Question

Why is the accounting cycle important to a business? Evaluate the significance of the accounting cycle in terms of its practical relevance for businesses. In your response, be sure to give specific examples of why certain steps are necessary. Address at least three different steps in your evaluation.

Answer 1

Importance of the accounting cycle:

Management decision making: Management uses the accounting information of a particular year to plan the future of the company. The financial report provides an indication of the health of the company. This allows the management to make a decision to the benefit of the company.

Investment decision: Potential investors and stockholders can assess the information about the company's financial health and make the decision wisely. The financial statement helps them to know the strengths and weaknesses of the company to make an investment decision for their portfolio.

Government agencies and banks: Bank can make a lending decision based on financial information. Financial reports provide a clear picture of the company's ability to repay loans. The accountants can use the information to prepare tax statements and present the information to the government.

Significance of the accounting cycle in terms of practical relevance for business:

The accounting cycle is the process of recording and processing of all the financial transactions of a company. It starts from when a transaction occurs to its representation on the financial statements. The steps involved in the accounting cycle are as follows:

Transactions: This is the starting process of an accounting cycle. It can include a sale revenue, expenses incurred, debt payoffs, purchases etc.

Journal entries: After the transaction happens the next step is to record the transactions in the companies books in chronological order. By debiting one or multiple accounts and crediting one or multiple accounts. Both the sides should always be in balance. This is the necessary step for every coompany to have in their accounting cycle.

Posting to general ledger: The the entries are posted to general ledger, where the summary of all the accpunts can be seen.

Trial balance: At the end of the companies accounting period the trial balance is calculated for the accounts.

Work sheet: When the debit and credit sides of the trial balance do no match they are corrected with the help of work sheet by the book keeper.

Adjusting entries:This is another important step of the accounting cycle. For accrual and deferals of the company the adjusting entries must be posted to accounts

Financial statements: May be the most important step in accounting cycle and the ultimate goal of the accounting cycle is representation of the account statements to the stake holders. The balance sheet, income statement and cash flow statements are prepared in this staege.

Closing:The revenues and expenditures are the indicators which represents the performance of a company for a particular accounting period. So, after the accounting cycle the revenues and the exenditures are zeroed out for the next cycle.