What is Full Cycle Accounting?
Accounting measures business activity within a certain period. The act of completing each necessary activity in the accounting period is referred to as the full accounting cycle. “Full cycle” accounting also can refer to activity cycles within the larger scope of accounting.
The eight-step accounting cycle is important to be aware of for all types of bookkeepers. It breaks down the entire process of a bookkeeper’s responsibilities into eight basic steps. Many of these steps are often automated through accounting software and technology programs. However, knowing and using the steps manually can be essential for small business accountants working on the books with minimal technical support.
What is the Accounting Cycle?
The accounting cycle is a basic, eight-step process for completing a company’s bookkeeping tasks. It provides a clear guide for the recording, analysis, and final reporting of a business’s financial activities.
The accounting cycle is used comprehensively through one full reporting period. Thus, staying organized throughout the process’s timeframe can be a key element that helps to maintain overall efficiency. Accounting cycle periods will vary by reporting needs. Most companies seek to analyze their performance monthly, though some may focus more heavily on quarterly or annual results.
Regardless, most bookkeepers will have an awareness of the company’s financial position from day-to-day. Overall, determining the amount of time for each accounting cycle is important because it sets specific dates for opening and closing. Once an accounting cycle closes, a new cycle begins, restarting the eight-step accounting process all over again.
The accounting cycle is the holistic process of recording and processing all financial transactions of a company, from when the transaction occurs, to its representation on the financial statements, to closing the accounts. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business.
The accounting cycle incorporates all the accounts, journal entries, T accounts, debits, and credits, adjusting entries over a full cycle.
Understanding the 8-Step Accounting Cycle
The eight-step accounting cycle starts with recording every company transaction individually and ends with a comprehensive report of the company’s activities for the designated cycle timeframe. Many companies use accounting software to automate the accounting cycle. This allows accountants to program cycle dates and receive automated reports.
Depending on each company’s system, more or less technical automation may be utilized. Typically, bookkeeping will involve some technical support, but a bookkeeper may be required to intervene in the accounting cycle at various points.
Every individual company will usually need to modify the eight-step accounting cycle in certain ways in order to fit with their company’s business model and accounting procedures. Modifications for accrual accounting versus cash accounting are usually one major concern.
Companies may also choose between single-entry accounting vs. double-entry accounting. Double-entry accounting is required for companies building out all three major financial statements, the income statement, balance sheet, and cash flow statement.
A full cycle accounting is a process of accounting activities that are followed by every business throughout the year, in the same repetitive manner, until the company remains in the business. This full-cycle starts with recording all the financial statements of the business and goes all the way to the closing account. Full Cycle Accounting is also known as Accounting Cycle, or a standard business cycle of the company that measures the business activities with full consistency and within a certain period of time. It also incorporates journal entries, transactions, debits and credits, adjusting entries to complete the cycle of 8 steps:
A journal entry is used to record business transactions. It can be recorded in the general ledger to create financial statements of the business. There are different types of journal entries:
- Adjusting entry
- Compound entry
- Reversing entry
A ledger account contains a record of all business transactions. It is a summary of all amounts entered in journals and follows the transactions to one or more ledgers. It is the separate record within the general ledger (a general ledger is an account that is used to sort, store and summarize a company’s transactions) that is linked with a specific asset, liability, equity, revenue, or expenses. The examples of ledger accounts are cash, accounts receivable, fixed assets, inventory, accounts payable, stockholders equity, revenue, cost of goods sold, depreciation, income tax expense and accrued expenses.
The unadjusted trial balance is used as the starting point for analyzing account balances and making adjusting entries. It is a listing of general ledger account balances at the end of the reporting period before any adjusting entries are made to balance and create financial statements. It is useful for the managers and accountants to use this to assess the accounts that must be adjusted or changed before the financial statements are prepared.
These are the journal entries made at the end of the accounting cycle to update revenue and expense accounts and to make sure that these entries are following the matching principle in full-cycle accounting. These entries are typically made before issuing a company’s financial statement. Adjusting entries always involve:
- Balance sheet account – interest payable, prepaid insurance and accounts receivable
- Income statement account – interest expense, insurance expense and service revenues.
Adjusted Trial Balance
What this is, is the listing of ending balances in all accounts after adjusting entries are prepared. It is an internal document that lists the general ledger accounts and the balances after any adjustments are made. The reason behind preparing this is to ensure that the entries which we made are correct because it is the last step before preparing the financial statements.
