Study notes and quiz on the Accounting Cycle

Study Notes: The Accounting Cycle
The Accounting Cycle is a systematic process used by businesses to record and process financial transactions during an accounting period. It ensures that financial statements are accurate and complete. The cycle typically follows these steps:

1. Identifying Transactions
Every financial activity (e.g., sales, purchases, payments) must be identified and documented.

Source documents include invoices, receipts, and bank statements.

2. Recording Transactions in the Journal
Transactions are recorded chronologically in the general journal using double-entry accounting.

Each entry includes a debit and a credit.

3. Posting to the Ledger
Journal entries are transferred to individual ledger accounts (e.g., Cash, Sales, Expenses).

This helps organize transactions by account.

4. Preparing an Unadjusted Trial Balance
A trial balance lists all ledger accounts and their balances.

It checks whether total debits equal total credits.

5. Making Adjusting Entries
Adjustments are made for accrued revenues, expenses, depreciation, and prepaid items.

These entries ensure that revenues and expenses are recorded in the correct period.

6. Preparing an Adjusted Trial Balance
After adjustments, a new trial balance is prepared to confirm accuracy before financial statements are created.

7. Preparing Financial Statements
Based on the adjusted trial balance, the following are prepared:

Income Statement: Shows profit or loss

Balance Sheet: Shows assets, liabilities, and equity

Cash Flow Statement: Shows cash inflows and outflows

8. Closing Entries
Temporary accounts (revenues, expenses, dividends) are closed to Retained Earnings.

This resets balances for the next accounting period.

9. Preparing a Post-Closing Trial Balance
Ensures that only permanent accounts remain open.

Confirms that debits still equal credits after closing entries.

🔁 The Cycle Repeats
The accounting cycle begins again with the next period’s transactions.

Accounting Cycle Quiz
Instructions: Choose the best answer for each question. Circle or highlight your choice.

1. What is the first step in the accounting cycle? A. Posting to the ledger B. Preparing financial statements C. Making adjusting entries D. Identifying transactions Answer: D

2. Which document is typically used to record a sale transaction? A. Invoice B. Balance sheet C. Trial balance D. Ledger Answer: A

3. In double-entry accounting, every transaction affects: A. Only one account B. Two or more accounts C. Only the income statement D. Only the balance sheet Answer: B

4. What is the purpose of the trial balance? A. To verify that debits equal credits B. To close temporary accounts C. To record transactions D. To prepare financial statements Answer: A

5. Adjusting entries are made to account for: A. Closing entries B. Cash transactions only C. Accruals and prepayments D. Errors in the ledger Answer: C

6. Which financial statement shows a company’s profitability? A. Income statement B. Cash flow statement C. Trial balance D. Balance sheet Answer: A

7. What is the purpose of closing entries? A. To prepare the trial balance B. To reset temporary accounts C. To record new transactions D. To adjust asset values Answer: B

8. Which accounts are closed at the end of the accounting period? A. Assets and liabilities B. Cash and inventory C. Revenues and expenses D. Equity and liabilities Answer: C

9. What is prepared after adjusting entries are made? A. General journal B. Adjusted trial balance C. Post-closing trial balance D. Income statement Answer: B

10. Which step comes immediately before preparing financial statements? A. Making adjusting entries B. Closing entries C. Posting to the ledger D. Preparing adjusted trial balance Answer: D

11. What does the balance sheet report? A. Cash inflows and outflows B. Assets, liabilities, and equity C. Debits and credits D. Revenue and expenses Answer: B

12. Which statement shows how cash moves in and out of a business? A. Cash flow statement B. Income statement C. Balance sheet D. Trial balance Answer: A

13. What is the final step in the accounting cycle? A. Recording transactions B. Making adjusting entries C. Preparing post-closing trial balance D. Preparing financial statements Answer: C

14. Which accounts remain open after closing entries? A. Revenue and expense accounts B. Permanent accounts C. Dividend accounts D. Temporary accounts Answer: B

15. What is the purpose of posting transactions to the ledger? A. To record transactions chronologically B. To prepare financial statements C. To close temporary accounts D. To summarize transactions by account Answer: D

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