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In: Accounting

The accounting cycle starts with analysis of business transactions and ends with the preparation of a...

The accounting cycle starts with analysis of business transactions and ends with the preparation of a post-closing trial balance. To recap, what is the implication of missing a step. Must the steps be performed following the same sequence? If yes, why is it important to follow the steps?

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Expert Solution

Steps involved in business cycle are:

  1. — Identify business events, analyze these transactions, and record them as journal entries
  2. — Post journal entries to applicable T-accounts or ledger accounts
  3. — Prepare an unadjusted trial balance from the general ledger
  4. — Analyze the trial balance and make end of period adjusting entries
  5. — Post adjusting journal entries and prepare the adjusted trial balance
  6. — Use the adjusted trial balance to prepare financial statements
  7. — Close all temporary income statement accounts with closing entries
  8. — Prepare the post closing trial balance for the next accounting period

If any of the step is missed than the cycle would be broken and there would be misstatement. There may be the chance that balance sheet figures matches but it shall not mean that the figures would be correct due to double effects of accounting transaction.

Thus it is important to follow the steps in order to avoid misstatement of figures and post correct financial statements.  

ekkarill92 answered 2 years ago
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