Question

There are various steps within the Accounting Cycle. List and explain the various steps in the Accounting Cycle. Which step do you feel is most important? Explain why it is important.

Answer 1

Following are the steps in the accounting cycle:-

1. Analyzing and recording the transactions:- In this step, transactions are analyzed and recorded in the system.

2. Posting the transactions to ledger:- In this step, transactions are posted into the ledger as per its nature.

3. Preparation of unadjusted trial balance:- Trial balance is prepared by posting all debits accounts in one place and all credits to the other.

4. Preparation of adjustment entries:- These are the entries which are passed in order to match expenses and incomes to the period they pertain to.

5. Preparation of adjusted trial balance:- Effect of adjustment entries are taken in trial balance to make the adjusted trial balance.

6. Preparation of financial statements:- Financial statements include income statement, balance sheet, and cash flow statements.

Preparation of financial statements is the most critical step because they contain a summary of all the financial information which all the stakeholders are interested in. Stakeholders include shareholders, govt authorities, investors, creditors, banks, etc.

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