3.

Accounting Cycle

Start accounting cycle (accounting period)

Engage in transactions
Prepare post-closing trial balance Source documents identify transaction
Analyze impact on acctg. equation
Assess debits & credits

Record and post closing entries End of period During the period
measurement measurement
activities activities Record transactions
Prepare financial statements (Income (journal entry)
Stmt, Stmt of SE, Balance Sheet,
Stmt of cash flows)

Record and post Prepare trial balance Determine ledger account Post to ledger
Prepare adjusted trial balance adjusting entries (Total debits=Total credits) balance (normal balance) accounts
(T-accounts)

4. The Measurement Process

Adjusting Entries measure revenues and expenses without cash
• Adjusting entries are a necessary part of accrual-basis accounting.
• Adjusting entries are unnecessary in two cases: (1) for transactions that do not involve revenue or expense
activities and (2) for transactions that result in revenues or expenses being recorded at the same time as cash.
Adjusting Entries result from four situations
Period Period
when Period when revenue is earned when
cash is or expense is incurred cash is

Timeline Timeline

1. Deferred Revenue Received Record revenue Received 3. Accrued Revenue

or or
2. Prepaid Expense Paid Record expense Paid 4. Accrued Expense

Deferrals/Prepayments
1. Deferred Revenues—Deferred revenues occur when a company receives cash in advance from customers.
Cash received is initially recorded as a liability because there is an obligation to the customer. Once the
obligation is met, the adjusting entry records the revenue.
2. Prepaid Expenses—Prepaid expenses are the costs of assets acquired in one period that will be recorded as an
expense in a future period. Costs are initially recorded as assets because they are resources that provide
future benefits. As the resources are used, the adjusting entry records the expense.
 8

Accruals
3. Accrued Revenues—Accrued revenues are recorded when a company provides products or services to
customers but the company hasn’t yet received cash. The adjusting entry records the revenue and a receivable
for the amount expected to be received in the future.
4. Accrued Expenses—Accrued expenses are recorded when a company has a cost that is used to help produce
revenue, but the cost hasn’t been paid. The adjusting entry records the cost as an expense and a payable for
the amount owed.
5. Adjusted Trial Balance
Lists all account balances after updating them for adjusting entries
Prepared after posting the adjusting entries to the general ledger
Purpose is to make sure total debits = total credits.
6. The Reporting Process: Financial Statements
Prepare financial statements using the adjusted trial
balance. Dates are important on the financial statements

Income Statement “Year ended December 31, 2022” 1/1-12/31/2022

Statement of Stockholders’ Equity “For the year ended December 31, 2022” 1/1-12/31/2022
Balance Sheet “As of December 31, 2022”—not for a period of time; At 12/31/2022
--Read page 137
Classified Balance Sheet (p. 135)
More useful for decision-making than a balance sheet
without classifications Four classifications on the balance
sheet
1. Current Assets Cash and other resources that provide a benefit within one year
2. Long-term Assets Resources that provide a benefit for more than one year
3. Current Liabilities Liabilities that are due within one year
4. Long-term Liabilities Liabilities that are due in more than one year