Utah General Contractors - Business and Law Practice Exam

What is the first step in the accounting cycle?

1. Preparing financial statements

2. Identifying transactions

3. Posting journal entries

4. Closure of accounts

The correct answer is: Identifying transactions

The first step in the accounting cycle is the identification of transactions. This is crucial because it lays the groundwork for all subsequent accounting activities. Identifying transactions involves recognizing and capturing all financial events that are quantifiable in monetary terms. This could include things like sales, purchases, receipts, or payments, which must all be documented accurately to ensure that the financial records are complete and correct. Once the transactions are identified, they can then be recorded in the journals, which leads into the next phases of the accounting cycle, such as posting journal entries, preparing financial statements, and eventually closing the accounts. Without the initial identification of these transactions, it would not be possible to maintain accurate financial records, making this step fundamental to the entire process.