Which of the following accounting cycle steps comes before the others?
a. The financial statements are prepared.
b. Closing entries are recorded and posted.
c. Source documents are analyzed.
d. Adjusting entries are recorded and posted.
The correct answer and explanation is :
Correct Answer:
c. Source documents are analyzed.
Explanation:
The accounting cycle consists of a series of systematic steps that help businesses record, process, and report financial transactions. These steps must be followed in a specific sequence to ensure accuracy in financial reporting. Among the given options, the first step in the accounting cycle is analyzing source documents (option c).
1. Analyzing Source Documents (First Step)
- Source documents, such as invoices, receipts, and bank statements, provide evidence of business transactions.
- Before any journal entry is made, accountants must analyze these documents to determine the nature of the transaction (e.g., revenue, expense, asset acquisition, or liability settlement).
- This ensures that transactions are classified correctly before recording them in the books.
2. Adjusting Entries (Later Step)
- Adjusting entries (option d) are recorded toward the end of the accounting period to account for accruals and deferrals, ensuring that revenues and expenses are recognized correctly.
- This step occurs after transactions have been recorded and financial statements need to reflect accurate balances.
3. Financial Statements Preparation (Near the End)
- The preparation of financial statements (option a) happens only after all transactions, including adjustments, have been recorded.
- This step summarizes the company’s financial position and performance.
4. Closing Entries (Final Step)
- Closing entries (option b) are recorded at the end of the accounting cycle to reset revenue and expense accounts for the next period.
- This ensures that temporary accounts (e.g., revenues and expenses) start fresh in the new accounting period.
Since analyzing source documents is the first step in the process, it must occur before adjusting entries, preparing financial statements, and recording closing entries.