The accounting cycle: its stages and bookkeeping

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The five stages of the accounting cycle — capture, recognition, accumulation, summarisation and disclosure —, chart of accounts, books and statements.

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The accounting cycle

The accounting cycle, also called the accounting process, is the sequence of stages through which the data on a period's transactions are turned into financial statements. Accounting's mission is to determine the entity's result at regular intervals. This is done at least once a year, at the end of the fiscal year, as Brazilian law requires — but it can also be done for shorter periods (monthly, quarterly), for management or tax purposes.

The cycle applies to commercial, industrial and service entities, public or private. The accounting result is determined on the accrual basis; the cash basis is used to monitor the financial flow (money coming in and going out).

The stages of the accounting cycle

The cycle is divided into five stages:

StageDescription
1. Data captureCollecting data on the economic transactions and events that affect the entity's property, from documents: contracts, invoices, receipts, reports, bank statements.
2. RecognitionDeciding what will be recorded, on what date, in which account and for what amount.
3. Accumulation (structuring the database)Recording and processing the entries in the accounting system, which organises them in the Journal, the Ledger and other databases.
4. SummarisationThe accumulated data are summarised and turned into information useful to users: trial balances, financial statements and other reports (analyses, opinions, reports).
5. DisclosureCommunicating the information to internal and external users: publishing the financial statements, sending reports, filing digital bookkeeping with the tax authorities.
The Accounting Cycle
The Accounting Cycle

After deciding in which account and for what amount the purchase of a machine will be recorded, the entry is processed by the system and organised in the Journal and the Ledger. Which stage of the accounting cycle does this last part correspond to?

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Answer: Accumulation — this is the stage in which entries are recorded and organised in the accounting database (Journal, Ledger). Deciding the account and the amount, which came before, is Recognition.

1. Data capture

Property changes because of the operations carried out in the period, which generate expenditures or revenue.

Accounting events are occurrences that change the entity's property, either in its composition (qualitative aspect) or in its value (quantitative aspect): issuing cheques, bank deposits, buying vehicles, buying materials, paying obligations, collecting receivables, selling goods and so on.

Acts that change neither property nor the result — such as hiring an employee, signing a contract that has not yet been performed or issuing a purchase order — are not recorded by Accounting and are called administrative acts. (Some of them, such as guarantees given to third parties, although they do not change property, may have to be disclosed in the notes to the financial statements.)

Types of revenue

The most common revenue comes from the company's main activity: sale of goods or products and provision of services. There are also other revenues, such as financial income (interest received, investment income), rent received and gains on the sale of fixed assets.

Types of expenditure

An expenditure is any financial sacrifice the entity makes to obtain a good or service. Depending on its destination, it is classified as:

  • Investment: an expenditure that is capitalised and will bring benefits in future periods. E.g.: buying a machine;
  • Cost: an expenditure on goods or services used to produce other goods or services. E.g.: raw materials, factory labour;
  • Expense: an expenditure consumed, directly or indirectly, to earn revenue, related to selling, administration or the company's finances. E.g.: advertising, office rent, interest paid;
  • Loss: a good or service consumed abnormally or involuntarily, without generating revenue. E.g.: inventory destroyed in a fire;
  • Disbursement: an outflow of money (payment), which may occur before, at the same time as or after the expenditure. E.g.: paying in March for a purchase made in January.

An industrial company buys R$ 8,000 of raw materials on credit in January and pays the debt in February. What took place in January and in February, respectively?

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Answer: An expenditure (which will become a production cost) and a disbursement — the expenditure occurs when the company acquires the raw materials, even without paying; the disbursement is the outflow of money, in February. It is not an expense, because the raw materials go into production.

Which of these is NOT an accounting event?

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Answer: Hiring an employee who will only start work next month — it is an administrative act: it does not yet change property. The deposit seems to change nothing, but it changes the composition of assets (out of Cash, into Banks), so it is an accounting event.

2. Recognition of accounting events

Recognising means deciding whether a captured event will be recorded, when, in which account and for what amount, according to accounting standards. For this to be done consistently, the entity needs, before the cycle starts, a chart of accounts: the set of rules and the list of accounts that serve as a guide and model for the accounting system's records.

In industry, trade and services, each company prepares its own chart of accounts, in line with Law No. 6,404/76 (the Brazilian Corporations Law) and the standards of the CPC (Comitê de Pronunciamentos Contábeis, the body that adapts IFRS to Brazil). Some sectors have a chart of accounts standardised by their regulator: financial institutions follow COSIF, from the Central Bank of Brazil; insurers, the rules of SUSEP (the Superintendence of Private Insurance); and the public sector, PCASP, from the National Treasury.

