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SUMMARIZING PHASE
4. Preparing the unadjusted trial balance A list of general ledger accounts with their respective
debit or credit balance. The purpose of the unadjusted trial balance is to provide evidence that
the total debits in the general ledger equal the total credits and prepares the accounts for
adjustments.
5. Preparing adjusting entries To take up accruals, expiration of prepayments and deferrals,
estimations and other events often not signaled by new source documents. Adjusting entries are
made at the end of each accounting period. The concepts involved behind adjusting entries are
ACCRUAL, MATCHING OF COSTS AGAINST REVENUE and ACCOUNTING PERIOD.
Typical Adjusting Entries classified according to timing of cash flow.
1. Prepayments and Deferrals The cash flow precedes the revenue or the expense
recognition.
Prepaid Expenses
Asset Method
Prepaid expense (asset)
Cash
Expense Method
xx
xx
Expense
Cash
xx
xx
xx
Adjustment:
Expense
Prepaid expense
xx
xx
xx
Income Method
xx
Cash
Income
xx
xx
Income
xx
Unearned Income (liab.)
xx
Adjustment:
Unearned Income
Income
xx
xx
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7. Preparing the closing entries Recorded and posted for the purpose of closing all nominal or
temporary accounts to the income summary account and the resulting net income or loss is
afterwards closed to the capital or retained earnings account.
8. Preparing the post closing trial balance A listing of general ledger accounts and their
balances after closing entries have been made. The post closing trial balance is the same with
the year-end statement of financial position, the only difference is that valuation accounts like
allowances for assets are found in the credit side instead of being deducted from the related
asset account.
9. Preparing reversing entries The last and optional step in the accounting cycle. Reversing
entries are made at the beginning of the new accounting period to reverse certain adjusting
entries from the succeeding accounting period.
The purpose of reversing entries is a matter of convenience for accruals and consistency for the
adjustments in the following year for prepaid expenses and deferred income when the income
statement method was used to record the cash flow.
Once again, reversing entries will only apply to the following but remember that they are not
necessary and only optional:
1.
2.
3.
4.
Accrued income
Accrued expense
Prepaid expense, only if the expense method was used in recording the payment
Unearned income, only if the income method was used in recording the collection
Accrued Income
12/31/16 Adjustment:
11/1/2016
Rent Receivable
Rent Income
200
Rent Expense
Cash
200
1,800
1,800
12/31/2016 Adjustment:
Prepaid Rent
1,600
Rent Expense
200
1,600
10/31/2017
Cash
1,200
Rent Income
Rent Expense
Prepaid Rent
1,200
1,600
1,600
400
400
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