Question

consider the steps in the accounting cycle. In what order do you think the financial statements should be produced? Does it make more sense to produce the statements in which the closing entries are completed after the income statement? Why or why not?

Answer 1

Accounting Cycle: 1. Journals 2. Ledgers 3. Adjusting Entries 4. Financial Statements 5. Closing Entries 6. Closing Trial Balance The financial Statements should be prepared as per the below order: 1. Income Statement 2. Statement of Stockholders' Equity 3. Statement of Financial Position The income statement is prepared to find out the net income. This net income is added to retained earnings in the Statement of Financial Position to find out the closing balance of retained earnings. The closing balance retained earnings and capital are taken from this statement and show in the statement of financial position. Thus the above order must be followed in order to complete the financial statements. In the closing entries, all the temporary accounts (i.e., revenue and expense) are closed. So we need the revenue realised and expense incurred for the accounting period. This is shown in the income statement to arrive at the net income. Thus preparing the closing entries after the income statement becomes easier as we get all the required account balance from the income statement.