The accounting cycle: its stages and bookkeeping

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Here we will talk about the Accounting Cycle and its stages. Furthermore, we will see the control points for the cycle to run smoothly.

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The Accounting Cycle

The Accounting Cycle, also called the Accounting Process, refers to obtaining data within a predetermined period of time. Accounting has the mission of calculating the entity’s results at regular time intervals. The calculations are redone at least once each year, which we call the Fiscal Year, mandatory under Brazilian legislation.

The cycle applies to Commercial, Industrial, Service-Providing, Public or Private Entities, according to the basis: Accrual Basis (for Accounting Results); Cash Basis (for Financial Flow).

The stages of the Accounting Cycle

The cycle is divided into 5 stages:

StageDescription
Data collectionCollection from economic transactions and events that affect equity: contracts, invoices, receipts, reports
Recognition of acts and factsDeciding what will be recognized, on what date, in which account, and for how much.
Structuring the databaseDatabase processed and organized by accounting systems
Summarization of dataData is processed and transformed into useful information for users, in the financial statements and other accounting reports – analyses, opinions, reports
Disclosure
Communication to internal and external users through publication in newspapers, websites, sending by mail, e-mail, electronic networks and/or fax.
The Accounting Cycle
The Accounting Cycle

Data Collection

Changes in equity result from actions during an accounting period in which expenses or revenue are generated.

Accounting Facts or Events are occurrences that in some way alter the equity of entities, whether qualitatively or quantitatively: issuing checks, bank deposits, vehicle purchases, purchase of materials, payment of obligations, receipt of rights, sale of goods, etc.

Acts that do not cause changes in the elements of Equity or Results, and therefore are not relevant to Accounting, are called Administrative Acts.

Types of revenue

In general, it is the sale of products.

Types of expenses

  • Investments: expenditures aimed at future benefits, such as a machine;
  • Costs: expenditures related to the acquisition of a good or service to be used in the production of other goods or services;
  • Expenses: expenditures directly and indirectly related to commercialization, management (administrative expenses), and financial expenses. Ex: spending on advertising or on a party;
  • Loss: good or service consumed abnormally or involuntarily, without the ability to generate benefits;
  • Disbursement: cash outflow (payment), generally for some good or service (which may have been purchased in another period, in which it represented an expenditure).

Recognition of acts and facts / Accounting recognition

Precedes Collection - it consists of the set of standards and list of accounts intended to serve as a guide and model for the work of the entity’s accounting system.

In industry, commerce, or services, the person responsible decides how to prepare the Chart of Accounts, complying with Law 6.404/76.

For Financial Institutions, the Central Bank establishes the Chart of Accounts.

The Chart of Accounts is composed of the following parts:

List of Accounts -> structure of the chart of accounts, can be changed if new operations arise

Function of Accounts -> explains the purpose of the account and its role in the entity

Operation of the Chart of Accounts -> demonstrates the relationship of one account with the others, as well as its opening, movement, and closing.

It begins with 1st-degree accounts, according to the financial statements:

1st Level or degree of accounts: Major GroupsMajor Groups
1Assets
2Liabilities
3Revenue
4Expenses
5Costs
2nd Level or degree of accounts: Account GroupsAccount Groups
1.1Current Assets
1.2Non-Current Assets
2.1Current Liabilities
2.2Non-Current Liabilities
3.1Operating Revenue
3.2Other Revenue
4.1Operating Expenses
4.2Other Expenses
5.1Cost of Goods Sold
5.2Cost of Service Provided
3rd Level or degree of accountsSubdivision of the Account Group
1.1.1Cash and Cash Equivalents
1.1.2Accounts Receivable
1.1.3Inventories
1.1.4Expenses for Subsequent Periods
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
2.1.3Labor Obligations
2.1.4Other Obligations
2.2.1Long-Term Payables
2.2.2Equity
3.1.1Gross Operating Revenue
3.2.1Other Revenue
4.1.1Administrative Expenses
4.1.2Commercial Expenses
4.1.3Financial Expenses
4.2.1Other Expenses
4th Level or Degree of Accounts: Subgroup Accounts
1.1.1.01Cash
1.1.1.02Bank checking account
1.1.1.03Financial Investment
1.1.2.01Customers
1.1.2.02Trade Notes Receivable
1.1.2.03Other amounts receivable
5th Level or Degree of Accounts Analytical Accounts
1.1.1.01.001Head Office Cash
1.1.1.01.002Branch 1 Cash
1.1.1.01.003Branch 2 Cash
1.1.1.02.001Banco do Brasil S.A.
1.1.1.02.002HSBC Bank Brasil S.A.
1.1.1.02.003Banco Itaú S.A.
1.1.1.03.001Banco do Brasil S.A.
1.1.1.03.002HSBC Bank Brasil S.A.
1.1.1.03.003Banco Itaú S.A.
1.1.2.01.001IFPR
1.1.2.01.002UFPR

At degree 1, we say that each part is divided into classes, with the 1st class being assets:

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Example:

1 Assets

1.1 Current

1.1.1 Available

1.1.1.001 Cash

1.1.1.002 Banks

1.1.1.003 Immediate Liquidity Investments

1.2 Non-Current

2 Liabilities

2.1 Current

2.2 Non-Current

2.3 Equity

Current assets are goods or rights that can be converted into cash in a short period of time, within the company’s fiscal year (a maximum of 12 months). They receive this name precisely because they have greater liquidity – that is, they can be turned into cash in a short time. Main examples of current assets: Inventory; Raw materials; Goods; Cash on hand; Short-term financial investments; Short-term accounts receivable.

