What is the accounting cycle?

The accounting cycle refers to the comprehensive sequence of steps that an organization follows in the accounting process. This cycle begins with the initial recording of financial transactions and progresses through various stages, ultimately culminating in the preparation of financial statements, which provide a summary of the organization's financial performance and position.

These steps typically include identifying transactions, recording them in journals, posting to ledgers, preparing an unadjusted trial balance, making necessary adjusting entries, preparing an adjusted trial balance, and finally producing the financial statements such as the income statement, balance sheet, and cash flow statement. This structured approach ensures that financial data is accurately processed and reported, allowing stakeholders to make informed decisions based on the organization's financial health.

The other options, while relevant to other aspects of accounting, do not encapsulate the overall process involved in the accounting cycle. Financial ratios relate to analysis rather than the steps in the cycle, budgeting is a separate financial planning function, and auditing focuses on evaluating financial statements rather than the systematic recording and reporting process that the accounting cycle describes.