20 Important Accounting Cycle Questions and Answers [With PDF]

The 5^th chapter of our accounting learning course is “Accounting Cycle”. In this article, we’ll learn the 20 most important accounting cycle questions and their answers.

It will help you understand the important accounting cycle terms and their explanations quickly.

By reading this post, you may quickly prepare for accounting courses and for any competitive tests such as school and college exams, vivas, job interviews, and so on.

So let’s get started…

Accounting Cycle Questions and Answers 

The 20 important accounting cycle questions and answers are as follows:

Question 01: What is Accounting Cycle?

Answer: An accounting cycle is a set of steps that a business entity goes through after a transaction, from recording to determining financial results.

Question 02: What is the Purpose of the Accounting Cycle?

Answer: The main purpose of the accounting cycle is to maintain the continuity of accounts between the previous and subsequent years and to establish a link between accounting periods.

Question 03: What are The Various Steps of the Accounting Cycle?

Answer: The accounting cycle’s 11 important steps are as follows:

1. Identification and Measurement of Transactions
2. Recording Transactions
3. Classification of Transactions
4. Summarizing
5. Adjusting and Rectifying Entries
6. Preparation of Adjusted Trial Balance
7. Preparation of Financial Statements
8. Analysis and Interpretation of Statements
9. Closing Entries of Nominal Accounts
10. Preparation of Post-Closing Trial Balance
11. Reversing Entries

Question 04: What is The First Step of the Accounting Cycle? And Tell about It.

Answer: The 1st step of the accounting cycle is the identification and measurement of transactions.

Not all day-to-day activities of the organization are recorded for the purpose of accounting. The first step in the accounting cycle is to analyze each event and identify it as a transaction that is measurable in terms of money.

By analyzing these transactions, the respective accounting sectors are identified. For example, goods worth $2,000 were purchased. There are two accounts in that transaction. One is a purchase account and the other is a cash account.

Question 05: What is The Second Step of the Accounting Cycle? And Tell about It.

Answer:  The 2nd step of the accounting Cycle is Recording transactions or journalizing.

In the second stage of the accounting cycle, the transactions are recorded in the accounting books. After the transaction has taken place, the dual entity of each transaction is analyzed and debited to one party and credited to the other.

Recording a transaction in a journal is called a journal entry.

Accounting activities rely heavily on journals. This is due to the fact that if no transaction is recorded in this book, subsequent calculations will be inaccurate.

Question 06: What is The Third Step of the Accounting Cycle? And Tell about It.              

Answer:  The 3rd step of the accounting cycle is a classification of the transactions or ledger posting.

After the transactions are documented, similar transactions are classified and recorded under different headings. This activity is called the classification of transactions or ledger posting.

A ledger is a book of accounts in which transactions are recorded permanently in a concise manner. The act of recording in a ledger is called ledger posting.

Question 07: What is The Fourth Step of the Accounting Cycle? And Tell about It.

Answer: The 4th step of the accounting cycle is summarizing the transactions or preparation of trial balance.

The Trial Balance is a list of the debit and credit balances of the accounts in the ledger. The trial balance is used to check the mathematical accuracy of accounts and to provide information for financial statement preparation.

On both sides, the trial balance is always equal. Because all ledger balances are presented on a single sheet, this step is known as summarization.

Question 08: What is The Fifth Step of the Accounting Cycle? And Tell about It.

Answer: The 5th step of the accounting cycle is the preparation of adjusting and rectifying journal entries.

After preparing the trial balance, the exact income and expenditure for the accounting period are determined by adjusting the arrears and advance income and expenditure.

If there is a calculation error, it must be corrected. Adjustment and correction journal entries are created for adjustments and corrections.

Question 09: What is The Sixth Step of the Accounting Cycle? And Tell about It.

Answer: The 6th step of the accounting cycle is the preparation of the adjusted trial balance.

After making the necessary adjustments, the parties are transferred to their respective accounts, and the account balances are recalculated.

The list that is then compiled with the recalculated balances is referred to as the adjusted trial balance.

Question 10: What is The Seven Step of the Accounting Cycle? And Tell about It.

Answer:  The 7th and most important step of the accounting cycle is the preparation of financial statements.

Financial statements are prepared using the trial balance and adjustment information. Financial statements are usually prepared at the end of the accounting period to know the financial results (Net profit or loss) and financial position (assets & liabilities).

Among the financial statements, production statements, income statements, and balance sheets are the main ones.

