Accounting Cycle

A. Procedures:

Process which produces Financial Statements

Steps in the cycle

1. Open ledger accounts;
2. Journalize transactions;
3. Post to the ledger;
4. Calculate unadjusted balances;
5. Develop trial balance on a worksheet;
6. Journalize and Post adjusting entries
   1. Match revenues and expenses to period earned and incurred.
   2. Correct measurement of period’s income.
   3. Bring related asset and liability accounts up-to- date.
7. Prepare financial statements;
8. Journalize and Post closing entries;
9. Prepare post closing trail balance;

B. 5 Categories of Adjusting Entries

1. Prepaid expenses – Expire or are used up in next period
2. Accrued expenses – Expenses incurred but not yet paid
3. Depreciation – Systematically spreads cost of assets over periods
4. Accrued revenue – Revenue earned, but cash not yet received
5. Unearned revenue – Revenue not earned by business but cash already received

C. The Adjusting Process

1. Purpose is to correctly measure or report income and expenses during a given time frame
   

   The accrual method of accounting requires adjusting entries because this method recognizes income when it is earned and expenses when they actually created. The Cash method of accounting does not need adjusting entries because income is recognized in the period in which the cash receipt was received or the expense when the cash payment was made. This method is simpler but does not accurately match income and expenses for planning and evaluation purposes.

2. Each entry affects one income statement account (revenue or expense)
3. Each entry also affects one balance sheet account (asset or liability)