Which of the following sequences of documents or records describes the proper sequence in the accounting cycle?
a. Source documents, ledger, journal, financial statements
b. Journal, source documents, ledger, financial statements
c. Source documents, journal, ledger, financial statements
d. Ledger, source documents, journal, financial statements
The correct answer and explanation is :
Correct Answer:
c. Source documents, journal, ledger, financial statements
Explanation:
The accounting cycle is the systematic process of recording, classifying, and summarizing financial transactions to prepare financial statements. The correct sequence of steps follows a logical order to ensure accurate financial reporting.
- Source Documents:
The first step in the accounting cycle involves collecting and analyzing source documents, such as invoices, receipts, bank statements, and contracts. These documents provide the original evidence of transactions and serve as the basis for recording entries in the accounting system. - Journal:
After analyzing source documents, transactions are recorded chronologically in the journal (also called the book of original entry). Each transaction is recorded using the double-entry system, ensuring that every debit has a corresponding credit. This step is crucial because it maintains a systematic and chronological record of financial events. - Ledger:
The next step is posting transactions from the journal to the ledger. The ledger consists of accounts such as cash, accounts payable, accounts receivable, revenues, and expenses. The purpose of the ledger is to classify and summarize transactions under appropriate account headings, making it easier to prepare financial statements. - Financial Statements:
After the ledger accounts are balanced and adjusted (if necessary), financial statements are prepared. These include:
- Income Statement (shows revenue and expenses, resulting in net profit or loss)
- Balance Sheet (shows assets, liabilities, and equity at a given point in time)
- Cash Flow Statement (tracks cash inflows and outflows)
- Statement of Changes in Equity (shows changes in the owner’s equity over time)
Conclusion:
The correct sequence is source documents → journal → ledger → financial statements, as it follows the logical flow of transaction recording and reporting in accounting.