A full cycle accounting is a process of accounting activities that are followed by every business throughout the year, 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. Here are the different types of 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 ledger (it’s 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 GL account balances at the end of the reporting period before any of them 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. It always involves: 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 they’re are prepared. It is an internal document that lists the 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 cycle 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.
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