What is Full Cycle Accounting?
A full cycle accounting is a process of accounting activities that are followed by every business throughout the year, in the same repetitive manner, till 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:
1. Journal Entries –
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
2. Ledger Accounts –
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.
3. Unadjusted Entries –
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 report 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.
4. Adjusting Entries –
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 in accordance with the matching principle in full-cycle accounting. These entries are typically made prior to 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.
5. 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.
6. 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
7. Closing Entries –
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
8. 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.
To conclude, those are the 8 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.
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