The chart of accounts has three parts:

  • List of accounts: the structure (the list) of accounts; it can be expanded when new operations arise;
  • Function of the accounts: explains the purpose of each account and what it records;
  • Operation of the accounts: shows how each account relates to the others — when it is debited, when it is credited and how it is opened, used and closed.

The list starts with the first-level accounts, which correspond to the major groups of the financial statements. Here is a simplified example:

1st level of accountsMajor groups
1Assets
2Liabilities and Equity
3Revenue
4Expenses
5Costs
2nd level of accountsAccount groups
1.1Current Assets
1.2Non-Current Assets
2.1Current Liabilities
2.2Non-Current Liabilities
2.3Equity
3.1Operating Revenue
3.2Other Revenue
4.1Operating Expenses
4.2Other Expenses
5.1Cost of Goods Sold
5.2Cost of Services Provided
3rd level of accountsSubdivision of the account group
1.1.1Cash and Cash Equivalents
1.1.2Receivables
1.1.3Inventories
1.1.4Prepaid Expenses (next fiscal year)
1.2.1Long-Term Receivables
1.2.2Investments
1.2.3Property, Plant and Equipment
1.2.4Intangible Assets
2.1.1Obligations to Suppliers
2.1.2Tax Obligations
2.1.3Labour Obligations
2.1.4Other Obligations
2.2.1Long-Term Loans and Financing
2.3.1Share Capital
2.3.2Reserves
3.1.1Gross Operating Revenue
3.2.1Other Revenue
4.1.1Administrative Expenses
4.1.2Selling Expenses
4.1.3Financial Expenses
4.2.1Other Expenses
4th level of accountsSub-group accounts
1.1.1.01Cash
1.1.1.02Bank Current Accounts
1.1.1.03Short-Term Highly Liquid Investments
1.1.2.01Customers
1.1.2.02Trade Notes Receivable
1.1.2.03Other Receivables
5th level of accountsDetail accounts
1.1.1.01.001Cash – Head Office
1.1.1.01.002Cash – Branch 1
1.1.1.01.003Cash – Branch 2
1.1.1.02.001Banco do Brasil S.A.
1.1.1.02.002Banco Bradesco S.A.
1.1.1.02.003Itaú Unibanco S.A.
1.1.1.03.001Banco do Brasil S.A.
1.1.1.03.002Banco Bradesco S.A.
1.1.1.03.003Itaú Unibanco S.A.
1.1.2.01.001IFPR
1.1.2.01.002UFPR

Accounts from the 1st to the 4th level are summary accounts (they group others); those at the last level are detail accounts, and entries are only posted to them. The numbering of the groups varies from chart to chart — in some, revenue comes after expenses, for example — but the logic is always the same. At the 1st level, each major group is called a class, and the 1st class is assets:

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Example, using the same codes as in the tables:

  • 1 Assets
  • 1.1 Current Assets
  • 1.1.1 Cash and Cash Equivalents
  • 1.1.1.01 Cash
  • 1.1.1.02 Bank Current Accounts
  • 1.1.1.03 Short-Term Highly Liquid Investments
  • 1.2 Non-Current Assets
  • 2 Liabilities and Equity
  • 2.1 Current Liabilities
  • 2.2 Non-Current Liabilities
  • 2.3 Equity

Current assets include cash and the goods and rights expected to be realised (converted into cash), sold or consumed in the following fiscal year, that is, within 12 months of the balance sheet date — or within the company's operating cycle, when it is longer (article 179 of Law No. 6,404/76 and CPC 26, equivalent to IAS 1). They get this name precisely because they are more liquid. Main examples: cash on hand and in banks; short-term investments; short-term receivables from customers; inventories (goods, raw materials, finished products); prepaid expenses.

Non-current assets include all other assets: rights that will only be realised after the next 12 months (long-term receivables) and goods and rights the company holds for use in its activities or as a permanent investment, not for sale. They are divided into long-term receivables (e.g.: loans to associates, judicial deposits), investments (e.g.: holdings in other companies, property held for rent), property, plant and equipment (e.g.: buildings in use, machinery, vehicles, equipment) and intangible assets (e.g.: trademarks, patents, software).

Current liabilities include obligations due in the following fiscal year (within 12 months of the balance sheet date), or within the operating cycle when it is longer. Main examples: suppliers; wages and charges payable; taxes payable; income tax and social contribution payable; rent payable; short-term loans; the portion of long-term loans due in the next 12 months; dividends payable.

Non-current liabilities include obligations due after the next 12 months. Main examples: long-term loans and financing; taxes payable in long-term instalments; deferred income tax and social contribution; long-term provisions for lawsuits (contingencies); obligations under employee pension and health plans.

Equity is the difference between assets and liabilities: what belongs to the partners or shareholders. Under article 182 of Law No. 6,404/76, it comprises share capital, capital reserves, equity valuation adjustments, profit reserves, treasury shares (a deduction) and accumulated losses (a deduction). When losses exceed capital and reserves, equity becomes negative — so-called uncovered liabilities.

