Chapter 4
The
Accounting
Cycle:
Accruals and
Deferrals
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
4-1
Introduction
In Chapter 3, you learned that we record
revenue when it is earned.
 For example, when a hairdresser cuts a
customer’s hair, revenue is earned when the hair
is cut and the fee is collected.
 Suppose the same passenger boards a Carnival
Corporation cruise ship to the Bahamas using
a ticket that was purchased six months in
advance. At what point should the cruise line
recognize that ticket revenue has been earned?

4-2
Introduction: Carnival Corporation
In its balance sheet, Carnival Corporation reports
a $3.3 billion liability account called Customer
Deposits. As passengers purchase tickets in
advance, Carnival Corporation credits the
Customer Deposits account for an amount equal
to the cash it receives. It is not until passengers
actually use their tickets that the company
reduces this liability account and records
Passenger Ticket Revenue in its income
statement.
4-3
Timing Differences
For most companies, revenue is not always
earned as cash is received, nor is an expense
necessarily incurred as cash is disbursed.
 Timing differences between cash flows and the
recognition of revenue and expenses are
referred to as accruals and deferrals.
 In this chapter, we examine how accounting
information must be adjusted for accruals and
deferrals prior to the preparation of financial
statements.

4-4
Step 4 in the Accounting Cycle

We covered the first three steps of the
accounting cycle in Chapter 3:
◦ Recording transactions
◦ Posting transactions
◦ Preparing a trial balance
KEY POINT
In this chapter, we focus solely upon the fourth step of the accounting
cycle—performing the end-of-period adjustments required to
measure business income.
4-5
The Need for Adjusting Entries
Certain transactions affect the revenue or
expenses of two or more accounting periods.
 Adjusting entries are needed at the end of each
accounting period to make certain that
appropriate amounts or revenue and expense
are reported in the company’s income
statement.

4-6
Categories of Adjusting Entries
Most adjusting entries fall into one of four general
categories:
1. Converting assets to expenses.
2. Converting liabilities to revenue.
3. Accruing unpaid expenses.
4. Accruing uncollected revenue.
4-7
Introduction: Converting Assets to
Expenses
A cash expenditure (or cost) that will benefit more than one
accounting period usually is recorded by debiting an asset
account (for example, Supplies, Unexpired Insurance, and so
on) and by crediting Cash.
 The asset account created actually represents the deferral
(or the postponement) of an expense.
 In each future period that benefits from the use of this asset,
an adjusting entry is made to allocate a portion of the asset’s
cost from the balance sheet to the income statement as an
expense.
 This adjusting entry is recorded by debiting the appropriate
expense account (for example, Supplies Expense or
Insurance Expense) and crediting the related asset account
(for example, Supplies or Unexpired Insurance).

4-8
Introduction: Converting Liabilities to
Revenue
A business may collect cash in advance for services to be
rendered in future accounting periods.
 Transactions of this nature are usually recorded by debiting
Cash and by crediting a liability account (typically called
Unearned Revenue or Customer Deposits). Here, the liability
account created represents the deferral (or the postponement)
of a revenue.
 In the period that services are actually rendered (or that goods
are sold), an adjusting entry is made to allocate a portion of the
liability from the balance sheet to the income statement to
recognize the revenue earned during the period.
 The adjusting entry is recorded by debiting the liability
(Unearned Revenue or Customer Deposits) and by crediting
Revenue Earned (or a similar account) for the value of the
services.

4-9
Introduction: Accruing Unpaid
Expenses



An expense may be incurred in the current accounting
period even though no cash payment will occur until a
future period.
These accrued expenses are recorded by an adjusting
entry made at the end of each accounting period.
The adjusting entry is recorded by debiting the
appropriate expense account (for example, Interest
Expense or Salary Expense) and by crediting the related
liability (for example, Interest Payable or Salaries
Payable).
4-10
Introduction: Accruing Uncollected
Revenue



Revenue may be earned (or accrued) during the current
period, even though the collection of cash will not
occur until a future period.
Unrecorded earned revenue, for which no cash has
been received, requires an adjusting entry at the end of
the accounting period.
The adjusting entry is recorded by debiting the
appropriate asset (for example, Accounts Receivable or
Interest Receivable) and by crediting the appropriate
revenue account (for example, Service Revenue Earned
or Interest Earned).
4-11
Adjusting Entries and Timing
Differences
In an accrual accounting system, there are often
timing differences between cash flows and the
recognition of expenses or revenue.
 A company can pay cash in advance of incurring
certain expenses or receive cash before
revenue has been earned.
 Likewise, it can incur certain expenses before
paying any cash or it can earn revenue before
any cash is received.

