The accounting cycle: from source documents to annual accounts

An overview of the six steps

There are several ways to describe the accounting cycle. The six steps below provide a practical workflow; Swiss law does not prescribe a particular number of stages.

The process works because the steps connect. An invoice missing at the start can distort the final profit even when every calculation in the software is mathematically correct.

Step 1: collect documents and analyse transactions

Gather customer and supplier invoices, bank statements, expense claims, payroll statements and contracts that affect the accounts. Include payment platforms and cards: their transactions do not always appear immediately in the main bank account.

The documents should explain what happened. A CHF 5,000 payment could be an advance to a supplier, a loan repayment or the purchase of equipment. The amount alone does not tell you how to record it.

Track missing documents in a list and assign someone to follow them up. Asking for evidence while a transaction is recent is easier than trying to remember what a payment was for several months later.

For unusual transactions, add the relevant context: delivery date, a connection with a shareholder, a dispute or repayment terms. Swiss accounting principles require records to be complete and traceable.

Step 2: record entries in the correct accounts

Allocate each transaction to the appropriate accounts, with a date, description and reference to its supporting document. The chart of accounts provides the structure. The relevant period and VAT treatment also need to be considered.

In double-entry bookkeeping, total debits equal total credits. An entry can affect more than two accounts, particularly where it includes VAT or several payroll deductions.

The journal records entries in chronological order. The general ledger lets you see all transactions in an individual account, such as rent or customer receivables. Accounting software generally produces both views from the same data.

For example, excluding VAT, a service delivered and invoiced for CHF 3,000 creates a debit to trade receivables and a credit to service revenue. When the customer pays, the bank account is debited and trade receivables are credited. The second entry does not create another sale.

Step 3: prepare and check the trial balance

The trial balance summarises the movements and balance for each account. It can be produced at any time; you do not have to wait until year-end.

A trial balance with equal debits and credits satisfies the arithmetic rule of double-entry bookkeeping. It may still contain an omitted invoice, a duplicated transaction or a private expense recorded as a business cost. All of these can leave debits and credits perfectly balanced.

Checks must therefore compare the figures with other evidence:

• Bank accounts: reconcile with bank statements and explain payments in transit.
• Customers: reconcile the receivables control account with outstanding invoices.
• Suppliers: check that amounts payable agree with invoices and payments.
• Payroll and VAT: reconcile the accounts with the relevant statements and returns.

An annual VAT reconciliation is a useful part of this work. Also apply a reasonableness check: a negative petty cash balance, an unusual supplier balance or an expense account that suddenly falls to zero needs an explanation. An unexpected balance is not automatically wrong, but you should understand it.

Step 4: record closing adjustments

Adjustments complete the day-to-day bookkeeping. In particular, they allocate income and expenses to the correct financial year and review the value of assets.

A twelve-month subscription costing CHF 1,200, paid on 1 July, does not relate entirely to a financial year ending on 31 December. Assuming the cost is spread evenly over the months, CHF 600 remains an expense for the year and CHF 600 becomes a prepayment. This example excludes VAT.

Other work concerns inventory, unbilled services, depreciation, doubtful receivables and risks requiring a provision. Amounts should be supported by evidence, such as a stock count, a schedule or an assessment of a dispute.

These entries are not all “tax adjustments”. Depreciation first reflects the use and loss of value of an asset under accounting rules. Tax limits are assessed separately. A tax return may contain adjustments without requiring arbitrary changes to the statutory accounts.

Our article on year-end accounting provides a fuller preparation checklist.

Step 5: review the adjusted trial balance

After posting closing entries, produce a new trial balance and review the accounts that changed. An adjustment should resolve the original issue without introducing an inconsistency elsewhere.

Return to the subscription example: the annual expense falls by CHF 600 and prepayments increase by CHF 600. The bank payment remains CHF 1,200. If the adjustment changes the bank balance again, the entry is wrong.

Next, check how profit reconciles with movements in equity, taking contributions, distributions or owner withdrawals into account. A change in equity does not necessarily equal the year’s profit alone.

Compare individual items with the previous year and with what you know about the business. Document significant changes. An improvement in margin may be real, but it could also result from overvalued inventory or missing purchase invoices.

Step 6: prepare the accounts and the next accounting cycle

Under Swiss law, annual financial statements generally comprise a balance sheet, an income statement and notes, subject to the applicable exemptions. A cash flow statement is an additional requirement for certain larger businesses, not for every SME.

Software brings the balances together, but does not necessarily prepare all the information needed in the notes to the accounts. Commitments, significant events and accounting policies need to be reviewed with the people who know the business.

The annual report must be prepared and submitted to the competent body or persons for approval within six months of the financial year-end. This is not a general tax-return filing deadline. Any audit requirement and the approval procedure should be included in the timetable.

Once the accounts are finalised, income and expense accounts are closed for the next period. Balance sheet accounts are carried forward as opening balances. Retain supporting documents, reports and evidence of approval, together with the access needed to consult them later. Our article on retaining accounting records explains the relevant periods and digital storage requirements.

Frequently asked questions