The Accounting Cycle - Free Essay Example

From the above steps, accountants can derive information that informs on the financial health of the business, and this evidence is purportedly the primary significance of accounting outputs. The primary stakeholders of the company need to know the financial status of their investment (Gunarathne et al., 2016). Warren et al. (2013) stated that financial statements are the by-products emanating from the accounting cycle.

These statements include the income statement, statement of retained earnings, balance sheet, and the statement of cash flows. The income statement is responsible for reporting the revenues and expenses earned and incurred respectively by the business (Warren et al., 2013). These authors further stated that it is essential for expenses and earnings to be reported in the same period in which they occur.

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The difference between the two, income and expenses, generates the retained earnings account, basically known as the statement of retained earnings. The interrelation between the two is that the income statement is reported before the retained earnings because the value for net loss or gain has to be reported in the latter statement (Warren et al., 2013). The balance sheet, on the other hand, equates accounting data into two parts. Assets and liabilities.

Assets relate to everything owned by the firm, and liabilities are what the firm owes to other parties. The value of the retained earnings is reported on the asset section of the balance sheet, hence the importance of creating the statement showing retained earnings of the company before computing the balance sheet (Dutescu, 2019). Lastly, the statement of cash flows summarizes all the above and relates to all activities of the company. Warren et al. (2013) divided the statement of cash flow into three parts; operating activities, investing activities, and financing activities.

Importance of the Accounting Cycle to a Business

The relevance of the accounting cycle to a business entity is to show the impact of transactions on an organization (Warren et al., 2013). All the above discussion conveys the importance of recording transactions. Recorded data reduce the chances of errors of omission or commission, and the same transcends to the actual capture of business activities. Every step of the accounting process affirms the accuracy of the preceding step, and this is crucially important to ensure that the ending balance is accurate and a true account of the transactions that ensued during that period.

Additionally, the accounting process helps investors know the worth of their business and the potential for growth or decline of the investment. Understanding financial statements, also, is a good practice to track expenditure and allocate funds to the most viable and profitable ventures the business might desire to accomplish. Lastly, Warren et al. (2013) stated that the essential elements of the accounting cycle are vested on the premise that it facilitates the analysis and comparison of business performance at any given accounting period.

Reference

Dutescu, A. (2019). The financial statements. In Financial Accounting (pp. 29-62). Palgrave Macmillan, Cham. 10.1007/978-3-030-29485-4_3

Gunarathne, N., Samudrage, D., Wijesinghe, D. N., & Lee, K. H. (2016). Fostering social sustainability management through safety controls and accounting. Accounting Research Journal. https://doi.org/10.1108/ARJ-04-2015-0062

Warren, C., Reeve, J. M., & Duchac, J. (2013). Financial & managerial accounting. Cengage Learning.