll bring you an overview of the standard process that includes the five main steps needed to ensure the integrity of a company’s accounting process.

What is the accounting cycle?

The accounting cycle is a straightforward process for carrying out a company’s financial activities. It provides step-by-step directions for recording, examining, and analyzing a company’s financial activities.

The accounting cycle duration will vary depending on the reporting requirements. In general, most business owners strive to close their books on a monthly basis. On the other hand, some may prefer completing the accounting cycle on a quarterly or annually basis. 

What is the purpose of the accounting cycle?

The accounting cycle’s primary goal is to ensure that all the money coming into or going out of a business is accounted for and all financial records are accurate. While preparing financial reports, the accountant will examine accounting entries and processes to be aware of the business’s financial position day-by-day. 

Each step in the accounting cycle works as a check and balance along the way, preventing errors and inaccuracies from occurring in the previous step. Thus, the accounting cycle is an indispensable base or stepping stone for creating financial statements.

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What are the five steps of the accounting cycle?

Step 1 – Collect and analyze transactions

The first step of the accounting cycle is to collect documents of your business transactions, like receipts, invoices, bank statements, etc., for the current accounting period. These documents contain raw financial data that will then be entered into your accounting system before being converted into something meaningful.

You need to keep details of every transaction, including the date, amount, and location. Then, you’ll break down (or analyze) the purpose of each transaction. For example, if you received a receipt from Target, you’ll need to clarify if it was office supplies. If you received a gasoline bill, was it for the company vehicle? It’s essential to collect as detailed information as you can. 

Step 2 – Posting transactions to the general ledger

In the next step, you’ll use the general ledger to record all financial information gathered in step one. The ledger is a comprehensive, detailed list showing all your company’s transactions and how they affect each of its individual accounts. 

The ledger includes various journal entries, which chronologically document all of a company’s financial transactions. Journal entries must follow the rules of double-entry accounting. Whenever a transaction occurs, it must be recorded in the journal entries in two sections: a debit (to state what it’s going towards) and a credit (to state where your money is coming from).

After converting all of your business transactions into debits and credits, it’s time to move them into your company’s ledger. Keep in mind that uploading journal entries to the ledger as soon as possible helps ensure that the business’s records are always up to date. 

Step 3 – Preparing an unadjusted trial balance

You’ll prepare an unadjusted trial balance after posting transactions to the general ledger. The unadjusted trial balance gathers all of these totals together and calculates the total credits and debits in each of your business’s accounts. From that, you can determine individual account balances.

Here’s what an unadjusted trial balance looks like: 

The Accounting Cycle
Example of an unadjusted trial balance (Source: Wikiaccounting)

According to the double-entry accounting rules, all of a business’s credits must be equivalent to the total debits. If the sum of the debit balances isn’t equivalent to the sum of the credit balances, it means that either the step of recording or posting journal entries is incorrect. 

If you do bookkeeping with accounting software, this usually indicates that you entered information incorrectly. The process of searching for and fixing these errors is called correcting entries.

Step 4 – Preparing adjusting entries at the end of a period

You’ll prepare adjusting entries after you’ve finished correcting entries. Adjusting entries ensure that your financial statements only include data that is relevant to the time period you’re working on. There are four main types of adjustments, including deferrals, accruals, tax adjustments, and missing transaction adjustments.

Deferrals are revenues and expenses that have been received or paid in advance but have not yet been earned or used. For example, unearned revenue is money received for goods that have yet to be delivered.

Accruals are unpaid income and expenses that have not yet been recorded through a standard accounting transaction. For example, rent paid at the end of the month is an incurred expense, even though a business can occupy the premises at the beginning of the month if the rent is not yet paid.

  • Tax adjustments help you address expenses that lower your tax liabilities like depreciation and other tax deductions. For example, if you have spent a lot of money on new equipment, you may be able to deduct a portion of the cost this year. Once a year, your CPA will most likely guide you through the process.
  • Missing transaction adjustments allow you to account for financial transactions that you may have overlooked when bookkeeping, such as business purchases made on your personal credit card.

Step 5 – Preparing an adjusted trial balance

After posting all of your adjusting entries, it’s time to create an adjusted trial balance. This adjusted trial balance takes all of your adjusting entries into account.

