Generally Accepted Accounting Principles and Trial Balance Essay

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Chapter 3

The Accounting Cycle: 1. Journalize 2. Post to the ledger (T-accounts) 3. Prepare unadjusted trial balance 4. Adjusting entries 5. Prepare adjusted trial balance 6. Prepare financial statements 7. Closing entries 8. Prepare post-closing trial balance

Review of Financial Statements:

Review of Accounting Equation and Debits and Credits:

Review of Adjusting Entries:

1. Prepaid Expense – Cash paid now for a future expense. What type of account is this? ____________

2. Unearned Revenue – Cash received now for a future service that will be provided. What type of account is this? ___________

3. Accrued Revenue – Revenue earned but not yet received in cash. What type of account is this? ____________

4. Accrued Expense – Expense that has happened but has not yet been paid in cash. What type of account is this? __________

Additional adjusting entry practice:
Pioneer signed a 3-month, 12% note payable in the amount of $50,000 on October 1. Prepare the adjusting entry on October 31 to record the accrual of interest.

Review of Closing Entries:

Revenues, expenses, and dividends are “temporary accounts” because they are closed at the end of the year. All other accounts are permanent accounts.

Steps in preparing closing entries: 1. Close revenues to Income Summary. 2. Close expenses to Income Summary. 3. Close Income Summary to RE. 4. Close dividends to RE.

Income Summary – a temporary account only used during the closing process.

Post-closing trial balance – shows all permanent accounts.

Cash Basis Accounting versus Accrual Basis Accounting:

Most companies use accrual-basis accounting which means • recognize revenue when it is earned and • record expenses in the time period incurred, without regard to the time of receipt or payment of cash.

Under the strict cash basis, companies