If you are a business owner, you've probably heard of accounting. Better yet, you’re most likely tasked to do the accounting of your business. Accounting is composed of numerous tasks, and it does not stop with keeping your books organized. In business, a "whole cycle" of accounting consists of different accounting tasks required in a quarter.
In this blog post, we'll take a closer look into full cycle accounting and the essential processes, step-by-step.
What Is Full Cycle Accounting?
Full cycle accounting is the term used to refer to the process of completing all accounting tasks needed in an accounting quarter. An accounting cycle starts with preparing all the needed financial documents and analyzing and creating reports regarding the business's financial status.
With the invention of accounting software, most tasks in the cycle can be automated. However, familiarizing yourself with the steps is essential to understand your finances better.
With that, here are the crucial steps you need to perform when doing a full accounting cycle.
Recording business transactions is the first step in full cycle accounting. The records include receipts of payments you make for your business and payments your business receives from sales. Your business should have a general ledger for all the transactions and a sub-ledger to categorize them.
For example, if you have a receipt acknowledging your payment to one of your suppliers, you should record that under the accounts payable ledger accounts. Depending on your business size, you can add different categories to your general ledger.
There are records for assets, liabilities, cost of goods, sales, expenses, taxes, and other transactions that could be present in a business.
Preparing Journal Entries
Once you record all your business transactions in order, you have to validate them. First, see if all entries are correct. Next, ensure both columns are balanced for credit and debit entries.
There are three types of journal entries to record in business transactions:
- Adjusting entries to tweak numbers up and down as needed.
- Compound entries for recording transactions with more than one credit or debit.
- Reversing entries to revert numbers to their original amount when errors are made.
Preparing the Unadjusted Trial Balance
An unadjusted trial balance or entry is used to analyze your business numbers and is a starting point to make necessary modifications. These unadjusted journal entries are the transactions in your ledger by the end of the accounting period.
These entries are untouched and are usually used by business managers and accountants to identify which ledgers need modifications to create financial statements.
Preparing the Adjusted Trial Balance
To generate the adjusted trial balance, you must adjust the journal entries. This is the step where you or your accountants modify your ledgers to create financial reports.
The adjusted trial balance is the number that will appear on your financial statements, which you can use to create strategies, make improvements and pinpoint potential issues in your business.
Generating Financial Statements
There are different financial statements you can produce for your business. These may differ depending on your business needs, but here are some of the common financial statements you will have to generate.
Balance sheets contain reports of the business's assets, liabilities, and stakeholders’ equity in a certain accounting period. These data points are used to evaluate the financial position of your business. Simply put, the balance sheet accounts for all that your business owns and owes, and the money invested by your stakeholders.
Cash Flow Statement
The cash flow statement shows the movement of cash in and out of your business. This financial statement shows how well you distribute your monetary resources, like how you generate cash and use it to fulfill your full cycle accounts payables. This financial report can also be the basis for some investors to know whether it's worth investing in your business.
Cash flow statements include cash flow from business activities like operations, financing, and investments. Furthermore, this data can be used by creditors to determine if they can give you credit and loans for your business.
Income statements are also known as profit and loss statements. This financial report shows your company's income and gains in a specific period. However, this report shows all income and expenses—whether from cash or credit receipts—and there's no way to tell them apart.
Nevertheless, income statements are useful to know if your current operations are generating business income, and to determine which aspects of your business are underperforming so you can make improvements.
In this phase, all your business revenue and expense accounts should be zeroed out in preparation for the next accounting period. This is necessary to verify if your credits and debits are balanced. Also, these accounts will be your starting point for the next accounting period, so transfer temporary account balances to permanent accounts.
Business-Specific Full Cycle Accounting
An accounting cycle can also refer to other business activities besides income and expenses. Compared to a full cycle that usually lasts three months, these specific cycles can be shorter. Here are some of them.
Full cycle accounts payable happens in this particular accounting cycle. This is when your company makes a request or an order to purchase goods for your business. Then, the supplier receives your order, you pay for it, and you acquire the goods. Simply put, a purchasing cycle is the process of acquiring goods for your business, from ordering to receiving.
The sales cycle is the full cycle accounts receivable of a business and it involves:
- Purchasing the goods.
- Storing them in the inventory.
- Getting an order.
- Taking the product out of the inventory.
- Sending it to the customer and exchanging it for cash or credit.
The payroll cycle involves every process between the employee and the business until the payment is received. The cycle starts with the employee submitting their time cards to human resources. From there, the admin will make adjustments and approve them for payment. Then, the payroll is processed by computing the gross pay and all necessary deductions.
Need Help with Full Cycle Accounting?
If you are a small business owner, doing all the tasks in the accounting cycle may be too much for you to handle. After all, accounting is not the only thing you do when running a business. If you need professional help, Unloop offers several accounting services for busy business owners like you.
Here are some of the services you can enjoy with Unloop.
- We provide you with monthly income statements, balance sheets, and cash flow statements.
- We use the accrual accounting method to generate all necessary financial statements.
- Our services include a subscription to an accounting software (either QuickBooks Online or Xero).
- We create custom KPIs and analytics to ensure you achieve your business goals.
- We oversee your payroll by linking your business to a cloud-based payroll and benefits-management software.
- We generate year-end returns that your employees need to file their taxes.
- Our forecasting service includes predictions for your business revenue and cost of goods.
- We help you identify potential issues in your business so you can fix them immediately.
- We use your business's previous data to assess your business and make tweaks along the way to give you the most accurate forecasting.
Unloop is your one-stop shop for accounting solutions. Book a call with us today, and work with our experts!