The main purpose of the adjusted trial balance is to prove that all of your ledger’s credits and debits balance after all adjustments. Once you finish this step, you have all the information you need to start preparing your company’s financial statements!

The bottom line

Understanding the accounting cycle helps bookkeepers and small business owners simplify their accounting processes, and makes financial performance analysis more consistent, accurate, and efficient.

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Everything You Need to Know About Virtual Bookkeeping Jobs and How to Get into this Exciting Work

Nowadays, more and more small businesses are using virtual bookkeeping services, opening many opportunities for fresh-graduate accountants, professionals with CPA certifications, and people looking for online jobs. 

In this article, we’ll explain what exactly a virtual bookkeeping position entails, including common duties and skill/educational requirements. We’ll also highlight why it’s a good idea to work as a virtual bookkeeper, and give you some ideas of how to build your skill. 

What does a virtual bookkeeper do? 

Virtual bookkeeping is also known as online or remote bookkeeping. Like traditional on-site bookkeepers, virtual bookkeepers manage daily financial responsibilities, such as recording and verifying transactions, creating and analyzing financial reports, processing accounts payable, receivable, payroll, and managing invoices and tax payments. 

The key difference is that a traditional on-site bookkeeper needs to be physically present in an office to carry out these tasks, whereas a virtual bookkeeper handles everything remotely using cloud-based software.

The chart below illustrates the key differences between traditional and virtual bookkeepers’ work. 

Why it’s great working as a virtual bookkeeper

Virtual bookkeeping is easy to learn

Though many of us may fear that virtual bookkeeping is only for those with an accounting background, this job is an open opportunity for both the experienced and inexperienced. 

Bookkeeping jobs mainly involve categorizing things correctly and entering financial information into accounting systems. No formal education is required to be a bookkeeper, and only basic math skills are needed. It’ll be a huge plus if you’re detail-oriented, highly organized, and have experience in administrative work.

If you’re a beginner, you can take a bookkeeping course. Normally, bookkeeping courses last from three months to several years, depending on the length of the course. You can either learn through an online course or get a Bachelor’s Degree in Accounting. Online courses take weeks, depending on how many subjects you take on. Meanwhile, it may take up to four years to complete a Bachelor’s Degree in Accounting, though some programs offer accelerated, three-year degrees.

You can work anytime 

Typically, most bookkeeping jobs offer the flexibility to work in your own schedule. As there are no fixed work hours, clients can call you only when needed, allowing you to have more flexibility. You can start your day whenever you want, set your own schedule, and take breaks any time. Being a virtual bookkeeper, you have to keep track of your client’s daily financial transactions thoroughly in order not to be overwhelmed later on.

There may be, of course, times that your clients need you to work extra hours in a day, like during the tax season. However, if you have excellent time management skills, this won’t be as stressful.

You can work anywhere

Being a virtual bookkeeper means you can work anywhere. All you need is a good laptop equipped with accounting software and a stable internet connection. 

If you have young children, a remotely located job allows you to work at home and take care of them. If you have school-aged kids, you can do your tasks from any computer, including outside your home, such as in a coffee shop or a co-working space, while waiting for them to finish school.

Being employed as a virtual bookkeeper offers you more freedom as you can bring your work with you, making sure your job doesn’t consume your entire life. Not to mention, working in different environments can help you stay motivated and focused on tasks. 

There are also other good reasons for working remotely, including: 

  • Greater flexibility
  • Better work–life balance
  • Higher productivity 
  • Increased motivation
  • Reduced need for office space

You can have a healthy work and life balance

Virtual bookkeeping jobs offer you flexible working hours, allowing you to maintain the work-life balance you want and need. Since you don’t need to travel long distances and hours to work and don’t necessarily have to work exactly from nine to five, you’ll have more time for family, friends, and other habits. 

However, do keep in mind that though your virtual bookkeeping job is flexible in counting your work hours, it’s still important to have good time management skills.

Virtual bookkeeping jobs pay well

According to the US Bureau of Labor Statistics, as of 2021, the median salary of a bookkeeper is $40,240 annually or $19.35 per hour. The actual range falls between $69,000 to $91,000, depending on the employee’s degree. 

