The preparation of financial statements and closing the books is the ______ step of the accounting cycle.

The preparation of financial statements and closing the books is the ______ step of the accounting cycle.

• A. Third
• B. Fourth
• C. Second
• D. Last

Answer: (D)

Closing the books and preparing financial statements sit at the end of the accounting cycle. After finishing all adjusting entries, the adjusted balances are used to create the income statement, the statement of owner’s equity (or retained earnings), and the balance sheet. Then the temporary accounts—revenues, expenses, and withdrawals—are closed to zero, with their net result moved into permanent equity (such as retained earnings). This resets the accounts for the next period and completes the cycle, which is why this is described as the last step. Earlier steps focus on recording and posting transactions and on verifying balances with trial balances before the statements are produced.

Closing the books and preparing financial statements sit at the end of the accounting cycle. After finishing all adjusting entries, the adjusted balances are used to create the income statement, the statement of owner’s equity (or retained earnings), and the balance sheet. Then the temporary accounts—revenues, expenses, and withdrawals—are closed to zero, with their net result moved into permanent equity (such as retained earnings). This resets the accounts for the next period and completes the cycle, which is why this is described as the last step. Earlier steps focus on recording and posting transactions and on verifying balances with trial balances before the statements are produced.