4-12
Adjusting Entries and Timing
Differences (cont.)

These timing differences, and the adjusting entries that
result from them, are summarized as follows.
◦ Adjusting entries to convert assets to expenses result
from cash being paid prior to an expense being
incurred.
◦ Adjusting entries to convert liabilities to revenue result
from cash being received prior to revenue being
earned.
◦ Adjusting entries to accrue unpaid expenses result
from expenses being incurred before cash is paid.
◦ Adjusting entries to accrue uncollected revenue result
from revenue being earned before cash is received.
4-13
Adjusting Entries
Adjusting
entries are
needed whenever
revenue or expenses
affect more than one
accounting
period.
Every
adjusting
entry involves a
change in either a
revenue or expense
and an asset
or liability.
4-14
Converting Assets to Expenses
End of Current Period
Prior Periods
Transaction
Pay cash in
advance of
incurring
expense
(creates an
asset)
Current Period
Future Periods
Adjusting Entry
 Recognizes portion of
asset consumed as
expenses, and
 Reduces balance of
asset account
4-15
Example: Insurance Policy
$18,000 Insurance Policy
Coverage for 12 Months
$1,500 Monthly Insurance Expense
Mar. 1
Feb.28
On March 1, Overnight Auto Service
purchased a one-year insurance policy
for $18,000.
4-16
Insurance Policy: Initial Entry
Initially, costs that benefit more than one
accounting period are recorded as assets.
GENERAL JOURNAL
Date
Mar.
Account Titles and Explanation
1 Unexpired Insurance
Cash
P
R Debit
Credit
18,000
18,000
Purchased a one-year insurance policy.
4-17
Insurance: Adjusting Entry
The costs are expensed as they are
used to generate revenue.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Monthly Adjusting Entry for Insurance
Mar. 31 Insurance Expense
1,500
Unexpired Insurance
1,500
Adjusting entry to record insurance expense for March.
4-18
Insurance: Financial Statement Impact
Balance Sheet
Cost of assets
that benefit
future periods.
Income Statement
Cost of assets
used this period to
generate revenue.
Unexpired Insurance
3/1
18,000 3/31 1,500
Bal. 16,500
Insurance Expense
3/31 1,500
4-19
Your Turn: Insurance
You as a Car Owner
Car owners typically pay insurance premiums six
months in advance. Assume that you recently
paid your six-month premium of $600 on
February 1 (for coverage through July 31). On
March 31, you decide to switch insurance
companies.You call your existing agent and ask
that your policy be canceled. Are you entitled to
a refund? If so, why, and how much will it be?
4-20
The Concept of Depreciation
Depreciation is the systematic allocation of
the cost of a depreciable asset to expense.
Fixed
Asset
(debit)
On date
when initial
payment is
made . . .
Cash
(credit)
The asset’s
usefulness is
partially
consumed
during the
period.
Depreciation
Expense
(debit)
At the end of
the period . . .
Accumulated
Depreciation
(credit)
4-21
Depreciation Is Only an Estimate
On Jan. 22, 2018, Overnight Auto Service
purchased a building with a useful life of
240 months for $36,000.
Using the straight-line method, calculate
the monthly depreciation expense.
Depreciation
Cost of the asset
expense (per =
Estimated useful life
period)
$36,000
=
$150/month
240
4-22
Case in Point
How long does a building last? For purposes of
computing depreciation expense, most
companies estimate about 30 or 40 years.Yet the
Empire State Building was built in 1931, and it’s
not likely to be torn down anytime soon. As you
might guess, it often is difficult to estimate in
advance just how long depreciable assets may
remain in use.
4-23
Example: Depreciation Expense
Overnight Auto Service would make the
following adjusting entry.
GENERAL JOURNAL
Date
Account Titles and Explanation
Feb. 28 Depreciation Expense: Building
Accumulated Depreciation: Building
P
R Debit
Credit
150
150
To record one month's depreciation.
Contra-asset
4-24
Example 2: Depreciation Expense
Overnight depreciates its $12,000 of tools
and equipment over 60 months. Calculate
monthly depreciation and make the journal
entry.
GENERAL JOURNAL
Date
Account Titles and Explanation
P
R Debit
Feb. 28 Depreciation Expense: Tools and Equipment
Credit
200
Accumulated Depreciation: Tools and Equipment
200
To record one month's depreciation.
$12,00060 months = $200 per month
4-25
Computing Book Value for Assets
We will assume that Overnight did not record any
depreciation expense in January because it
operated for only a small part of the month.
December 31, 2018 Balance Sheet Presentation
Building
$ 36,000
Less: Accum. depr.
1,650
Tool and Equipment $ 18,000
Less: Accum. depr.
2,200
34,350
15,800
Cost − Accumulated Depreciation = Book Value
4-26
Converting Liabilities to Revenue
End of Current Period
Prior Periods
Transaction
Collect cash in
advance of
earning revenue
(creates a
liability)
Current Period
Future Periods
Adjusting Entry
 Recognizes portion
earned as revenue, and
 Reduces balance of
liability account
4-27
Example: Rental Revenue
$3,000 Rental Contract
Coverage for 3 Months
$1,000 Monthly Rental Revenue
Dec. 1
Feb. 28
