What Is Full Cycle Accounting? A Guide for New Business Owners

Michael Pignatelli
Nov 08, 2022

So you have a new business, and you're wise enough to know you'll need something to measure your business’s performance. You're off to a good start. This line of thinking will give you an advantage over other new business owners.

You've come to the right place if you need to put together a proper accounting system. Unloop will help you understand the accounting cycle. This is an essential system any business can implement at any stage in their business, but most importantly, by infant businesses.

So hop on and let us show you the steps in building the full accounting cycle for your business. Note that these steps are traditional, but we'll give some tips if you want to make them more efficient.

The Full Cycle Accounting Steps

You must know bookkeeping for your business to start on the right foot. This is important, especially for ecommerce businesses participating in online marketplaces, as they can have frequent transactions.

Essentially, bookkeeping follows the full cycle accounting process, which includes recording and reporting transactions using financial statements.

Learning the steps and implementing them in your business will not only help you in your decision-making process, but it will also make your future accountants a lot happier for having established a good accounting system from the start.

Step 1: Identifying Accounts

Before you put any amount on paper, you'll need to identify your business's accounts first. These accounts are what the entire accounting cycle depends on. In financial accounting, they are collectively known as the Chart of Accounts.

You'll need to establish certain labels for transactions such as Revenue, Rent Expenses, Supplies Expenses, Utilities, and many more. An accountant can also determine these transaction labels (e.g., accounts).

Step 2: Recording Journal Entries

After all the accounts relevant to your business are set, you can start recording transactions. You'll need to record every business-related activity that has a financial bearing in an accounting journal. Each entry is composed of at least two accounts. This is known as the double-entry method.

Step 3: General Ledger Posting

After recording transactions in the journal, you must post their respective amounts in the ledger account. Each account on the general ledger has a credit and a debit side where you can place the amount similar to where it is placed on the journal entry. You'll do this for every business transaction.

Step 4: Totalling Accounts

After an accounting period, you'll have to look at your general ledger again. Each account will have to be totaled. So you'll have to get the sum of the ledger account debit and credit columns and then subtract them from each other. The difference will be the net amount of a particular account.

what is full cycle accounting - A businessperson illustrates the steps in the accounting cycle

Step 5: Preparing Unadjusted Trial Balance

After finding out the net total of all the ledger accounts, you'll have to line them all up again and put two columns on the side of each account—debit and credit.

From there, you'll have to record the net total of all accounts based on their results. If their net amount falls on the debit side, you will place it on the left column and vice versa. In the end, the sum of the debit column and the credit column must match each other. This is how you prepare the initial trial balance.

Step 6: Accounting for Adjusting Entries

The transaction needs to be reflected if several are ongoing at the end of the accounting period. So you'll have to create adjusting entries to accommodate them. Adjusting entries such as accrued or deferred revenue or expenses and depreciation will have to be put in. These adjusting entries will form an accounting worksheet beside the trial balance section.

Some businesses that rely heavily on credit for purchasing and selling will benefit the most from this process. On the other hand, there’s a different cycle for managing credit purchases of your business. If you want to know what full cycle accounts payable is, check out our other blogs.

Step 7: Preparing an Adjusted Trial Balance

After all the adjusting entries have been accounted for, you will create another trial balance to check if all the accounts and their net total post-adjustment will still be equal.

In most cases, businesses tend to have a lot of ongoing transactions during the accounting period. So it can be easy to lose track of the correct adjusting amounts. That's why an adjusted trial balance is necessary to ensure everything is balanced after the adjustment.

Step 8: Organizing Accounts for Financial Statements

If the adjusted trial balance yields an identical amount on the credit and debit side, you can prepare financial statements. Therefore, you'll have to determine which of the accounts are nominal and real so you can place them in the proper column on the worksheet.

Nominal accounts are income statement accounts such as rent expenses, revenue, and salary. On the other hand, real accounts are balance sheet accounts such as cash, furniture, and equipment, accounts receivable, and accounts payable.

A note on cash flow statement:

You can only create an income statement and balance sheet from the worksheet because the cash flow statement isn't based on these accounts. Instead, it's derived from every cash transaction during the accounting period.

Step 9: Post-Closing Trial Balance

Before closing the books, you will ignore all the temporary (i.e., income statement accounts) and collect the real accounts (i.e., balance sheet accounts) again for a final trial balance.

Step 10: Closing Previous Accounting Period Books

All the financial transactions and their respective accounts on the previous books are reversed. Afterward, the books are closed. This leaves only the real accounts.

Step 11: Opening Books for the Next Accounting Period

You will open new books, and the first journal entries are the real accounts from the post-closing trial balance. Similarly, you will open a new general ledger, and the balance sheet accounts will have an opening amount.

Once all accounts are recorded in the proper places, the accounting cycle steps will restart (Step 2) and conclude in the next period.

what is full cycle accounting - Two accountants doing work on their computers

A Note on Accounting Software and Accounting Services

The steps you've read above are the manual bookkeeping and accounting process. This is what traditional business owners and accountants follow when they work on actual books and spreadsheets. But if you think these steps are too tedious, there's a way to make them more efficient.

Purchase Accounting Software

Online accounting software such as QuickBooks Online (QBO) has all these steps integrated into its software. So, for example, when you acquire one, you'll no longer need the accountant's help to plan out your chart of accounts; the software already has it pre-made.

Accounting Services Give You Expert Accounting

When you get a team of accounting professionals working on your accounting software, they will be able to use it more efficiently. For example, some accounting teams are experts in using QuickBooks Online so that they can hit the ground running.

They can record financial transactions accurately, do monthly financial reporting, and handle invoices using accounting software.

Make Your Full Cycle Accounting More Efficient

It's important to know the steps behind bookkeeping and recording transactions, but it is a tedious task. To cut it short, you'll need efficient software incorporating these steps and a team of experts to use it more efficiently.

Unloop is a team. We are experts in accounting and use QuickBooks and Xero as our accounting software of choice. Our specialty is in ecommerce businesses in marketplaces such as Amazon or Shopify.

The team can help you maximize your accounting software and put your accounting system on autopilot, so all you need to do is make important decisions for your business.If you're ready to skip these steps but get an awesome accounting system, call us at 877-421-7270 for a consultation, or check out our ecommerce services now.

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About unloop

Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting.. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.

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