In connection with a set of financial statements (of a given entity), circular reference is a situation that arises due to timing differences in payment or repayment schedules or expense incurrence patterns as set in the broader context of a financial statement or a set of financial statements. A circular reference is a series of references (e.g., entries) where the last of which references the first, resulting in a closed loop.

For example, a financial statement might be prepared on an annual or interim basis (annual statement or interim statement), but specific expenses (e.g., interest expense) are not paid in the same increments as the financial statement. If interest expense associated with a loan is not calculated from the opening balance of the loan, interest expense and income would affect cash flows, which in turn would affect financing cost and the principal amount. In this case, a circular reference occurs if the interest expense is paid out for a partial period (e.g., monthly), based on the closing balance of the loan.