What is Full Cycle Accounting?
If you've been researching accounting services, you may have come across the term full cycle accounting.
If you've been researching accounting services, you may have come across the term full cycle accounting.
But what is full cycle accounting?
Full cycle accounting refers to handling the complete accounting process from the original financial transaction through the preparation and review of financial statements.
In other words, accounting isn't finished simply because transactions have been entered into QuickBooks.
Those transactions need to be reviewed, reconciled, adjusted when necessary, and ultimately reflected correctly on the financial statements.
The Accounting Cycle Starts with Transactions
Every business generates financial activity.
Customers pay invoices. Employees receive paychecks. Vendors send bills. Credit cards are used. Loan payments are made. Equipment is purchased.
Those activities have to be recorded properly in the accounting system.
This is the beginning of the accounting cycle, not the end.
Bank and Credit Card Reconciliations
One of the most important steps in full cycle accounting is reconciliation.
The accounting records should be compared to bank and credit card statements to make sure transactions are complete and balances agree.
Without regular reconciliations, businesses can accumulate:
Duplicate transactions
Missing transactions
Old outstanding checks
Duplicate expenses
Incorrect deposits
Unidentified charges
A bank feed can make entering transactions easier, but it doesn't replace reconciliation.
Accounts Receivable and Accounts Payable
For businesses using invoicing or bill-entry systems, full cycle accounting may also include reviewing accounts receivable and accounts payable.
An accounts receivable aging should reflect what customers actually owe.
An accounts payable aging should reflect bills the business still needs to pay.
Old balances deserve attention. An invoice that has supposedly been unpaid for a year may represent a collection problem - or it may simply have been recorded incorrectly.
Payroll Accounting
Payroll also affects several parts of the financial statements.
The accounting records should properly reflect gross wages, employer payroll taxes, employee withholdings, benefit expenses, retirement contributions, and related liabilities.
Recording only the amount that leaves the bank account for employee paychecks doesn't provide the full picture.
Balance Sheet Review
A strong month-end accounting process includes reviewing the balance sheet.
That means looking beyond the bank balance.
Loans should agree with lender records. Payroll liabilities should make sense. Fixed assets should reflect assets the company actually owns. Accounts receivable and payable should be reasonable.
Balance sheet errors are particularly important because they don't disappear at the end of the year. They carry forward until someone corrects them.
Month-End Adjustments
Some transactions require adjustments before financial statements are complete.
Depending on the business, those might include depreciation, prepaid expenses, loan principal and interest allocations, payroll adjustments, or other accruals.
The exact process depends on the accounting method and complexity of the business.
Preparing Financial Statements
Once the accounting records have been reviewed and adjusted, financial statements can be prepared.
For most small businesses, the two primary reports are the profit and loss statement and balance sheet.
The profit and loss statement shows financial performance over a period of time.
The balance sheet shows what the business owns, what it owes, and its accumulated equity at a specific date.
Together, they provide a much more complete view of the business.
The Final Step: Understanding the Numbers
This is the part of full cycle accounting that is often overlooked.
Producing financial statements isn't particularly useful if no one looks at them.
Business owners should understand what changed, what looks unusual, and what deserves attention.
Maybe revenue increased but labor costs increased even faster.
Maybe profit looks good but cash is declining.
Maybe an expense category has been creeping upward for several months.
Accounting should help identify those trends.
Why Full Cycle Accounting Matters
Incomplete accounting can create a false sense of security.
Your bank may reconcile while your accounts payable is wrong.
Your profit and loss statement may look reasonable while your balance sheet contains years of incorrect balances.
Your QuickBooks file may have thousands of transactions without producing reliable financial information.
Full cycle accounting connects all the pieces.
At BookWise Bookkeeping, our goal isn't simply to get transactions entered. We help businesses maintain accurate accounting records throughout the month-end cycle so their financial statements provide information they can actually use.
BookWise Bookkeeping
Phone 314-325-2478
info@bookwisestl.com