On December 1, Overnight received $3,000
in advance for a three-month rental contract.
4-28
Rental Revenue: Initial Entry
Initially, revenues that benefit more than one
accounting period are recorded as liabilities.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dec. 1 Cash
Unearned Rent Revenue
Debit
Credit
3,000
3,000
Collected $3,000 in advance for rent.
4-29
Rental Revenue: Adjusting Entry
Over time, the revenue is recognized
as it is earned.
GENERAL JOURNAL
Date
Account Titles and Explanation
P
R Debit
Credit
Monthly Adjusting Entry for Rent Revenue
Dec. 31 Unearned Rent Revenue
1,000
Rental Revenue
1,000
Adjusting entry to record rental revenue for December.
4-30
Rental Revenue: Financial Statement
Impact
Balance Sheet
Liability for
future periods.
Unearned Rental Revenue
12/31 1,000 12/1 3,000
Bal. 2,000
Income Statement
Revenue earned
this period.
Rental Revenue
12/31 1,000
4-31
Accruing Unpaid Expenses
End of Current Period
Prior Periods
Current Period
Adjusting Entry
 Recognizes expenses
incurred, and
 Records liability for
future payment
Future Periods
Transaction
Pay cash in
settlement of
liability.
4-32
Example: Wages Owed
$1,950 Wages
Expense
Monday,
Dec. 30
Friday,
Jan. 3
Tuesday,
Dec. 31
On Dec. 31, Overnight owes wages of
$1,950. Payday is Friday, Jan. 3.
4-33
Wages Owed: Initial Entry
Initially, an expense and a liability are
recorded.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dec. 31 Wages Expense
P
R Debit
Credit
1,950
Wages Payable
1,950
Adjusting entry to accrue wages owed to employees.
4-34
Wages Owed: Financial Statement
Impact
Balance Sheet
Liability to be
paid in a future
period.
Wages Payable
12/31 3,000
Income Statement
Cost incurred this
period to generate
revenue.
Wages Expense
12/31 1,950
4-35
Wage Expense Calculation
$2,397 Weekly Wages
$1,950 Wages
Expense
Monday,
Dec. 30
Tuesday,
Dec. 31
$447 Wages
Expense
Friday,
Jan. 3
Let’s look at the entry for Jan. 3.
4-36
Wages Owed: Payment Entry
The liability is extinguished when the
debt is paid.
GENERAL JOURNAL
Date
Account Titles and Explanation
Jan. 3 Wages Expense (for Jan.)
Wages Payable (accrued in Dec.)
Cash
P
R Debit
Credit
447
1,950
2,397
Weekly payroll for Dec. 30–Jan. 3.
4-37
Accruing Uncollected Revenue
End of Current Period
Prior Periods
Current Period
Adjusting Entry
 Recognizes revenue
earned but not yet
recorded, and
 Records receivable
Future Periods
Transaction
Collect cash in
settlement of
receivable
4-38
Example: Service Revenue
$750 Repair
Service
Revenue
Dec. 15
Dec. 31
Jan. 15
On Dec. 31, Airport Shuttle Service owes
Overnight half of its maintenance agreement.
The one-month fee of $1,500 is to be paid on
the 15th day of January.
4-39
Accrued Service Revenue Entry
Initially, the revenue is recognized and
a receivable is created.
GENERAL JOURNAL
Date
Account Titles and Explanation
P
R Debit
Dec. 31 Accounts Receivable
Repair Service Revenue
Credit
750
750
Adjusting entry to record accrued service revenue.
4-40
Accrued Revenue: Financial Statement
Impact
Balance Sheet
Receivable to
be collected in a
future period.
Accounts Receivable
12/31
750
Income Statement
Revenue earned
this period.
Repair Service Revenue
12/31
750
4-41
Accrued Revenue Calculation
$1,500 Total Revenue
$750 Service
Revenue
Dec. 15
$750 Service
Revenue
Dec. 31
Jan. 15
Let’s look at the entry for January 15.
4-42
Accrued Revenue: Collection Entry
The receivable is collected in a future
period.
GENERAL JOURNAL
Date
Account Titles and Explanation
P
R Debit
Jan. 15 Cash
Credit
1,500
Repair Service Revenue (for Jan.)
750
Accounts Receivable (accrued Dec. 31)
750
To record cash collected for monthly maintenance fee.
4-43
Accruing Income Taxes Expense: The
Final Adjusting Entry
As a corporation earns taxable income, it
incurs income taxes expense, and also a
liability to governmental tax authorities.
GENERAL JOURNAL
Date
Account Titles and Explanation
Dec. 31 Income Taxes Expense
Income Taxes Payable
Debit
Credit
4,020
4,020
Adjusting entry to record income taxes accrued in December.
4-44
International Case in Point
Corporate income tax rates vary around the world. A
recent survey shows that rates range from 9 percent in
Montenegro to 55 percent in the United Arab Emirates.
Worldwide, the average tax rate is 24 percent. The average
rate in the United States is 40 percent, which is the
highest rate among OECD countries.* In addition to
corporate income taxes, some countries also (1) withhold
taxes on dividends, interest, and royalties, (2) charge valueadded taxes at specified production and distribution
points, and (3) impose border taxes such as customs and
import duties. A few countries, including the Bahamas, have
no corporate taxes.
*KPMG Corporate Tax Rate Survey (2015).
4-45
Supporting the Matching Principle
The matching principle underlies such
accounting practices as:
◦ Depreciating plant assets.
◦ Measuring the cost of supplies used.
◦ Amortizing the cost of unexpired insurance
policies.
 All end-of-the-period adjusting entries involving
expense recognition are applications of the
matching principle.