Here you can see how the federal government divides its accounts into levelslink outside website.

Today the company took out a loan of R$ 120,000, to be repaid in 24 equal monthly instalments of R$ 5,000, the first one month from now. Ignoring interest, how does it appear on today's balance sheet?

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Answer: R$ 60,000 in current liabilities and R$ 60,000 in non-current liabilities — the 12 instalments due in the next 12 months (12 x R$ 5,000) are current, and the other 12 fall due after that. Putting everything in non-current is the most common mistake: the short-term portion of a long-term debt is current.

3. Accumulation: bookkeeping

Bookkeeping is the recording of accounting events in the proper books, in chronological order, in the national language and currency, without erasures or blank spaces, and based on valid and reliable documents that support each transaction (Brazilian interpretation ITG 2000). It used to be manual or mechanised; today it is done by computer systems and, for most companies, filed in digital form through the ECD (Escrituração Contábil Digital, the digital bookkeeping filing of SPED, the federal Public Digital Bookkeeping System).

Main accounting books

Required by commercial law and accounting standards

  • Journal: records all events in chronological order, day by day. It is mandatory for all business owners and companies (article 1,180 of the Brazilian Civil Code), except small business owners, who may be exempted.
  • General Ledger: records the movements of each account separately. It is required by income tax law (Law No. 8,218/1991) and by accounting standards (ITG 2000).
Example of a ledger
Example of a ledger

Required by tax law

Today, most of these books are kept and filed digitally through SPED:

  • Inventory Register;
  • Registers of Inputs and Outputs (purchases and sales);
  • ICMS and IPI Assessment Registers (ICMS is the state VAT on goods and some services; IPI, the federal excise tax on manufactured goods);
  • Production and Inventory Control Register;
  • Real Profit Assessment Book (LALUR), now filed within the ECF (Escrituração Contábil Fiscal, the digital tax bookkeeping for corporate income tax);
  • Fuel Movement Book (LMC), for filling stations;
  • Control of ICMS Credits on Fixed Assets (CIAP).

With Brazil's tax reform (Constitutional Amendment No. 132/2023 and Complementary Law No. 214/2025), ICMS and ISS (the municipal services tax) will be abolished by 2033 and replaced by IBS, while PIS and Cofins will be replaced by CBS; the books and filings linked to these taxes will change during the transition.

Required by the Corporations Law (article 100)

  • Register of Registered Shares;
  • Transfer of Registered Shares;
  • Register of Registered Founders' Shares (partes beneficiárias);
  • Transfer of Registered Founders' Shares;
  • Minutes of General Meetings and Shareholder Attendance;
  • Minutes of Board of Directors and Executive Board Meetings;
  • Minutes and Opinions of the Fiscal Council.

Optional and auxiliary books

  • Customer Subsidiary Ledger;
  • Supplier Subsidiary Ledger;
  • Cash Book (mandatory only in specific cases, such as for companies under the Simples Nacional — a simplified tax regime for small businesses — that do not keep full accounting records).

4. Summarisation: the financial statements

Statements required by corporate law

(Article 176 of Law No. 6,404/76 – Corporations Law, amended by Law No. 11,638/07)

  • Balance Sheet (BP);
  • Statement of Retained Earnings or Accumulated Losses (DLPA), which may be replaced by the Statement of Changes in Equity (DMPL), mandatory for listed companies;
  • Income Statement (DRE, Demonstração do Resultado do Exercício);
  • Statement of Cash Flows (DFC), not required for a privately held corporation with equity below R$ 2 million at the balance sheet date;
  • Statement of Value Added (DVA, Demonstração do Valor Adicionado, which shows the wealth the company created and how it was distributed), mandatory only for listed companies;
  • Notes to the financial statements (NE), which complement the statements.

The Management Report is also required of corporations (article 133), but it is not part of the financial statements. Internal management reports are not mandatory.

Statements required by CPC 26 (R1)

  • Balance Sheet at the end of the period;
  • Income Statement for the period;
  • Statement of Comprehensive Income for the period;
  • Statement of Changes in Equity for the period;
  • Statement of Cash Flows for the period;
  • Statement of Value Added, when required by law (listed companies) or by a regulator, or disclosed voluntarily;
  • Notes, including a summary of significant accounting policies and other information;
  • Comparative information for the previous period and, when the entity applies an accounting policy retrospectively or restates/reclassifies items, a Balance Sheet at the beginning of the earliest period presented.

Note: CPC 26 (R1) applies until 2026. For fiscal years beginning on or after 1 January 2027, it is replaced by CPC 51 (equivalent to IFRS 18), which changes the structure of the income statement, with new operating profit subtotals and disclosure of management-defined performance measures.