Question 11: What is The Eight Step of the Accounting Cycle? And Tell about It.

Answer: The 8th step of the accounting cycle is the analysis and interpretation of statements.

Various stakeholders such as owners, management, creditors, debtors, employees, government, tax authorities, the public, researchers, etc., feel the need for various important information related to the business organization.

Business organizations provide information to those parties in the form of statements and reports obtained from the analysis of financial statements and their interpretation.

In the case of statement analysis, techniques like ratio, fund statement, intersection point analysis, etc. are used.

Question 12: What is The Ninth Step of the Accounting Cycle? And Tell about It.

Answer: The 9th step of the accounting cycle is closing entries of nominal accounts.

Income-expenditure accounts, or nominal accounts, are used to create a comprehensive income statement.

Furthermore, the net result of the comprehensive income statement, i.e. net profit or net loss, is shown as capital adjustment.

As a result, the current accounting period’s nominal accounts must be closed during the current accounting period, as opposed to the income summary accounts, without being transferred to the next accounting period. For nominal accounts, a closing entry must be made.

Question 13: What is The Ten Step of the Accounting Cycle? And Tell about It.

Answer: The 10th step of the accounting cycle is the preparation of the post-closing trial balance.

After closing entries, all nominal accounts are closed. As a result, only assets, liabilities, and capital accounts are accounted for, resulting in a post-closing trial balance.

The goal is to transfer the balances of all these assets, liabilities, and capital accounts as an opening balance for the next accounting period. Continuity is maintained between one accounting period and the next in this manner.

Question 14: What is The Eleventh Step of the Accounting Cycle? And Tell about It.

Answer: The 11th or last step of the accounting cycle is reversing entries.

The reverse entries of income and expenses related to the previous accounting period’s arrears and advances can be made at the start of the new accounting period.

The primary goal of this reverse entry is to show current year expenses and income that were paid and received in the previous year as current year expenses and income at the start of the current year.

Question 15: How Does Accounting Cycle Maintain the Continuity of the Accounts?

Answer: According to the accounting concept of going concern, a business organization will continue indefinitely. Year after year, business accounting activities continue. When one year of accounting is completed, the following year of accounting begins.

For this, if any expenditure is outstanding in the previous year, it is adjusted, and if any expenditure is paid in advance, it is also adjusted. Similarly, if any income is arrears in the previous year or any income is collected in advance, it is recorded through proper adjustment.

Revenue income and expenditure accounts are closed at the end of the accounting period with closing entries. The assets, liabilities, and capital account balances are carried over to the following year.

In this way, the accounting cycle maintains the continuity of the accounts between the previous year and the current year.

Question 16: Which Four Entries in the Accounting cycle Play an Important Role in Maintaining Account Continuity?

Answer: The following four entries in the accounting cycle play an important role in maintaining account continuity:

1. Adjusting Entries
2. Closing Entries
3. Reversing Entries
4. Opening Entries

Question 17: How long will the Specific Activities of the Accounting Cycle Continue?

Answer: The specific activities of the accounting cycle will continue as long as the organization is active.

Question 18: Why the Specific Process of Accounting is called the Accounting Cycle?

Each of the accounting activities rotates in stages. When one step is completed, the work of the next step begins, that is, each step is rotated in stages. For this reason, the specific process of accounting is called the accounting cycle.

Question 19: Which Step of the Accounting Cycle is not required or Optional?

Answer: The final step in the accounting cycle, preparing reverse entries, is optional.

Question 20: For What Type of Transaction is the Reverse Entry Given?

Answer: The reverse entries are given for the following four transactions:

• Accrued Expense
• Accrued Revenue
• Prepaid Expense
• Unearned Revenue

I hope that by the end of this post, you have a good understanding of the “Accounting Cycle” chapter.

You will gain a better understanding of the “Accounting Cycle” chapter if you read these 20 important accounting cycle questions and answers on a regular basis.

You can read the previous four chapters of our accounting learning course here if you missed them.

• 25 Important Introduction to Accounting Questions and Answers [With PDF]
• 30 Important Accounting Transaction Questions and Answers [With PDF]
• 25 Important Account Questions and Answers [With PDF]
• 25 Important Double Entry System Questions and Answers [With PDF]
• 30 Important Accounting Journal Questions and Answers [With PDF]
• 30 Important Accounting Ledger Questions and Answers [With PDF]
• 30 Important Cash Book Questions and Answers [With PDF]
• 25 Important Trial Balance Questions and Answers [With PDF]