Recall from
Analyzing and Recording Transactions that prepaid expenses (prepayments) are assets for which
advanced payment has occurred, before the company can benefit from
use. As soon as the asset has provided benefit to the company, the
value of the asset used is transferred from the balance sheet to
the income statement as an expense. Some common examples of prepaid
expenses are supplies, depreciation, insurance, and rent. When a company purchases supplies, the original order, receipt
of the supplies, and receipt of the invoice from the vendor will
all trigger journal entries. This trigger does not occur when using
supplies from the supply closet. Similarly, for unearned revenue,
when the company receives an advance payment from the customer for
services yet provided, the cash received will trigger a journal
entry.

1. The general ledger provides a breakdown of all accounting activities by account.
2. Overall, determining the amount of time for each accounting cycle is important because it sets specific dates for opening and closing.
3. There are a few other guidelines that support the need for
   adjusting entries.
4. You see that you earned $120,000 this year in revenue and had expenses for rent, electricity, cable, internet, gas, and food that totaled $70,000.
5. For example, one does not “start over” each period reaccumulating assets like cash and so on; their balances carry forward.
6. However, today it could sell for more than, less than, or the same as its book value.

The first is modified accrual accounting, which is commonly used in governmental accounting and merges accrual basis and cash basis accounting. The second is tax basis accounting that is used in establishing the tax effects of transactions in determining the tax liability of an organization. Previously unrecorded service revenue can arise when a company
provides a service but did not yet bill the client for the work. Since
there was no bill to trigger a transaction, an adjustment is
required to recognize revenue earned at the end of the period. For example, a company pays $4,500 for an insurance policy
covering six months. It is the end of the first month and the
company needs to record an adjusting entry to recognize the
insurance used during the month.

Prepaid Expenses

Instead, declaring and paying dividends is a method utilized by corporations to return part of the profits generated by the company to the owners of the company—in this case, its shareholders. In this chapter, we complete the final steps (steps 8 and 9) of the accounting cycle, the closing process. This is an optional step in the accounting cycle that you will learn about in future courses.

What Are Some of the Advantages and Disadvantages of Accounting?

The adjustments total of $2,415 balances in the debit and credit columns. Once the trial balance information is on the worksheet, the next step is to fill in the adjusting information from the posted adjusted journal entries. The trial balance information for Printing Plus is shown previously.

Financial Accounting

Let’s say a company pays $8,000 in advance for four months of
rent. After the first month, the company records an adjusting entry
for the rent used. The following entries quickbooks online for individuals show initial payment for
four months of rent and the adjusting entry for one month’s
usage. The unadjusted trial balance may have incorrect balances in some
accounts.

Both US-based companies and those headquartered in other countries produce the same primary financial statements—Income Statement, Balance Sheet, and Statement of Cash Flows. Concepts Statements give the Financial Accounting Standards Board (FASB) a guide to creating accounting principles and consider the limitations of financial statement reporting. To be a successful forensic accountant, one must be detailed, organized, and naturally inquisitive. This position will need to retrace the steps a suspect may have taken to cover up fraudulent financial activities.

Understanding the accounting cycle and preparing trial balances is a practice valued internationally. The Philippines Center for Entrepreneurship and the government of the Philippines hold regular seminars going over this cycle with small business owners. They are also transparent with their internal trial balances in several key government offices. Check out this article talking about the seminars on the accounting cycle and this public pre-closing trial balance presented by the Philippines Department of Health. Our discussion here begins with journalizing and posting the closing entries (Figure 5.2).

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For Printing Plus, the following is its January 2019 Income Statement. Let’s say a company pays $8,000 in advance for four months of rent. After the first month, the company records an adjusting entry for the rent used. The following entries show initial payment https://intuit-payroll.org/ for four months of rent and the adjusting entry for one month’s usage. The unadjusted trial balance may have incorrect balances in some accounts. Recall the trial balance from Analyzing and Recording Transactions for the example company, Printing Plus.

Double-entry bookkeeping calls for recording two entries with each transaction in order to manage a thoroughly developed balance sheet along with an income statement and cash flow statement. Accumulated Depreciation is contrary to an asset account, such as Equipment. This means that the normal balance for Accumulated Depreciation is on the credit side. Accumulated Depreciation will reduce the asset account for depreciation incurred up to that point. The difference between the asset’s value (cost) and accumulated depreciation is called the book value of the asset.

Steps 1 through 4 were covered in Analyzing and Recording Transactions and Steps 5 through 7 were covered in The Adjustment Process. The eight-step accounting cycle process makes accounting easier for bookkeepers and busy entrepreneurs. It can help to take the guesswork out of how to handle accounting activities. It also helps to ensure consistency, accuracy, and efficient financial performance analysis. After closing, the accounting cycle starts over again from the beginning with a new reporting period.

Adjusted Trial Balance

This may be useful for businesses needing to coincide with a traditional yearly tax schedule. It can also be easier to track for some businesses without formal reconciliation practices, and for small businesses. For example, a company accrued $300 of interest during the
period. One difference is the supplies account; the figure on paper does
not match the value of the supplies inventory still available.

The company wants to depreciate the asset over those four years equally. This means the asset will lose $500 in value each year ($2,000/four years). In the first year, the company would record the following adjusting entry to show depreciation of the equipment. The accounting period a company chooses to use for financial reporting will impact the types of adjustments they may have to make to certain accounts. As one can see on each year’s balance sheet, the asset continues to be reported at its $150,000 cost.

This allocation of cost is recorded over
the useful life of the asset, or the time period
over which an asset cost is allocated. The allocated cost up to
that point is recorded in Accumulated Depreciation, a contra asset
account. A contra account is an account paired
with another account type, has an opposite normal balance to the
paired account, and reduces the balance in the paired account at
the end of a period. The main purpose of the accounting cycle is to ensure the accuracy and conformity of financial statements.