Chapter 3: Financial Accounting and Adjusting Entries

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Henry Dauderis and David Annand
Athabasca University via Lyryx Learning

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Learning Objectives

LO1 – Explain how the timeliness, matching, and recognition GAAP require the recording of adjusting entries.
LO2 – Explain the use of and prepare the adjusting entries required for prepaid expenses, depreciation, unearned revenues, accrued revenues, and accrued expenses.
LO3 – Prepare an adjusted trial balance and explain its use.
LO4 – Use an adjusted trial balance to prepare financial statements.
LO5 – Identify and explain the steps in the accounting cycle.
LO6 – Explain the use of and prepare closing entries and a post-closing trial balance.

Chapters 1 and 2 described the recording and reporting of economic transactions in detail. However, the account balances used to prepare the financial statements in these previous chapters did not necessarily reflect correct amounts. Chapter 3 introduces the concept of adjusting entries and how these satisfy the matching principle, ensuring revenues and expenses are reported in the correct accounting period. The preparation of an adjusted trial balance is discussed, as well as its use in completing financial statements. At the end of the accounting period, after financial statements have been prepared, it is necessary to close temporary accounts to retained earnings. This process is introduced in this chapter, as is the preparation of a post-closing trial balance. The accounting cycle, the steps performed each accounting period that result in financial statements, is also reviewed.