Chapter 5
The Accounting Cycle: Adjustments
106
Step 1
Step 2
Step 3
Step 4
Step 5
Step 6
Step 7
Step 8
Step 9
ACCOUNTING
CYCLE
Analyze
transactions
Journalize the
transactions
Post to ledger
accounts
Prepare the trial
balance
Journalize and
post adjusting
entries
Prepare the
adjusted trial
balance
Prepare the
financial
statements
Journalize and post
closing entries
Prepare the post-
closing trial balance
______________
FIGURE 5.1
An accounting period is the period of time covered by the financial statements. A company will
have a
fiscal year
, which is usually a one-year time frame. A company’s fiscal year may cover the
same time as the calendar year from January 1 to December 31; however some companies have a
fiscal year that ends during a slow time of the year. For example, a retail store may have its fiscal
year end at the end of January, after the Christmas rush is finished. In this case, the fiscal year is
from February 1 to January 31.
A company will usually prepare a set of financial statements at the end of each fiscal year, although
some prepare the statements more frequently to better manage the business. Whenever these
statements are prepared, remember that accrual-based accounting states that revenue and expenses
should be recognized in the accounting period when they occur, regardless of when the cash
payment is received or made.
Adjusting entries
are made at the end of the
accounting period to record assets, liabilities,
equity, revenue and expenses according to revenue
and expense recognition. Every adjustment will
affect both a balance sheet account and an income
statement account. Adjusting entries typically fall
under five broad categories
Revenue recognition states that
revenue must be recorded when services are
performed, regardless of when cash is received.
Expense recognition requires that expenses
must be recorded in the same period in which
they were used to generate revenue.
WORTH REPEATING
