SAP Business One Certification Practice Exam

Which financial statement is typically prepared first in the accounting cycle?

1. Balance Sheet

2. Profit and Loss Statement

3. Trial Balance

4. Cash Flow Statement

The correct answer is: Trial Balance

The trial balance is typically prepared first in the accounting cycle because it serves as a key step in ensuring that the debits and credits in the accounting records are in balance. After all financial transactions have been recorded in the respective journals, the trial balance is compiled at the end of a reporting period to verify that the total debits equal the total credits. This balance is crucial as it provides a preliminary check on the accuracy of the bookkeeping process before moving on to the preparation of other financial statements. Once the trial balance is confirmed to be correct, the accountant can then proceed to prepare the income statement (profit and loss statement), which summarizes the revenue and expenses for that period, followed by the balance sheet that reflects the financial position of the company at that point in time. Lastly, the cash flow statement is prepared to illustrate the inflow and outflow of cash, derived from the information in the earlier statements. The trial balance thus acts as a foundation for the subsequent financial statements, making it an essential first step in the overall accounting cycle.