Introduction

Chapter 2 introduced the first four steps in the accounting cycle: identifying transactions, recording transactions, posting transactions in the ledger and preparing a trial balance from which financial statements are prepared. This chapter builds on those initial steps and examines the remaining four steps in the accounting cycle. These steps include the adjusting process that results in accrual based financial statements and the closing process that prepares the accounting system for the next accounting period. Both these processes occur at the end of an accounting period.

Chapter outline

After reading this chapter, you should be able to:

1. Explain how profit is measured and reported under the accrual and cash bases of accounting
2. Identify the four major circumstances in which adjusting journal entries are necessary
3. Record and post adjusting journal entries and prepare an adjusted trial balance and financial statements
4. Describe the purpose of the closing process and prepare closing entries