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What is full cycle accounting?

By Justin Parker - Feb. 20, 2023

Full-cycle accounting refers to a series of steps utilized by accountants and accounting departments to record and report an organization's financial transactions. There are eight steps in full-cycle accounting, these are:

  • Transaction analyzation. The first step in full-cycle accounting is to analyze different events and determine if they can be categorized as "transactions." The impact of the transactions on the organization is another crucial aspect of this step. Relevant company transactions include the following:

    • Company purchases

    • New debts acquired

    • Debts paid

    • Revenue generated from sales

Events that would not be considered financial transactions include signing new contracts and drafting purchase orders.

  • Log journal entries. The next step in full-cycle accounting is to log those financial transactions as journal entries. This is most often done in chronological order. A key point here is that you must comprehend the impact of these transactions (from step 1) to log the journal entries.

    Journal entries have debits and credits associated with each one. Whether a specific account is credited or debited depends on how the balance of that account is tracked.

  • Makes posts of entries to the general ledger. A general ledger account consists of all of the journal entries that debit or credit that account. This is also known as the master set of all ledger accounts.

    This is a crucial step because general ledgers keep track of an organization's financial activities. You should log a summary of each financial activity or transaction for each ledger account.

  • Unadjusted trial balance. After each accounting period (determined by each company), the accounting department must enter information from the ledger accounts into a trial balance. This is an unadjusted trial balance because it is done before adjusted entries are entered.

  • Determine the accuracy of worksheets. When the debits and credits of the trial balance are not equal, this step is a requirement. Transaction information should be reviewed to determine the errors.

  • Record any adjusted entries. Adjustments are categorized into deferrals and accruals.

    Accountants and departments must use the matching principle to complete this step. This helps determine if an organization's deferrals and accruals will be factored into the organization's total revenue or unearned revenue for the accounting period.

  • Organize financial statements and documents. Now accounting departments can prepare the financial statements and adjust the trial balance. Financial statements are normally prepared in this order:

    • Income statement

    • Statement of retained earnings

    • Balance sheet

    • Statement of cash flows

    This order is important because the preparation of each can impact the others in different ways.

  • Close all temporary accounts. This is the last step in full-cycle accounting. Any accounts determined to be temporary on the income statement are closed out.

  • What is full cycle accounting?

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