4-46
Matching Costs
Costs are matched with revenue in one of two ways.
1. Direct association of costs with specific revenue
transactions. The ideal method of matching revenue
with expenses is to determine the actual amount of
expense associated with specific revenue transactions.
However, this approach works only for those costs
and expenses that can be directly associated with
specific revenue transactions. Commissions paid to
salespeople are an example of costs that can be
directly associated with the revenue of a specific
accounting period.
4-47
Matching Costs (cont.)
2.
Systematic allocation of costs over the useful life of the
expenditure. Many expenditures contribute to the
earning of revenue for a number of accounting periods
but cannot be directly associated with specific revenue
transactions. Examples include the costs of insurance
policies and depreciable assets. In these cases,
accountants attempt to match revenue and expenses
by systematically allocating the cost to expense over
its useful life. Straight-line depreciation is an example
of a systematic technique used to match the cost of an
asset with the related revenue that it helps to earn
over its useful life.
4-48
Materiality Concept
Materiality refers to the relative importance
of an item or an event.
 An item is considered material if knowledge of
the item might reasonably influence the
decisions of users of financial statements.
 Accountants must be sure that all material
items are properly reported in financial
statements.

4-49
Materiality Concept (cont.)
Immaterial items are those of little or no
consequence to decision makers.
◦ The financial reporting process should be
cost-effective—that is, the value of the
information should exceed the cost of its
preparation.
◦ Immaterial items may be handled in the
easiest and most convenient manner.
4-50
Materiality and Adjusting Entries
The concept of materiality enables accountants to shorten
and simplify the process of making adjusting entries in
several ways. For example:
1. Businesses purchase many assets that have a very low
cost or that will be consumed quickly in business
operations. Examples include wastebaskets, lightbulbs,
and janitorial supplies. The materiality concept permits
charging such purchases directly to expense accounts,
rather than to asset accounts. This treatment
conveniently eliminates the need to prepare adjusting
entries to depreciate these items.
4-51
Materiality and Adjusting Entries (cont.)
2.
3.
Some expenses, such as telephone bills and utility bills,
may be charged to expenses as the bills are paid,
rather than as the services are used. Technically this
treatment violates the matching principle. However,
accounting for utility bills on a cash basis is very
convenient, as the monthly cost of utility service is
not even known until the utility bill is received. Under
this cash basis approach, the amount of utility expense
recorded each month is actually based on the prior
month’s bill.
Adjusting entries to accrue unrecorded expenses or
unrecorded revenue may actually be ignored if the
dollar amounts are immaterial.
4-52
Materiality and Professional Judgment
Whether a specific item or event is material is a
matter of professional judgment. In making these
judgments, accountants consider several factors:
1. The size of the organization.
2. The cumulative effect of numerous
immaterial events.
3. Nature of the item.
4. Dollar amount of the item.
4-53
Your Turn: Materiality
You as Overnight Auto’s Service Department
Manager
You just found out that Betty, one of the best mechanics
that you supervise for Overnight Auto, has taken home
small items from the company’s supplies, such as a
screwdriver and a couple of cans of oil. When you talk to
Betty, she suggests that these items are immaterial to
Overnight Auto because they are not recorded in the
inventory and they are expensed when they are
purchased. How should you respond to Betty?
4-54
Effects of the Adjusting Entries
Income Statement
Adjustment
Type I
Converting Assets to Expenses
Type II
Converting Liabilities to Revenue
Type III
Accruing Unpaid Expenses
Type IV
Accruing Uncollected Revenue
Revenue Expenses
No effect Increase
Increase
Assets
Liabilities
Decrease Decrease No effect
No effect Increase
No effect Increase
Increase
Net
Income
Balance Sheet
No effect Decrease
Decrease No effect Increase
No effect Increase
Increase
No effect
Owners'
Equity
Decrease
Increase
Decrease
Increase
4-55
Overnight’s Adjusted Trial Balance

