The accounting cycle involves analyzing transactions, journalizing entries, and posting to accounts to track a company's financial activities over a period. At the end of the period, adjusting entries are made for deferred and accrued revenues and expenses to update account balances according to accrual accounting. This ensures revenues and expenses are recorded in the proper period before financial statements are prepared. Adjusting entries may defer existing balances, accrue new balances, or allocate asset costs like depreciation over multiple periods using methods such as straight-line depreciation. T-accounts are used to track debits and credits to accounts during this process.

1. The Accounting Cycle
Analyze
Transactions
Journalize
and Post
Adjusting
Entries
During Period
Unadjusted
Trial Balance
End of Period
KNOWLEDGE FOR ACTION

2. KNOWLEDGE FOR ACTION
Adjusting Entries
• Adjusting entries
– Internal transactions that update account balances in accordance with accrual
accounting prior to the preparation of financial statements
• Deferred Revenues and Expenses
– Update existing account balances to reflect current accounting values
– Cash flow in past; record revenue/expense now
• Accrued Revenues and Expenses
– Create new account balances to reflect unrecorded assets or liabilities
– Record revenue/expense now; cash flow in future

3. KNOWLEDGE FOR ACTION
Deferred Expenses
• Question: Are there any assets that have been “used up” this
period and should be expensed?
• Examples:
– Prepaid Rent
– Prepaid Insurance
– Depreciation or amortization
• Journal Entry:
Dr. Expense
Cr. Prepaid Asset

4. KNOWLEDGE FOR ACTION
Deferred Revenues
• Question: Are there any liabilities that have been fulfilled by
delivery of goods or services that should be recognized as revenue?
• Examples:
– Unearned rental revenue
– Deferred subscription revenue
• Journal Entry:
Dr. Unearned Revenue Liability
Cr. Revenue

5. KNOWLEDGE FOR ACTION
Accrued Expenses
• Question: Have any expenses accumulated during the period that
have not yet been recorded?
• Examples:
– Income Taxes Payable
– Interest Payable
– Salaries and Wages Payable
• Journal Entry:
Dr. Expense
Cr. Payable Liability

6. KNOWLEDGE FOR ACTION
Accrued Revenue
• Question: Have any revenues accumulated during the period that
have not yet been recorded?
• Examples:
– Interest Receivable
– Rent Receivable
• Journal Entry:
Dr. Receivable Asset
Cr. Revenue

7. KNOWLEDGE FOR ACTION
Depreciation and Amortization
• Allocate the original cost of a long-lived asset over its useful life
– Matches the total cost of asset to the revenues it generates over its period of use
• Terminology
– Tangible assets (physical assets) require depreciation
– Intangible assets (abstract assets) require amortization

8. KNOWLEDGE FOR ACTION
Depreciation and Amortization
• Accounting Procedure
– Depreciation is not deducted from the tangible asset account. Rather, it is
recorded in a Contra Asset Account (XA) called Accumulated Depreciation, which
• has a credit balance
• is subtracted from PP&E on the balance sheet to get the “Net Book Value”
– Amortization is often (but not always) deducted directly from the intangible asset
account
• Straight-line Depreciation:
– Depreciation expense = (Original Cost – Salvage Value) / Useful Life

9. KNOWLEDGE FOR ACTION
Super T-account
Assets
Liabilities
Contributed
Capital
Assets Liabilities & Shareholders’ Equity
Revenues
Retained Earnings
Dr.
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Cr.
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Dr.
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Cr.
+
Dr.
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Cr.
+
Cr.
+
Dr.
-
Cr.
+
Dr.
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Cr.
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Dr.
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Expenses
Contra Assets
Dr.
-
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