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Ye Sun Accounting English SUN HX Accounting English Lesson3 Lesson 3 Adjusting the accounts, preparing the statements, and completing the accounting cycle Before financial statements can be prepared, the accounts must be reviewed to ensure they reflect the correct balances; adjustments will be needed to adjust prepaids and unearned amounts, and to record amortization and accruals. The adjusted trial balance is used to prepare the statements. Closing entries are journalized and posted in preparation for the next accounting period. Need for adjustments The life of a business is divided into accounting periods so that periodic financial reports can be prepared and used to evaluate the financial progress of the business. Adjustments at the end of each period are necessary to update some of the asset, liability, expense, and revenue accounts and to show the effects of previously unrecorded internal economic events of the business. Need for adjustments Accrual and cash basis accounting Accrual accounting requires adjustments for prepaid, unearned, and accrued items; therefore, it reports revenues when earned and expenses when the expiration of benefit is incurred. Cash basis accounting does not make adjustments for prepaid expenses, accrued expenses, unearned revenues, and accrued revenues; revenues are recorded when cash is received and expenses are recorded when cash is paid. The cash basis of accounting is not generally accepted. Step 5: Adjusting the accounts Adjusting entries are journalized in the general journal and then posted into the general ledger. Adjusting entries are used to: charge the expired portion of prepaid expenses to Expense charge the expired portion of tangible capital assets cost to Amortization/Depreciation expense accrue expenses and record the related liabilities …… Step 5: Adjusting the accounts (cont.) recognize as revenues the earned portion of unearned revenue liabilities accrue revenues and record the related assets Types of
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