Question

Define and explain the 4 main accounting cycles along with their control objective. What is the 5th accounting cycle that incorporates information from the 4 main cycles? What controls should be included to ensure quality information from this 5th cycle?

Answer 1

The four main cycles in accounting includes source documents,Journals,Ledgers and Trial balance.

Source document forms the proof for every transaction.It is the starting stage of every transaction and every transaction should be supported by some documents so that it can be traced back.The control objective is to support accounting transactions.

Journals are records of transactions which are recorded serially by the business.It is the basic entry for credit and debit of each transaction.The control objective is to record all the business activities.

Ledger Accounts are also called as T accounts where we take the debit and credits of each transaction and draws up a T account.The control objective is to identify each account balances.

Trial balance is a sheet displaying all the account balances and is drawn with the help of ledgers.It is actually drawn as a check before final accounts are prepared.The control objective is to include all accounts which shows a balance.

The fifth accounting cycle is Financial statement.This is prepared after all the above steps.Financial statemnts are prepared from the trial balance after all adjustments are made.The basis of preparation of financial statement is trial balance.Financial statements are the most important reports of a business.It is usually prepared once in a year and the aim of preparing financial statement is to give information to the stakeholders regarding the business activities during the year.

The controls which should be included to enhance the quality of financial statements are.

it should be easily understandable

it should contain relevant informations only

It should be reliable

It should be able to compare.