Accounting Cycle
This domain tests the sequence from source document to financial statements, the purpose of each stage, and the effect of errors before reporting. Exam questions often ask where a transaction is first recorded or which step detects a particular problem.
Core rules
- Steps: source documents, books of prime entry, ledger posting, trial balance, period-end adjustments, financial statements, closing entries.
- Source documents evidence a transaction: invoice, credit note, receipt, bank statement, petty cash voucher.
- Books of prime entry summarise similar transactions before ledger posting.
- The trial balance extracts ledger balances; it checks arithmetic equality, not full accuracy.
- Adjustments apply accrual accounting, depreciation, inventory and allowances before statements are prepared.
- Closing entries transfer income and expense balances to the capital or retained earnings account.
Worked example
On 1 March, goods with a sales value of 1,200 are sold on credit. The sales invoice is entered in the sales day book. The total is posted to the sales account credit and to the customer account debit in the receivables ledger. At the period end, the customer balance and sales balance are included in the trial balance. The sale is recognised in the statement of profit or loss for the period in which control transfers, not necessarily when cash is received. If the customer later pays, the cash book records the receipt and the customer account is credited.
Traps
- Treating the sales day book as the ledger account.
- Posting a credit sale to the cash book.
- Preparing statements before completing adjustments.
- Assuming a balanced trial balance proves there are no errors.