EN.662.611 Chap.2 The Accounting Cycle and Adjusting Entries
The Accounting Cycle and Adjusting Entries
Analysis comes before any entry
Transaction analysis takes an economic event, looks through to its substance and translates it into accounts and amounts. The Week 1 lecture asks two questions of every event, what was received and what was given up, and sets three rules: each transaction touches two or more accounts, the accounting equation must still balance afterwards, and debits equal credits.
Assets carry debit balances; liabilities and equity carry credit balances.
From journal to trial balance
The general journal records each transaction in date order, debit first and the credit indented beneath it with a short explanation. Posting moves each line to a T-account in the general ledger, debits on the left and credits on the right, so every account shows its running balance.
A trial balance then lists all balances to prove that total debits equal total credits. The course glossary describes this as a six-step process ending with the statements, while the Week 1 slide adds a seventh stage, closing.
Why adjustments are needed
Week 2 extends the rules: revenue is credited and expenses debited because they flow into retained earnings, and dividends are a debit to retained earnings.
Adjusting entries correct timing differences at the end of each period, usually monthly, and each one moves one balance sheet account and one income statement account. There are two families, revenue and expense, each with a deferral, where cash moves first, and an accrual, where cash moves later.
Formats the course expects
Statements come from the adjusted trial balance.
The balance sheet lists assets by liquidity and liabilities by maturity, with subtotals for current assets and current liabilities. The multi-step income statement separates operating from non-operating activity so readers can tell recurring from non-recurring results, and earnings per share appears on it or in the notes.
The statement of retained earnings carries net income into equity.
A first ratio from the finished statements
The Week 2 lecture closes by introducing ratio analysis, which serves two purposes: trend analysis of one company over time and competitor analysis that levels the field between companies of different size.
Its first example is the current ratio, current assets divided by current liabilities, with a benchmark of 2, which measures the ability to pay obligations due within a year. Every adjustment in this chapter moves that ratio, so an omitted accrual distorts analysis as well as income.
What this chapter covers
- 01
Transaction analysis and the rules of debit and credit
- 02
General journal, T-accounts and the general ledger
- 03
The trial balance and what it cannot prove
- 04
Deferred and accrued revenue
- 05
Prepaid and accrued expenses, interest and depreciation
- 06
Multi-step income statement and balance sheet format
- 07
The current ratio
Worked example · free
Record three month-end adjustments
- 2Insurance: one month used, debit Insurance Expense $400, credit Prepaid Insurance $400.
- 2Wages: debit Wages Expense $600, credit Wages Payable $600.
- 2Deposit: the work is done, so debit Unearned Revenue $1,200, credit Service Revenue $1,200.
Key terms
- Journal Entry
- A dated record of a transaction's debits and credits, with a short explanation, in the general journal.
- T-Account
- A ledger account drawn with debits on the left and credits on the right to show its running balance.
- Trial Balance
- An internal list of every account balance used to check that total debits equal total credits.
- Unearned Revenue
- A liability for cash received before the related goods or services are delivered.
- Accumulated Depreciation
- A contra-asset holding total depreciation to date, subtracted from cost to give net book value.
The Accounting Cycle and Adjusting Entries FAQ
Does a balanced trial balance mean the books are correct?
No. It proves only that debits equal credits. An entry posted to the wrong account, or a transaction left out entirely, still balances while misstating both the accounts and the statements built from them.
How do I tell a deferral from an accrual?
Look at when cash moved. If cash moved before the revenue was earned or the expense used, it is a deferral; if the revenue or expense happened first and cash follows later, it is an accrual.
Why is interest calculated with a fraction of a year?
Rates on financial instruments are quoted annually, so interest for a shorter period is principal times rate times the fraction of the year that has passed, such as one twelfth for a month.
Exam move
Keep one invented business for the whole chapter: journalize its first month, post to T-accounts, prepare a trial balance, list the timing differences, then adjust and build the statements. Repeat the month with new numbers until the order feels automatic.
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