Full cycle accounting refers to recording and processing all business financial transactions from start to finish. This accounting process is cyclical, meaning it repeats itself over every financial period—whether that period is monthly, quarterly, or annually.
Full cycle accounting encompasses every aspect of a company’s financial activities, from the initial recording of transactions to the final production of financial statements and the closing of accounts.
Let’s get straight to the point
Full cycle accounting is the comprehensive process of recording and processing all financial transactions within a business, repeated every financial period. This method ensures accurate financial records and is essential for maintaining a company’s financial health.
The process involves eight key steps:
- Recording Journal Entries: Documenting financial transactions.
- Posting to Ledger Accounts: Organising transactions in the general ledger.
- Preparing an Unadjusted Trial Balance: Ensuring debits and credits balance.
- Making Adjusting Entries: Aligning records with the accrual accounting method.
- Preparing an Adjusted Trial Balance: Reflecting updated account balances.
- Generating Financial Statements: Creating reports like the balance sheet.
- Making Closing Entries: Resetting temporary accounts.
- Preparing the Post-Closing Trial Balance: Ensuring accounts are ready for the next cycle.
This approach simplifies financial management, providing a clear and accurate picture of a business’s financial health.
The Importance of Full Cycle Accounting
At its core, accounting is the systematic study of financial transactions over time. In full cycle accounting, this methodology is applied through a structured and consistent process.
This process is crucial for ensuring that a company’s financial records are accurate, up-to-date, and compliant with legal requirements. Full cycle accounting is not just a series of tasks but a comprehensive approach to managing a company’s finances, helping businesses maintain financial health and transparency.
The 8-Step Full Cycle Accounting Process
Step 1: Recording Journal Entries
The first step in the full cycle accounting process is recording journal entries. These entries represent individual financial transactions, such as sales, expenses, or payments.
Each transaction is recorded in the company’s general ledger, ensuring that all financial activity is accurately documented. Journal entries are the foundation of the accounting process, as they capture the raw data that will later be used to prepare financial statements.
Types of Journal Entries
- Simple Journal Entries: Single-entry transactions, typically straightforward and involving only one account.
- Compound Journal Entries: These involve multiple accounts and are used for more complex transactions.
- Adjusting Journal Entries: This is made at the end of an accounting period to correct discrepancies or allocate revenues and expenses to the correct periods.
Step 2: Posting to Ledger Accounts
Once journal entries are recorded, the next step is to post them to ledger accounts. The ledger is a comprehensive record that summarises all the transactions affecting a particular account, such as cash, inventory, or accounts receivable.
Posting to the ledger ensures that all financial data is organised and can be easily referenced during the preparation of financial statements.
Step 3: Preparing an Unadjusted Trial Balance
After posting to the ledger, an unadjusted trial balance is prepared. This document lists all ledger accounts and their balances at a specific time.
The purpose of the unadjusted trial balance is to ensure that the total debits equal the total credits, which confirms that the financial records are in balance. However, this balance must still be accounted for in any necessary adjustments.
Step 4: Making Adjusting Entries
Adjusting entries is crucial for aligning financial records with the accrual basis of accounting. These entries ensure that revenues and expenses are recorded when they are earned or incurred rather than when cash is received or paid.
Adjusting entries are typically made for accrued revenues, expenses, prepaid expenses, and depreciation.
Common Adjusting Entries
- Accrued Revenues: Revenue that has been earned but not yet received.
- Accrued Expenses: Expenses that have been incurred but not yet paid.
- Depreciation: Allocation of the cost of a fixed asset over its useful life.
- Prepaid Expenses: Payments made in advance for expenses that benefit future periods.
Step 5: Preparing an Adjusted Trial Balance
An adjusted trial balance is prepared once all adjusting entries have been made. This document reflects the updated balances of all accounts, incorporating the adjustments made in the previous step.
The adjusted trial balance provides a complete and accurate snapshot of the company’s financial position and serves as the basis for preparing financial statements.
Step 6: Generating Financial Statements
Financial statements are the primary output of the accounting cycle. These statements give stakeholders a comprehensive view of the company’s financial performance and position.
The three key financial statements are:
- Balance Sheet: Shows the company’s assets, liabilities, and equity at a specific point in time.
- Income Statement: Summarises revenues and expenses over a period, resulting in net profit or loss.
- Statement of Cash Flows: Details the cash inflows and outflows from operating, investing, and financing activities.
Step 7: Making Closing Entries
At the end of an accounting period, closing entries are made to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (such as retained earnings). This process resets the balances of temporary accounts to zero, preparing them for the next accounting period.
Steps in the Closing Process
- Closing Revenue Accounts: Transferring revenue balances to the retained earnings account.
- Closing Expense Accounts: Transferring expense balances to the retained earnings account.
- Closing Dividend Accounts: Transferring dividends declared to the retained earnings account.
- Closing the Income Summary Account: Summarising the net income or loss and transferring it to retained earnings.
Step 8: Preparing the Post-Closing Trial Balance
The final step in the full cycle accounting process is preparing the post-closing trial balance. This document lists all balance sheet accounts with non-zero balances after the closing entries have been made.
The post-closing trial balance ensures that all temporary accounts have been properly closed and that the ledger is ready for the next accounting period.
Conclusion: The Value of Full Cycle Accounting
Full cycle accounting systematically manages a company’s financial records, ensuring accuracy, consistency, and compliance. Understanding and implementing the eight-step accounting cycle can simplify financial management and enhance decision-making for small business owners and bookkeepers.
By following this process, businesses can maintain a clear and accurate picture of their financial health, which is essential for long-term success. Are you struggling to keep up with your bookkeeping? At Bookkept, our team of experienced accountants and business advisors is here to help. Contact us today at (03) 8568 3606 or [email protected] for a consultation, and let us take the stress out of managing your finances.
FAQsÂ
What Is Full Cycle Accounting?
Full cycle accounting refers to the complete process of managing a business’s financial transactions from start to finish, typically over a fiscal period.
What Are The Main Stages Of Full Cycle Accounting?
The stages include transaction recording, adjusting entries, preparing financial statements, closing the books, and beginning the next accounting cycle.
Who Typically Handles Full Cycle Accounting In A Business?
Accountants, bookkeepers, or financial professionals are responsible for managing the full cycle, depending on the business size and complexity of operations.
Why Is Full Cycle Accounting Important?
It ensures accurate financial records, compliance with regulations, and provides insights into a business’s financial health for decision-making.
Is Full Cycle Accounting Suitable For Small Businesses?
Yes, small businesses benefit greatly from full cycle accounting as it provides a structured approach to managing finances and preparing for tax compliance.