What Is Full Cycle Accounting?

Introduction 

In today’s financial world, accounting and bookkeeping demand a high level of accuracy and consistency. Businesses always prioritize timely and precise completion of tasks, which is essential for tracking financial transactions, ensuring compliance, and preparing reports.

Among all the techniques, full cycle accounting is widely used and a prominent one. Do you know what full cycle accounting is? 

If not, this comprehensive blog explains full cycle accounting meaning, process, and its benefits. 

What is Full Cycle Accounting?

The accounting cycle definition is quite simple. It refers to the comprehensive process of recording, processing, and closing financial transactions by an accountant during the specific accounting period, i.e., from the initial business transactions to the conclusion of all transactions. 

The full cycle accounting process is cyclical, which means the process repeats over every financial period, whether it is monthly, quarterly, or on an annual basis. And, this method ensures to provide accurate financial records, essential for maintaining the financial health of the organization. 

An effective and efficient full cycle accounting is possible when the core tasks of accounting and bookkeeping are managed with utmost precision and consistency. 

Full cycle accounting process steps:

1. Recording journal entries 
2. Posting ledger accounts 
3. Preparing a trial balance 
4. Adjusting entries 
5. Preparing an adjusted trial balance
6. Generating financial statements 
7. Closing the financial entries
8. Preparing post-closing trial balance 

The full cycle accounting process covers everything from the beginning to the end of the organization’s finances. 

Importance of Full Cycle Accounting 

The full cycle accounting method is a consistent and structured process that is crucial for organizations. And, here’s why it matters as a priority to the organizations:

• Adhere to Compliance 

Organizations must comply with accounting standards, like Ind AS, GAAP and IFRS , and full cycle accounting ensures thorough compliance with the regulations.

• Ensures Business Growth 

Investors always trust businesses with accurate financial records as this reduces the chances of errors and encourages investment.

• Improves Decision-Making 

Detailed and accurate financial statements help to understand the overall financial health of an organization, i.e., profit, cash flow, and expenses

• Reduces Financial Risks 

Proper documentation and reconciliation help in minimizing financial risks. 

Thus, by implementing full cycle accounting, organizations can strengthen their financial practices and foster long-term stability. 

What are the Stages of the Accounting Cycle?

• Identifying and Recording Journal Entries 

This is the initial phase where all the financial events of the organizations are recognized, such as sales, payroll, banking transactions, loans, and more. 

Each of the business transactions is recorded in the company’s ledger, ensuring all the financial activities are accurately documented. In fact, journal entries are considered the foundation of accounting tasks, as they collect raw financial data that can be used at later stages. 

• Posting to Ledger Accounts

The next step is to post the journal entries to the ledger accounts.

A ledger is a comprehensive record that summarizes all the financial transactions of an account. The ledger entries are further categorized into accounts, like assets, liabilities, expenses, equity, and Revenue.

By posting journal entries into the ledger, financial data is properly organized, making it easier to refer when preparing financial statements.  

• Preparing Unadjusted Trial Balance 

Once all the financial data are posted to the ledger, an unadjusted trial balance is prepared- which is a list of all the ledger account balances made at the end of the accounting period, prior to making any sort of adjustments.

Nevertheless, it is essential to consider this balance for any necessary adjustments.

• Making Adjusting Entries

Adjusting entries are typically made at the end of the accounting period in order to record revenues that have been earned but not yet recorded. On the other hand, it also includes expenses that have been incurred but not yet recorded.

Adjusting entries are made for accrued expenses, revenues, depreciation, and prepaid expenses.

• Accrued expenses- Expenses incurred, but not yet paid.
• Accrued revenue- Revenue earned, but not yet paid.
• Depreciation- Allocate the cost of a tangible asset over its useful life
• Prepaid expenses- Advance payments are made for the expenses that will be incurred for the future period. 

• Preparing Adjusted Trial Balance

An adjusted trial balance is prepared once all the adjusting entries are made. And, this adjusted trial balance reflects up-to-date account balances by including all the necessary adjustments from the previous steps. 

Therefore, the adjusted trial balance provides a comprehensive picture of the organization’s financial status. Also, it can be used as a basis for preparing financial statements. 

• Generating Financial Statements 

Irrespective of your company, generating financial statements is considered to be the major output of the accounting cycle. In fact, it also provides a comprehensive view of the financial position and performance of the organization. 

Key financial statements include:

• Balance sheet- reflects the company’s assets, equity, and liabilities.
• Income statement- summarizes expenses and revenues of a specific duration, resulting in profit/loss.
• Cashflow statement- Comprehensive details of cash inflow and outflow from all the financial activities.
  

• Closing the Financial Entries

When it comes to the end of the accounting period, closing entries are typically made to transfer balances of temporary accounts to permanent accounts.

*Temporary accounts– revenues, dividends, and expenses for a specific period of time

*Permanent accounts– retained earnings

Closing entries reset the temporary account balance to zero and prepare for the next accounting period. 

Here are some of the steps involved in the closing entry process:

• Closing expense accounts 
• Closing revenue accounts 
• Closing dividend accounts 
• Closing income summary accounts 

• Preparing Post-Closing Trial Balance 

This is the final step of the process.  And, this document outlines all the balance sheet accounts having non-zero balances. It also ensures temporary accounts have closed properly and the ledger is ready for the next accounting period.

A Detailed Example (Retail Shop)

1. Identifying and Recording Journal Entries

• Monthly Sales- Rs 8,00,000
• Inventory purchase- Rs 3,00,000
• Rent- Rs 45,000
• Salary- Rs 80,000
• Utility bills payable- Rs 9,000
  2. Posting to Ledger 

All the journal entries are transferred to the corresponding ledger entry-

• Sales ledger
• Inventory ledger
• Expense accounts (rent, salary, utilities)
• Bank accounts
  3. Preparing a trial balance 

Balances are checked to ensure debit=credit 

            4. Adjusting entries 

• Utility bills
• Inventory adjustments 
• Depreciation 

Also, the accountant realizes that the rent expense for the current month has been paid and needs to be adjusted for the coming months.

• Debit- Prepaid rent
• Credit- Rent expense 

After making the adjusted entry, the accountant then prepares the adjusted trial balance 

          5. Preparing financial statements 

• Income statement 
• Balance sheet
• Cash flow statement 
• Retained earnings
  6. Closing the entries 

Temporary accounts are closed and reset for the next month.

Benefits of Full Cycle Accounting 

Understanding and implementing a full cycle accounting brings assorted benefits to your business. Here are some of the major benefits:

• Streamlined Business Operations

The full cycle accounting process automates financial processes, reducing the resources and time required to maintain accurate records. And, it also enables businesses to focus on priority works, such as sales and growth, while reducing the likelihood of errors and inaccuracies.  

• Error Reduction 

The same accountant handling the entire accounting process can significantly decrease the chances of committing errors. 

• Increased Cost Savings and Efficiency 

With a full cycle accounting process, businesses can easily identify the areas where costs can be reduced. Additionally, it allows better negotiation with vendors and suppliers, leading to significant cost savings.

• Quick Reporting 

Month-end and year-end closing reports can be generated quickly and efficiently. 

Conclusion

A full cycle accounting is a comprehensive and end-to-end financial process that helps in generating financial statements and maintaining accurate business records, among others. From recording business transactions to closing the accounting books, each step is designed to ensure financial stability and transparency. 

Whether you are a business owner, an accountant, or a student who seeks to gain a robust foundation in financial management, understanding and implementing full cycle accounting can simplify the process. With skilled professionals and modern accounting tools, full cycle accounting becomes a powerful technique to develop the financial health of the business.