ACCT 2610 Lecture 8: Accounting Cycle, Trial Balances, and Adjusting Journal Entries

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Course Code
Accounting ACCT 2610
Lemayian Zawadi

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Lecture 6-8: The Accounting Cycle, Trial Balances, Adjusting Journal Entries I. Accounting Cycle A. Overview 1. Step 1: during period a. Analyze transactions, record journal entries, and post amounts to general ledger (T-accounts) 2. Step 2: at the end of period a. Adjust revenues and expenses (adjusting journal entries), post adjustments to T- accounts 3. Step 3 a. Prepare the financial statements and disseminate to users 4. Step 4 a. Close revenues, gains, expenses, and losses (temporary accounts) to retained earnings b. This zeroes out the accounts that show up in the income statement B. Trial Balances 1. 3 Trial balances are typically prepared during the accounting cycle: a. Unadjusted trial balance • Prepared between step 1 and 2, before recording adjusted journal entries b. Adjusted trial balance • Prepared between step 2 and 3, after recording adjusted journal entries c. Post-closing trial balance • Prepared after step 4, after recording all closing entries 2. For all trial balances: a. Purpose = To check whether the total debits equal the total credits b. Finding that debits = credits • Does NOT imply that you recorded the journal entries properly • Does NOT imply that all journal entries were properly posted to t-accounts c. Trial balances are for internal purposes only • They are NOT disclosed in the financial statements or by any other means d. Accounts are listed in financial statement order • First, balance sheet accounts • Second, income statement accounts 3. Unadjusted Trial Balance a. The unadjusted trial balance is prepared before we record the adjusting journal entries b. Balances in the unadjusted trial balance represent the end of period balances for each account, with exception to the retained earnings account c. Retained Earnings (unadjusted trial balance) – represents the beginning balance of retained earnings minus dividend declared during the period • To find the final RE, must find the new NI (account for all revenues and expenses after adjustment) for final NI d. Accumulated Depreciation – represents the total amount of property and equipment used in the past (i.e., the total amount of depreciation expense recognized) • PP&E – Accumulated depreciation = net PP&E (only one will be reported on the balance sheet), specifications in the notes 4. Adjusted Trial Balance a. Make all adjustments, then sum to the adjusted trial balance • Make sure credits = debits b. Use adjusted balances to create new income statement • Find new net income c. Bring net income to the statement of stockholder’s equity • Find new retained earnings d. Bring adjusted balances and new RE to balance sheet C. Adjusting Journal Entries 1. Basics a. Record events that occur during the accounting period but that have not yet been recorded by the end of the period b. Facilitate correct income measurement, correction of errors and adequate valuation of balance sheet accounts c. Are made at the end of the accounting period d. Have nothing to do with cash – the cas
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