Financial statements are the records of the business activities and the financial performance of the organization. These statements are audited by the Government agencies, accountants and auditors to ensure that the statements prepared are accurate and there is no fraud in them. They must include:
- Balance Sheet
- Income Statement
- Cash Flow Statement
Closing entry is made at the end of an accounting period to transfer balances from the temporary account to the permanent account. A closing entry also transfers the owner’s drawings account balance to the owner’s capital account. The four basic steps in the closing process are:
- Closing Revenue Account
- Closing Expense Account
- Closing Dividend Account
- Closing Income Summary Account
Post Closing Trial Balance
This is prepared after closing entries are finished. The post-closing balance only contains real accounts, as all the other temporary accounts have already been closed at the previous stages. This step is done to assure that the accounts are in balance and equalized. With this, the accounting cycle comes to an end and gets ready for the new cycle from step one for the full cycle accounting.
This balance should reflect the closing of temporary accounts. This is a list of all the balance sheet accounts that contain non-zero balances at the end of a reporting period. It is used to verify that the total of all debit balances equals the total of all credit balances, which should net to zero. It contains no revenue, gain, expense, or loss, or summary account balances because these temporary accounts have already been closed and had their balances moved to the retained earnings account as part of the closing process.
Full cycle accounting may also refer to the entire set of transactions associated with specific business activities, such as:
- Payroll: Staff members submit a time card or timesheet to the payroll system or staff. Once reviewed for accuracy, supervisors make the necessary adjustments and approve them for payment. The payroll is aggregated for gross pay, including all the taxes and other deductions for net pay. At that point, the payment is issued to employees, in the form of a check or direct deposit. These activities are the full cycle of activities for paying staff members.
- Sales: An organization purchases goods, stores them, processes customer orders, picks the items from stock, sells them on credit, and then collects payment from customers. This is the full cycle of activities for selling goods and services to customers.
- Purchasing: This is where the full cycle accounts payable actions take place. An employee submits a purchase requisition for goods or services, and the purchasing department issues a purchase order. From there, the receiving department receives the goods, and the accounts payable team processes the payment to the supplier. This cycle represents everything required to obtain goods and services for the organization.
Full Cycle Accounting Positions
Within the accounting function, there are business activities — like sales, payroll and purchasing — that also have cycles. For example, the purchasing function requires submitting a purchase request, sending a purchase order, receiving the goods, and processing the outgoing payment.
When companies create job descriptions for accounting, they sometimes label the position as “full cycle.” This means that the employee is responsible for each step in that particular accounting cycle. For example, a full-cycle accounts payable clerk would be responsible for each step in the purchasing cycle, and a full-cycle payroll clerk would be responsible for each step in the payroll cycle.
What Is a Revenue Cycle
Professional Services: Companies or individuals that provide services rather than goods – such as law or accounting firms – have different types of revenue cycles. These types of professionals often require money upfront from clients as a retainer, and this retainer is kept in a special account. When the firm provides services, money is drawn from that account. Attorneys sometimes have another type of arrangement wherein they take on a client with the agreement that they receive their payment from any settlement won in the lawsuit.
Manufacturing Companies: A manufacturing firm’s revenue cycle begins when it completes the production of the goods it intends to sell. The next step is processing the order and getting the inventory ready to ship. Some manufacturers have sales teams who handle this part of the cycle, or they have regular dealers that they supply with goods. After the goods are delivered, the company sends the customer an invoice. When the customer pays the invoice, the company’s revenue cycle is complete.
Health Care Companies: Health care companies have the most complicated revenue cycles. The costs of health care services are very high, as most consumers know, and patients either use private insurance or government-sponsored insurance to pay for much of their care. These insurance companies are middlemen who protract and complicate the revenue cycle. Health care companies that accept insurance must conform to the billing practices of the insurance company and translate the procedures they performed into a universal code. Often, the insurer does not cover the full cost of the services, and this means that the health care provider will also have to bill the patient to recover the full cost. The revenue cycle is complete when payment from both the patient and the insurance company are received.
Software Development: Software development businesses often create revenue cycles based on hitting certain milestones. Some elements of the project are delivered to the client during each stage of the development process, and the client sends the company a payment to fund the next stage in the process. The revenue cycle is complete when the full project is delivered, and the client makes the final payment.
