Lecture 2 - Accrual Accounting (cont.)

Accrual Accounting (continued)

Cash flows can be determined from examining the accrual data.

Prepaid expenses
Accrued expenses
Accrued revenues
Prepaid revenues

Adjusted Trial Balance

Accountants use a worksheet to work with the adjustments and then record them in the ledger accounts.

Then the books for the period are closed and a post-closing trial balance is calculated. The numbers from the post-closing trial balance feed the preparation of the financial statements. Sometimes the financial statements are made from the adjusted trial balance.

Closing Entries

Assets, liabilities and owners' equity (balance sheet accounts, aka permanent or "real accounts") are never zeroed out. They carry over.
Revenue and expenses (temporary or "nominal accounts") start at zero each period.
Dividends restart at zero each period even those it's an equity account.

Revenue accounts typically have credit balances, so debit them and balance that debit with a credit in a special account called Income Summary.

Expense accounts typically have debit balances, so credit them and balance it with a debit to Income Summary.

Dividends always have a debit balance, so credit the account and balance it with a debit to Retained Earnings.

This new account, Income Summary, has expenses on the left side and revenues on the right side. The balance is the Net Income. We need to zero out this account also. If it's a credit (right-hand, revenue) balance, zero it with a debit and balance that debit with a credit to Retained Earnings. If it's a debit (left-hand, expense) balance, zero it with a credit and balance it with a debit to Retained Earnings.

Then the Post-Closing Trial Balance is generated. The difference between the P-C Trial Balance and the Adjusted Trial Balance is that the P-C Trial Balance has all revenue, expense and dividend accounts zeroed out.