In your own words, explain why the accounting cycle is important to organizations. State the ethical consequences if one of the steps is skipped.
The accounting cycle is an important process for all organizations as it guides the people in recording transactions and preparing financial statements. Following the accounting cycle will aid in keeping the records updated. This process is important for the business managers in making important financial decisions for the business. These records are also used for raising loans. The recording of the financial information actually follows eight steps.
All of these steps in the accounting cycle are equally important and cannot be skipped in any case. If any one of these steps is skipped, then the resulting information on the accounting reports would not be as per the regulatory guidelines as such information will be wrong. This also implies that the reports would be incomplete, misleading and inaccurate, not only for stakeholders but it also would be wrong for decision making. More importantly, these would not conform to the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Missing the steps would cause wrong opening balances for the reporting periods coming next. After the closing process, the account needs to have an accurate closing balance which is confirmed by having a completed post-closing trial balance. Any mistake or skipping of the trial balance step would lead to errors throughout the accounting cycle. Having false accounting information reported in the financial statements would lead to unethical practice as it would be misleading to the investors and management of the company. Furthermore, after its identification and correction, investors would lose faith in the account recording process leading to a loss in investors and consequently in loss of investment. It shows that each step should be considered with due attention and focus on limiting any chances of errors and unethical practices.
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