Question

In what order must the financial statements be prepared and why must they be prepared in this order? How does the standard order of accounts in the general ledger and in adjusted trial balances facilitate the preparation of financial statements?

Answer 1

Accounting involves the recording of transactions and other events in a manner that facilitates preparation and presentation of financial statements. Accounting cycle refers to the cycle starting with the recording of opening entries (balances carried forward from the previous reporting period) in the general ledger and ends with the preparation of financial statements. Following steps are involved in the preparation of financial statements:
1. Recording of opening entries in the general ledger
2. Recording of transactions and events in the journal (Journalisation)
3. Posting journal entries in appropriate accounts in the general ledger
4. Balancing the accounts in the general ledger
5. Preparing the trial balance
6. Recording adjustment entries
7. Preparing an adjusted trial balance
8. Recording closing entries to prepare financial statements

After balancing the accounts in the general ledger, a statement listing the debit and credit balances in various account heads in the general ledger is prepared. This statement is known as the trial balance. The total in the debit column of the trial balance should agree with the total in the credit column. This is because in the double-entry system, for each transaction or event, the total of the amounts debited to various accounts equals the total of amounts credited to various ac..counts. The trial balance forms the basis bf preparing the statement of profit and loss and the balance sheet.

Adjusted Trial Balance of the company in the non-financial statement in which the list and the balances of the company's all the accounts are presented after the adjusting journal entries are made at the year-end and those balances are then reported on respective financial statements.

The general ledger is the basis of preparation of adjusted trial balance which finally lead to the preparation of financial statements.