A virtual bookkeeper can work as an independent contractor for a bookkeeping agency hired by businesses that need outsourced bookkeepers, or they can work directly for a company in need of their services. Virtual bookkeepers also work as independent contractors with their clients. 

As a virtual bookkeeper, your salary will largely depend on the specific requirements of the job, the number of clients you handle, the level of education you’ve attained, any training and certifications gained, your work experience, and your specialty. 

Working as a virtual bookkeeper also brings you some economic benefits depending on certain factors. By making your home your office, you may be able to reduce commuting or lunch costs. Some virtual jobs even allow you to claim certain work-from-home expenses.  

What’s more, like most online jobs, virtual bookkeepers can work on the side and earn much more. Freelance bookkeepers with multiple clients can possibly make around $50 an hour.

What are the essential skills and aptitudes to succeed as a virtual bookkeeper?

To work as a virtual bookkeeper, besides having a strong base of basic accounting and finance-related knowledge, you need to be familiar with Excel sheets and accounting programs like QuickBooks, Xero, and Sage.

Remember that when it comes to bookkeeping, practice makes perfect, so before applying for virtual bookkeeping jobs, make sure you obtain proper education, train wherever you can, and master the science of bookkeeping through practice.

Having good time management and organization skills is also important for a virtual bookkeeper-to-be. Write a thorough and organized to-do list and check it as you go; this small action will help you manage your time and work much more efficiently. 

You also need to have an eye for details. Bookkeeping is a game of numbers, so there’s no room for error! A single wrong number can throw off all the work that you’ve already done, making things more difficult and making you untrustworthy to your clients.  

See more: Your Complete Guide to Online Accounting Jobs

After gaining all the necessary skills and aptitudes to become a successful virtual bookkeeper, how to find your dream job? Our suggestion is to visit some potential websites that are actively hiring for virtual bookkeeping jobs, such as FlexJobs,, Belay Solutions, Click Accounts, Two Roads, Robert Half, and 1-800Accountant

The bottom line

It’s fascinating how many advantages and possibilities virtual bookkeeping can bring to fresh-graduate accountants, those who earned a CPA certification, and people looking for a remote job. Even if you start from entry-level, you can reach further in this career with diligence and perseverance.

Don’t forget to fully use all the amazing virtual tools available to you! The Shoeboxed app is a tailored accounting app for freelancers, accountants, bookkeepers, and small business owners to simplify their accounting and bookkeeping processes. Shoeboxed helps users free their desks and drawers from piles of receipts and turn them into digital, clearly categorized data. You can easily scan your receipts, manage expenses, store business cards, track mileage, and so much more, with the Shoeboxed app

Additionally, Shoeboxed’s OCR (Optical Character Recognition) function and human-verification features ensure that your receipts are clearly scanned and well categorized, resulting in human-verified data that are legibly accepted by both the Internal Revenue Service and the Canada Revenue Service. 

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What Are The Differences Between A Bookkeeper And An Accountant?

Regardless of your business’s industry, size, and model, bookkeeping and accounting professionals play an essential role in the financial health of your business. While many people know that a bookkeeper is not the same as an accountant, they can’t put their finger on what exactly differentiates a bookkeeper vs accountant. 

In this guide, you’ll learn what separates an accountant from a bookkeeper, which your business should hire and when to employ them. 

Bookkeeper vs. Accountant: An overview 

A bookkeeper starts and an accountant finishes. In other words, a bookkeeper handles the initial stage of an accounting process which is recording and organizing daily financial transactions. An accountant takes up the work done by a bookkeeper and carries on the remaining tasks of the accounting cycle. Accountants are then responsible for analyzing and interpreting data gathered by bookkeepers, consulting with business owners, and preparing financial reports. 

To look at the differences in detail, we will compare bookkeeper vs accountant in two major aspects: job description and required credentials.  

Bookkeeper vs. Accountant: Job description 

Duties of a bookkeeper:

The practice of bookkeeping is far from new to the human race. Bookkeeping may have existed as early as around 2600 B.C. A bookkeeper’s core duty is to maintain complete and accurate records of the money coming in and out of business in a general ledger. Bookkeepers keep track of daily transactions in a consistent, systematic way, and their records allow the accountants to perform their jobs. 

