Asked Nov 10, 2019

What are the outputs of the accounting cycle, why are they important and how are they interrelated? 


Expert Answer

Step 1

Outputs of the accounting cycle-

First of all, we need to understand what is an accounting cycle.  An accounting cycle is a series of accounting procedures followed in each accounting period. Please see attached table to understand the accounting cycle.

As highlighted in yellow above- the key output of accounting cycle is the financial statements.

Financial statements mainly include the following- 

1. Balance sheet ( statement of financial position)-    A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time. It is a financial statement that provides a snapshot of what are company's owns ahd what it owes. Also, it includes the amount invested by shareholders.

2. Income statement- Income statement depicts the revenue earned by company in its operations. Also, it discloses the various cost it has incurred over a period of time. Thereby, it helps in determing the net profit earned or loss suffered by the company.

3. Statement of changes in Equity- This statement shows the changes in equity.  This means it records the movements of equity along with adjusting the accumulated earnings and losses respectively. It also depicts the changes in share capital reserves over the period. It is also called the statement of retained earnings. This statement is usually prepared on annual basis. 

4. Statement of cash flows- This statement shows the movement of cash as outflow and inflow in the company. All the cash receipts and payments are classified into three broad heads as cash flow from operating, investing and financing activities.

5. Notes to financial statements- All the key information and important notes and disclosures related to all other four financial statements are presented in notes to financial statements.

Step 2

Importance of accounting outputs-  Below is the importance of balance sheet, income statements and other outputs as mentioned in step 1- 

1. It helps management to analyse the performance of the company and also compare the same with other companies of similar sector.  It therefore helps them to form right policies for their company and take timely decisions.

2. Shareholders require the financial statements of the company to see how the company is progressing and it enables them to understand that their money is safe and what returns they are getting by investing in a particular organization.

3. It also is important for prospective shareholders and customers as they need to understand the dividend payout ratio and forecast the future dividends

4. Creditors or lend...

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