What is the first step in the accounting cycle?

The first step in the accounting cycle is analyzing business transactions. This step involves reviewing and interpreting the events or transactions that affect the financial position of a business. Accountants need to determine the economic impact of these transactions, which involves identifying the accounts that will be affected, the amount, and whether the transaction will increase or decrease the account balance.

Understanding the nature of the transactions is crucial because it lays the foundation for all subsequent steps in the accounting cycle. If the transactions are not accurately analyzed, it can lead to errors in all later stages, including journal entries, posting to the ledger, and ultimately the preparation of financial statements. Hence, this initial step ensures that the financial records reflect the true state of the business's operations and activities.