Apart from the primary task of managing accounting ledgers, there are many other responsibilities that a company would ask from a bookkeeper.

A bookkeeper’s job description typically includes: 

  • Entering and correcting Accounts Payable and Accounts Receivable
  • Reconciling accounts and matching bank transactions
  • Issuing invoices and processing payments 
  • Managing expense reports 
  • Processing payroll 
  • Adjusting entries where necessary and as instructed by the accountant

Besides the above-mentioned typical responsibilities of bookkeepers, their duties vary depending on the industrial environment and business nature. For example, if you own a cannabis business, you may want to look for someone who can use seed-to-sale software (Biotrack, MJ Freeway, METRC, etc.) Or a bookkeeper who knows how to deal with IFTA (International Fuel Tax Agreement) will be an ideal choice for trucking businesses. 

Duties of an accountant: 

 An accountant analyzes the financial data collected by the bookkeeper to provide vital business insights and financial advice to the business owner. Accountants look at the big picture, putting key components of your business’s finances together and presenting them via financial statements. Such reports offer you a clear view of where your finances stand and what they imply, as well as what you can and should do about them and where you may anticipate your company will go in the near future.

The following are a few examples of typical requirements in an accounting job description: 

  • Preparing accounts and tax returns
  • Monitoring business spending and budgets
  • Auditing and analyzing financial performance
  • Administering payroll
  • Compiling and presenting financial and budget reports
  • Providing tax planning services 
  • Providing timely forecasts and important insights for future growth

Accounting work is often office-based, with usual 9 to 5 working hours. However, the workload typically becomes much greater during peak seasons like the tax period and the end of a fiscal year.   

In small businesses, an accountant may undertake all of the activities associated with the accounting process, but in larger businesses, various accountants are often in charge of different accounting areas. This might cover both financial and managerial accounting.

Bookkeeper vs. Accountant: Credentials and licensing 

Requirements of a bookkeeper:

In most cases, bookkeepers don’t need to acquire any certificates to handle the books. Businesses or employers usually only require their bookkeepers to have a high school degree providing basic math, communication, and computer skills. Other necessary skills like time management, organization, and multitasking can also be gained in high school.

While bookkeeping is not a licensed profession, businesses sometimes ask for a certification as proof of expertise. Many big organizations offer accreditation and licensing to bookkeepers, such as the American Institute of Professional Bookkeepers (AIPB) and the National Association of Certified Public Bookkeepers (NACPB).

Software companies for bookkeeping and accounting such as QuickBooks, Excel, Xero offer certifications to highlight bookkeepers’ skills and abilities using these software products. So if your accounting system is heavily dependent on software, a bookkeeper with a sophisticated understanding of accounting-support programs should be your best option. That’s when these software certifications can help you. 

Requirements of an accountant:

Although not always mandatory, an accountant needs to obtain at least a bachelor’s degree in accounting or related fields like business, economics, finance, or management. 

In addition to a university degree, an accountant can earn advanced accounting certificates to demonstrate their competency, such as a CPA certificate. A CPA is a “certified public accountant” who has satisfied the state’s standards and passed the Uniform CPA test. They must also meet continuing education criteria to keep their certification. 

When interviewing for a CPA, seek someone knowledgeable about tax law, proficient in accounting software and with excellent communication skills. They should be familiar with your sector as well as the unique demands and expectations of small enterprises.

When to hire a bookkeeper vs. an accountant

If your business is still in the early stages and you feel confident managing all the receipts and recording transactions, you may not need a bookkeeper yet. Do your own bookkeeping and hire a part-time accountant as a financial consultant.

However, when your business starts growing you’ll soon be overwhelmed by the paperwork. Then, it’s the right time to get a full-time bookkeeper to record daily data and keep your finances organized. Plus, an accountant at this point can help you create a long-term business plan, handle taxes neatly or advise you on the legal structure. 

Before you finally decide between a bookkeeper vs accountant, consider not only their credentials and expertise but also their cost, reputation, and their experience working in your industry. 

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