Chapter 5
The Accounting Cycle: Adjustments
125
In Summary
Describe the purpose of adjustment
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Adjustments are made to ensure that all accounts are accurately reported at the end of the
period.
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Adjustments are made before the creation of the financial statements.
Prepare adjusting entries for accrued revenue
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Accrued revenue is revenue that has been earned but has not yet been recorded.The adjustment
is made by debiting (increasing) accounts receivable and crediting (increasing) service revenue.
Prepare adjusting entries for accrued expenses
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Accrued expenses are expenses that have been incurred but have not yet been recorded.The
adjustment is made by debiting (increasing) an expense and crediting (increasing) a liability.
Prepare adjusting entries for unearned revenue
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Adjustments to unearned revenue is to account for revenue that has now been earned. The
adjustment is made by debiting (decreasing) unearned revenue and crediting (increasing)
service revenue.
Prepare adjusting entries for prepaid expenses
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Adjustments to prepaid expenses is to account for expenses that have now been incurred.
The adjustment is made by debiting (increasing) an expense and crediting (decreasing) the
prepaid expense.
Prepare adjusting entries for depreciation
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Adjustments for depreciation is to allocate the cost of a long-term asset over its useful life.The
adjustment is made by debiting (increasing) depreciation expense and crediting (increasing)
the contra account called accumulated depreciation.
Prepare an adjusted trial balance
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The adjusted trial balance is prepared after the adjusting entries have been made. This is to
ensure the accounts are still in balance and the financial statements can be prepared.
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