A privately held corporation has equity of R$ 1.5 million at the balance sheet date. Under Law 6,404/76, which of these statements is it exempt from preparing?

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Answer: Statement of Cash Flows — article 176, paragraph 6, exempts privately held corporations with equity below R$ 2 million from the DFC. The balance sheet, income statement and notes are mandatory for all.

5. Disclosure: publishing the results

The last stage is getting the information to users. Corporations publish their financial statements; since 2022 (Law No. 13,818/2019), they are published in summary form in a widely circulated newspaper, with the full version on the same newspaper's website. Listed companies also file them with the CVM (the Brazilian Securities and Exchange Commission) and on their investor relations website. For the tax authorities, bookkeeping is filed digitally through SPED (ECD and ECF), and other types of company present their statements to partners, banks and other stakeholders.

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Exercises

1) (CESPE / CEBRASPE - 2018) Regarding the accounting cycle, judge the following items.

I The accounting cycle comprises recording transactions in the journal and T-accounts, preparing the adjusted trial balance and the closing entries.

II Preparing working papers is the initial part of planning the accounting cycle, when the objectives of the whole process are set.

III The phases of the accounting cycle can be described as: capture, recognition, accumulation process, summarisation and disclosure.

IV Preparing the financial statements for each fiscal year need not necessarily follow the accounting cycle.

Only the following items are correct:

A) I and II.

B) I and III.

C) II and IV.

D) I, III and IV.

E) II, III and IV.

2) (FUNDATEC - 2011) The accounting cycle is the sequence of accounting procedures, representing the process carried out in companies to prepare the financial statements from the economic transactions carried out. Summarising the data processed and organised by the accounting systems, turning them into useful information for users, is the function of which stage of the accounting cycle?

A) Capture.

B) Recognition.

C) Accumulation.

D) Summarisation.

E) Disclosure.

3) (FUNDATEC - 2012) The accounting cycle represents the process carried out in companies to prepare the Financial Statements from the economic transactions carried out. Which of the phases below does NOT belong to the accounting cycle?

A) Disclosure.

B) Accrual basis.

C) Summarisation.

D) Capture.

E) Recognition.

4) (FUNCAB - 2015) Choose the alternative that shows the phase of the accounting cycle represented by recording the purchase of an asset in property, plant and equipment and in liabilities because the purchase was made on credit.

A) Recognition.

B) Accumulation.

C) Disclosure.

D) Capture.

E) Summarisation.

5) (Instituto UniFil - 2020) Accounting is a system of information and measurement that records the transactions that change the entity's property, making information available to its users through its statements. State whether each statement about basic accounting concepts is true (T) or false (F) and choose the alternative with the correct sequence.

( ) Information is made available only to internal users, as they need to assess management performance and the performance of the entity's activities.

( ) Bookkeeping must be carried out in the national language and currency, in chronological order and based on external or internal source documents that evidence administrative events.

( ) An asset is a resource controlled by the entity as a result of past events and from which the entity expects to obtain future economic benefits.

( ) Current Liabilities represent the entity's obligations whose operating cycle is longer than the fiscal year, such as: obligations to employees, suppliers, loans and financing.

A) F – T – F – F.

B) F – F – T – T.

C) F – T – T – F.

D) F – T – F – T.

6) (FGV - 2021) According to Technical Pronouncement CPC 26 (R1) - Presentation of Financial Statements, when an entity's normal operating cycle is not clearly identifiable, its duration is assumed to be

A) 30 days.

B) 90 days.

C) 12 months.

D) 18 months.

E) 4 years.

7) (Fundação CESGRANRIO - CESGRANRIO - 2018) CPC 26 (R1) Presentation of Financial Statements, approved by CVM Deliberation 676/2011, establishes the company's operating cycle as one of the criteria for classifying assets on the balance sheet. In this context, the operating cycle of an industrial company is understood as the period between the purchase of raw materials, their processing and the

A) sale and receipt of the sale

B) issue of the sales invoice

C) transformation into finished goods

D) sale and transfer of ownership

E) release of the product from finished goods inventory

8) (DIRENS - Brazilian Air Force - Sergeant - Specialty: Administration - 2017) One of the parts of the Chart of Accounts is the

A) T-account.

B) trial balance.

C) list of accounts.

D) accounting bases.

Answer key

1) B — I and III are correct; II is wrong (working papers are not the initial stage of the cycle) and so is IV (the financial statements are precisely the product of the accounting cycle).

2) D

3) B — the accrual basis is a recognition criterion, not a phase of the cycle.

4) A — deciding that the purchase goes into property, plant and equipment, against an obligation in liabilities, is recognising the event.

5) C — information also serves external users; and current liabilities are obligations due in the following fiscal year (or operating cycle), not longer-term ones.

6) C

7) A — the operating cycle ends with conversion into cash, that is, when the sale is collected.

8) C

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