If current assets are everything that can be converted into cash in the short term, non-current assets are exactly the opposite: all goods and rights that can only be turned into cash in the medium or long term. Main examples of non-current assets: Long-term investments; Intellectual property (such as the brand and patents); Real estate; Equipment.

Current liabilities is the name given to short-term financial obligations. In other words, everything essential for maintaining the company’s activities over the next 12 months. But what is included in this account? Generally, the company takes the following factors into account: Short-term debts; Long-term debts that are close to their due date; Accounts payable; Taxes payable; Short-term loans; Payment of raw material suppliers; Salaries and payments related to employees; Rent; Credits from partners or shareholders.

Non-current liabilities also refer to obligations that companies have assumed financially. What distinguishes non-current liabilities from current liabilities is the term. While in current liabilities the accounts must be prepared taking into account only the next 12 months, non-current liabilities cover those obligations with a maturity period of more than one year. What is included in non-current liabilities: Financing and loans from financial institutions payable; Provision for income tax and social contribution; Pension and health plans; Long-term financing; Provision for lawsuits; Taxes payable; Provisions for contingencies.

Shareholders' Equity corresponds to the wealth of an organization, that which truly belongs to its shareholders. It is composed of Share capital; Profit and Capital Reserves; Treasury shares; Equity valuation adjustments; Negative Shareholders' Equity.

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

Database Structuring / Bookkeeping Methods

Bookkeeping: is the set of accounting entries, composed of accounting entries and the financial statements prepared at the end of each fiscal year. It can be manual, mechanized, or by data processing. Every entry must be supported by proper, reliable documents appropriate to the type of transaction.

Main Accounting Books

Required by Commercial Laws

  • Journal: presents the events that occurred in chronological order.
  • Ledger: records the movement of all accounts.
Example of a ledger
Example of a ledger

Required by tax legislation

  • Inventory Register
  • Input Register (Purchases)
  • Real Profit Calculation Book (LALUR)
  • Stock Register
  • Fuel Movement Register
  • Auxiliary Ledger (Asset Control)
  • Input Books, Output Books, ICMS Calculation Book, and IPI Calculation Books

Required by the Corporations Law:

  • Registered Share Register
  • Registered Share Transfer Book
  • Registered Beneficiary Parts Register
  • Registered Beneficiary Parts Transfer Book

Optional and auxiliary accounting books

  • Customer Auxiliary Ledger
  • Supplier Auxiliary Ledger

Entries and books / Data Summarization

Financial Statements mandatory under Corporate Legislation

(Art. 176 of Law No. 6404/76 – Corporations Law, amended by Law No. 11.638/07)

  • Balance Sheet (BS)
  • Statement of Accumulated Profits or Losses
  • Income Statement for the Year (IS)
  • Statement of Cash Flows (SCF)
  • Statement of Value Added (for corporations)
  • Explanatory Notes (EN)
  • Does not include the obligation to present Management Report; Report to the Chief Executive Officer; Management Statements; and

Financial Statements mandatory under CPC 26

  • Balance Sheet at the end of the period (BS)
  • Statement of Income 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 (for cases legally required (e.g., corporations) and others, if required by a regulatory body; or also, by voluntary decision)
  • Explanatory notes, with a summary of significant accounting policies and others
  • Balance Sheet at the beginning of the earliest period in which the accounting policy is applied retrospectively, or in restatements and reclassifications

Disclosure / Publication of results

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Exercises

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

I The accounting cycle consists of recording transactions in the journal and T-account, preparing the trial balance after adjustments, and closing entries.

II Preparing working papers is an initial part of planning the accounting cycle, the moment when the objectives of the entire process are outlined.

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

IV The preparation of financial statements relating to each fiscal year does not necessarily have to follow the accounting cycle.

Only the following items are correct, alternatives:

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 consists of the sequence of accounting procedures, representing the process carried out in companies to prepare financial statements based on the economic transactions performed. Summarizing the data processed and organized by accounting systems, transforming it into useful information for users, is the function of which stage of the accounting cycle?

A) Capture.

B) Recognition.

C) Accumulation.

D) Summarization.

E) Disclosure.

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

A) Disclosure.

B) Accrual basis.

C) Summarization.

D) Capture.

E) Recognition.

4) (FUNCAB - 2015) Mark the alternative that presents the phase of the accounting cycle representing the fact of recording the purchase of a fixed asset and a liability because the purchase was made on credit.

A) Recognition.

B) Accumulation.

C) Disclosure.

D) Capture.

E) Summarization.

5) (Instituto UniFil - 2020) Accounting is an information and evaluation system that records transactions that alter the entity's assets, providing information through its statements to its users. State whether each statement about the basic concepts of accounting is true (T) or false (F), and mark the alternative that presents the correct sequence.

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

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

( ) 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 operating cycle is not clearly identifiable, its duration is presumed 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 Resolution 676/2011, establishes, as one of the criteria for classifying assets on the balance sheet, the company’s operating cycle. In this context, it is understood that the operating cycle of an industry is the period between the purchase of raw material, its processing, and the

A) sale and receipt of the sale proceeds

B) issuance of the sales invoice

C) transformation into finished product

D) sale and transfer of ownership

E) removal of the product from finished goods inventory

8) (DIRENS - Aeronautics - Aeronautics - Sergeant - Specialty: Administration - 2017) One of the parts that makes up the Chart of Accounts is the

A) T-account.

B) trial balance.

C) list of accounts.

D) accounting regimes.

Answer Key

1) B

2) D

3) B

5) C

6) C

4) A

5) C

6) C

7) A

8) C

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