What Is Full Cycle Accounting?
Accounting measures business activity within a certain period. The act of completing each necessary activity in the accounting period is referred to as the full accounting cycle. "Full cycle" accounting also can refer to activity cycles within the larger scope of accounting.
The full cycle of accounting is all the steps necessary to process business transactions and create a set of financial statements. According to Accounting Explained, the accounting cycle can be broken into the following steps:
- Record accounting transactions like purchases and receipts of payment. These are recorded as journal entries in the appropriate subledger. For example, a purchase of office supplies would be posted to the accounts payable ledger.
- Approve accounting transactions and posting them to the general ledger, which encompasses all subledgers.
- Prepare an unadjusted trial balance. The unadjusted trial balance lists all transactions that occurred during the accounting period.
- Record adjusting journal entries. Common adjusting journal entries are depreciation expense, revenue deferrals and expense accruals.
- Generate an adjusted trial balance. This is similar to the unadjusted trial balance, but reflects adjusting journal entries.
- Prepare financial statements, including the balance sheet, income statement and statement of cash flows.
- Transfer temporary account balances, like revenues and expenses for the period, to the income summary and reset temporary account balances to zero.
- Generate a post-closing trial balance that reflects the closing of temporary accounts.
After the last step is completed, the accounting department is ready to complete the cycle again for the new accounting period.
Within the accounting function, there are business activities -- like sales, payroll and purchasing -- that also have cycles. For example, the purchasing function requires submitting a purchase request, sending a purchase order, receiving the goods, and processing the outgoing payment.
When companies create job descriptions for accounting, they sometimes label the position as "full cycle." This means that the employee is responsible for each step in that particular accounting cycle. For example, a full cycle accounts payable clerk would be responsible for each step in the purchasing cycle, and a full-cycle payroll clerk would be responsible for each step in the payroll cycle.