What Is the Expenditure Cycle in Accounting?
Another important cycle in accounting is the expenditure cycle. While the revenue cycle follows the journey of an item from delivery to sale, the expenditure cycle is all about the purchasing done by a company.
Companies purchase goods and services to operate efficiently and achieve their business objectives. Purchasing is an internal function, and effective purchasing has several goals, including minimizing spending and maintaining quality. The expenditure cycle is what governs the methodology a company uses for purchasing.
An expenditure cycle involves the repetitive process of first creating purchase orders and ordering goods and services, then receiving these items, approving the invoices and finally paying the invoices. A good example of the expenditure cycle at work is the purchase of office supplies, which is something most companies need. The expenditure cycle for office supplies would begin when purchase orders are created based on the needs of employees. Next, those supplies are ordered by phone or online from an office supply store. The order is placed using a purchase order. Once the items are delivered, the accounting will approve the invoice for payment and write a check to the supplier.
Importance of Expenditure Cycles
Creating a process for your company’s expenditure cycles is a good idea, no matter how small the business. Many small-business owners don’t implement a system to track purchases accurately. Without a clearly defined expenditure cycle, a business owner or manager must personally approve every purchase, every invoice and every vendor. Or if you decide just to let employees do what they want when they want, your company’s expenditures could increase significantly. Duplicate and unnecessary purchases can become common when there is no system in place that tracks purchasing.
If you establish a system for your company’s expenditure cycle, you can reduce fraud and the potential for fraud. Putting a system in place has shown to reduce the opportunity for embezzlement significantly. Employees can’t “pay” fake or fraudulent vendors if your system requires vendors to be pre-approved or approved before ordering. Besides, if you control payments, employees can’t write unauthorized checks. A written expenditure cycle can truly strengthen your company’s accounting and financial infrastructure.
What Is a Production Cycle?
The production cycle is yet another key cycle in the business world. Also known as the product life cycle, the production cycle describes the period over which an item is developed, brought to market and eventually removed from the market. There are four stages to the production cycle: introduction, growth, maturity and decline.
While the revenue and expenditure cycles are important to accountants, the production cycle is more useful for the marketing department. It helps your company’s marketing team decide when it is a good time to advertise, reduce prices, explore new markets or create new packaging.
The production cycle follows a fairly standard path. First, a product idea is introduced, then sent to research and development to determine the product’s feasibility and potential profitability. Next, the product is produced, marketed and rolled out. This is called the growth phase of the product. If the new product becomes successful, production will increase until the product becomes widely available and matures. This is called the maturity phase of the product. Eventually, demand for the product will decline, and it will most likely become obsolete, resulting in the decline stage. Understanding a product’s life cycle is important for a successful company.
When a product begins its life cycle, it may have little-to-no competition in the marketplace. Then, if it does well, competitors may start to emulate its success. The more successful the product becomes, the more competitors it will face. This may cause the product to lose market share, eventually leading to its decline.
The way a company markets a product depends, in part, on its stage in the production cycle. A brand-new product, for example, must be explained to consumers. A product that is further along in its life cycle will need to be differentiated from its competitors.
What Is a Full Cycle Payroll?
The length of time between payrolls is referred to as the payroll cycle or full-cycle payroll. Businesses vary in their payroll time frames, and every business must decide which payroll schedule is best for their company and employees. Often, there are different payroll cycles within a single company. Exempt or salaried employees may be paid once a month, for example, while hourly employees may be paid weekly.
The payroll cycle starts with deciding on the wages and salaries for new employees. The next part of the cycle involves attendance and timekeeping. Some employees must clock in and out to keep a record of their hours worked. Others are paid a set amount no matter the hours they put in. The payroll cycle ends with payment followed by preparation of governmental (tax) and internal reports. Steps in the payment cycle, including gathering employee time, running earnings and deduction calculation and printing a check.
To conclude, those are the steps followed in every financial year in every business. The Full Cycle Accounting requires a consistent recording of financial transactions that result in the making of financial statements which helps companies to record and monitor their financial conditions of organizations.
The eight-step accounting cycle process makes accounting easier for bookkeepers and busy entrepreneurs. It can help to take the guesswork out of how to handle accounting activities. It also helps to ensure consistency, accuracy, and efficient financial performance analysis.