FAR 7021 - Accounting Process 5.

Preparing the adjusting entries

- Identifying, measuring and - To split mixed accounts into their real
communicating economic information and nominal elements
that is useful in decision making - To bring the balances up to date
purposes - Allocates revenue and expenses
between current and future periods
Accounting cycle
- Accounting procedures by entities to  Accruals
record transaction and prepare financial a. Accrued income - income already
statements earned but not yet collected
- Implements the accounting process Receivable xx
Income xx
Steps in the accounting cycle: b. Accrued expense – expense
Recording Phase already incurred but not yet paid
1. Analyzing transactions Expense xx
a. Identifying Payable xx
b. Measuring
c. Classifying  Prepaid expense (adj: unused)
2. Journalizing a. Expense method
a. Double-entry system Expense xx
a. General (complete records) Cash xx
b. Special – sales, purchase,
cash receipts & disbursement Asset xx
journals Expense xx
b. Single-entry system
a. Cash books b. Asset method (adj: used portion)
b. Subsidiary ledgers Asset xx
3. Posting – accumulating transactions in: Cash xx
a. General ledger - total
b. Subsidiary ledger – details of each Expense xx
account in general ledger (ex: per Asset xx
customer)
 Chart of accounts – a list of all  Deferrals
accounts being used by the entity to a. Income method (adj: unearned)
record transactions Cash xx
 Accounts Income xx
a. Real – carried over several
accounting periods and have Income xx
cumulative balances Deferred income xx
b. Nominal – closed each accounting
period (income & expenses) b. Liability method (adj: earned)
c. Mixed – elements of real and Cash xx
nominal closed using adjusting Deferred income xx
entries
Deferred income xx
Summarizing Phase Income xx
4. Preparing the unadjusted trial balance
- Provide evidence that total debits = total Other adjusting entries:
credits a. Ending inventory (periodic)
- Provide information that helps formulate Inventory, end xx
adjustments Income summary xx
 b. Bad debts
Bad debts xx
Allowance for BD xx
c. Depreciation
Depreciation xx
Accu. Depreciation xx

6. Preparing the financial statements

7. Preparing the closing entries
- Close all or “zero out” all nominal
accounts in the ledger
8. Prepare the post-closing trial balance
- Prove that debits = credits after the
closing process
- Provide the balances that will be carried
over to next accounting period
9. Preparing the reversing entries
- Reverse certain adjusting entries to the
nominal accounts
a. Accruals
b. Prepaid expense – expense method
c. Deferred income – income method