Textbook Problem

What is the third step in the accounting cycle?

1. Analyze source documents and record business transactions in a journal.
2. Prepare a post-closing trial balance.
3. Journalize and post the closing entries.
4. Prepare a trial balance.

To determine

Find the correct option, the option that indicates the third step in accounting cycle.

Answer to Problem 1QY

The correct answer is option (d).

Explanation of Solution

Accounting cycle: The whole process of identifying, sorting, analyzing, and recording the transactions, journalizing the transactions, posting the entries, preparation of trial balance, updating the adjustments in worksheet, preparing financial statements, and closing the books, is referred to as accounting cycle.

Steps in accounting cycle:

1. Identify and sort the source documents, and record the business transactions.
2. Post the journal entries to the ledger accounts.
3. Prepare trial balance.
4. Identify and record the adjustments on the work sheet.
5. Complete work sheet.
6. Record the adjusting entries and post the entries.
7. Prepare financial statements from the balances of the accounts in the ledgers on work sheet.
8. Journalize the closing entries and post the entries.
9. Prepare a post-closing trial balance.

Justification for correct answer: Accounting cycle is the complete process of recording transactions, journalizing, posting, and preparation of financial statements. As per the steps in accounting cycle, the preparation of trial balance is the third step of accounting cycle process. Hence, option (d) is correct.

Justification for incorrect answers:

• Option (a) is incorrect because identifying and sorting the source documents, and recording the business transactions is the first step of accounting cycle.
• Option (b) is incorrect because preparation of post-closing trial balance is the ninth step in accounting cycle.
• Option (c) is incorrect because journalizing and posting closing entries is the eighth step in accounting cycle.

Conclusion

Therefore, option (d) is correct answer.