What Is Full Cycle Accounting?
The responsibility of financial reporting falls on the accounting staff. Accountants work throughout the accounting period to ensure that the financial numbers appearing on the final financial statements represent the true financial health of a company. The full accounting cycle begins immediately following the end of the previous cycle and includes several steps.
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Record Transactions
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The accounting cycle begins with the accounting staff recording transactions as they occur throughout the month. The accounting staff needs to know when each transaction occurs, the dollar amount of the transaction and in which accounts the transactions have occurred. Armed with this information, the accountant records the transactions in the company's accounting records. These transactions include sales to customers, receiving inventory and paying wages.
Prepare Unadjusted Trial Balance
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At the end of the period the accounting staff creates an unadjusted trial balance. This report lists every account used by the company and the current balance in debits or credits. The debits and credits listed on the unadjusted trial balance must equal. The accounting staff must review each account listed to determine whether any adjustments are required.
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Record Adjustments
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Adjusting entries are required for deferred revenues or expenses and accrued revenues or expenses. These balances must be adjusted to reflect the current balance in these accounts and to recognize any revenue earned during the period or any expenses incurred. A customer deposit represents an example of deferred revenue. Prepaid insurance represents an example of a deferred expense. Services performed for a customer that have not yet been billed represent accrued revenues. Utilities used that the company has not been billed for yet represent accrued expenses.
Prepare Adjusted Trial Balance
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An adjusted trial balance follows the same format as the unadjusted trial balance. The accounting staff runs this report after recording the adjustments to ensure everything is recorded correctly and that the debits and credits still equal.
Create Financial Statements
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After verifying that the information on the adjusted trial balance is complete, the accounting staff creates the financial statements. These include the balance sheet, the income statement, the statement of owner's equity and the statement of cash flows. The financial statements communicate the financial activities during the period and the current financial health of a company.
Record Closing Entries
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Once the financial statements are finalized, the accounting staff records the closing entries and completes the full cycle of accounting. Closing entries zero out the balance in all revenue and expense accounts and the owner's drawing account. These accounts reset to start the next accounting cycle.
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