Textbook Notes (381,336)
CA (168,503)
UTSC (19,326)
MGA (381)
MGAB01H3 (127)
Liang Chen (50)
Chapter 4.3

chapter 4.3

2 Pages
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Department
Financial Accounting
Course Code
MGAB01H3
Professor
Liang Chen

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Chapter 4
Adjusting Entries for Accruals
Adjusting entries for accruals are required in order to record revenues earned, or expenses incurred, in
the current accounting period. Unlike prepayments, accruals have not been recognized through daily
entries and thus are not yet reflected in the accounts.
Revenue that have been earned but not yet received in cash or recorded in the books is called accrued
revenues. Accrued revenues may accumulate with the passage of time, as in the case of interest
revenue. An adjusting entry is required for two purposes: (1) to show the receivable that exists at the
balance sheet date and (2) to record the revenue that has been earned during the period.
Expenses incurred but not yet paid or recorded at the statement date are called accrued expenses.
Adjustments for accrued expenses are necessary to (1) record the obligations that exist at the balance
sheet date, and (2) recognize the expenses that apply to the current accounting period.
The Adjusted Trial Balance and Financial Statements
After all adjusting entries have been journalized and posted; another trial balance is prepared from the
general ledger accounts. This trial balance is called an adjusted trial balance.
Closing the Books
Since revenue, expense, and dividends are a subdivision of retained earnings, they are considered
temporary accounts. In contrast, everything else is considered permanent accounts.
Preparing Closing Entries
At the end of the accounting period, the temporary account balances are transferred to the permanent
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the transfer of the balances in the revenue, expense, and dividends account. In addition to closing the
temporary account, Retained earnings are updated.
Through the manual process of closing accounts, revenue and expense are first closed to income
summary, then to retained earnings, and finally dividends to retained earnings. The four necessary steps
are:
1. To close revenue accounts, debit each revenue account and credit income summary by the total
2. To close expense accounts, credit each expense account and debit income summary by the total
3. To close income summary, debit/credit (pending on the balance) to retained earnings
4. To close dividends, credit the account and debit the amount to retained earnings.
Do not close dividends to income summary along with expenses. Although this will result in a similar
answer, it does not produce the correct net earnings amount.
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Description
Chapter 4 Adjusting Entries for Accruals Adjusting entries for accruals are required in order to record revenues earned, or expenses incurred, in the current accounting period. Unlike prepayments, accruals have not been recognized through daily entries and thus are not yet reflected in the accounts. Revenue that have been earned but not yet received in cash or recorded in the books is called accrued revenues. Accrued revenues may accumulate with the passage of time, as in the case of interest revenue. An adjusting entry is required for two purposes: (1) to show the receivable that exists at the balance sheet date and (2) to record the revenue that has been earned during the period. Expenses incurred but not yet paid or recorded at the statement date are called accrued expenses. Adjustments for accrued expenses are necessary to (1) record the obligations that exist at the balance sheet date, and (2) recognize the expenses that apply to the current accounting period. The Adjusted Trial Balance and Financial Statements After all adjusting entries have been journalized and posted; another trial balance is prepared from the general ledger accounts. This trial balance is called an adjusted trial balance. Closing the Books Since revenue, expense, and dividends are a sub
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