Chapters 1 and 2 described the recording and reporting of economic transactions in detail. However, the account balances used to prepare the financial statements in these previous chapters did not necessarily reflect correct amounts. Chapter 3 introduces the concept of adjustingentries and how these satisfy the matching principle. This enables revenues and expenses to be reported in the correct accounting period. The preparation of an adjusted trial balance is discussed, as well as its use in completing financial statements. At the end of the accounting period, after financial statements have been prepared, it is necessary to close temporary accounts to retained earnings. This process is introduced in this chapter, as is the preparation of a postclosing trial balance. The accounting cycle – the steps performed each accounting period to produce financial statements – is also reviewed.
Learning Objectives
LO1 – Explain how adjusting entries match revenues and expenses to the appropriate time period.
LO2 – Explain the use of and prepare the adjusting entries required for prepaid expenses, depreciation, unearned revenues, accrued revenues, and accrued expenses.
LO3 – Prepare an adjusted trial balance and explain its use.
LO4 – Use an adjusted trial balance to prepare financial statements.
LO5 – Identify and explain the steps in the accounting cycle.
LO6 – Explain the purpose of closing entries and use closing entries to prepare a post-closing trial balance.
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