After these
adjustments are
posted to the
ledger, Overnight’s
ledger accounts
will be up-to-date
(except for the
balance in the
Retained Earnings
account).
4-56
Ethics, Fraud, & Corporate Governance
Improper accounting for operating costs has often
resulted in the SEC bringing action against companies for
fraudulent financial reporting. Expenditures that are
expected only to benefit the year in which they are made
should be expensed (deducted from revenue in the
determination of net income for the current period).
Companies that engage in fraud will often defer these
expenditures by capitalizing them (they debit an asset
account reported in the balance sheet instead of an
expense account reported in the income statement).
4-57
Ethics, Fraud, & Corporate Governance
(cont. 1)
Prior to Enron and WorldCom, one of the largest
financial scandals in U.S. history occurred at Waste
Management. Waste Management was the world’s
largest waste services company. The improper accounting
at Waste Management lasted for approximately five years
and resulted in an overstatement of earnings during this
time period of $1.7 billion. Investors lost over $6 billion
when Waste Management’s improper accounting was
revealed.
4-58
Ethics, Fraud, & Corporate Governance
(cont. 2)
Waste Management’s scheme for overstating earnings was
simple. The company deferred recognizing normal
operating expenditures as expenses until future periods.
These improper deferrals were accomplished in a number
of different ways, many of which involved improper
accounting for long-term assets. For example, Waste
Management incurred costs in buying and developing land
to be used as landfills (i.e., garbage dumps).
4-59
Ethics, Fraud, & Corporate Governance
(cont. 3)
Capitalizing these costs—treating them as long-term
assets—was proper accounting. However, in certain cases,
the company was not able to secure the necessary
governmental permits and approvals to use the purchased
land as intended. In these cases, the costs that had been
capitalized and reported as landfills in the balance sheet
should have been expensed immediately, thereby reducing
net income for the year in which the company’s failure to
obtain government permits and approvals occurred.
4-60
Learning Objective Summary LO4-1
LO4-1: Explain the purpose of adjusting entries.
The purpose of adjusting entries is to allocate
revenue and expenses among accounting periods in
accordance with the realization and matching
principles. These end-of-period entries are necessary
because revenue may be earned and expenses may be
incurred in periods other than the period in which
related cash flows are recorded.
4-61
Learning Objective Summary LO4-2
LO4-2: Describe and prepare the four basic types
of adjusting entries. The four basic types of adjusting
entries are made to (1) convert assets to expenses, (2)
convert liabilities to revenue, (3) accrue unpaid
expenses, and (4) accrue uncollected revenue. Often a
transaction affects the revenue or expenses of two or
more accounting periods. The related cash inflow or
outflow does not always coincide with the period in
which these revenue or expense items are recorded.
Thus, the need for adjusting entries results from timing
differences between the receipt or disbursement of
cash and the recording of revenue or expenses.
4-62
Learning Objective Summary LO4-3
LO4-3: Prepare adjusting entries to convert
assets to expenses. When an expenditure is made
that will benefit more than one accounting period, an
asset account is debited and cash is credited. The asset
account is used to defer (or postpone) expense
recognition until a later date. At the end of each
period benefiting from this expenditure, an adjusting
entry is made to transfer an appropriate amount from
the asset account to an expense account. This
adjustment reflects the fact that part of the asset’s
cost has been matched against revenue in the
measurement of income for the current period.
4-63
Learning Objective Summary LO4-4
LO4-4: Prepare adjusting entries to convert liabilities to
revenue. Customers sometimes pay in advance for services to
be rendered in later accounting periods. For accounting purposes,
the cash received does not represent revenue until it has been
earned. Thus, the recognition of revenue must be deferred until it
is earned. Advance collections from customers are recorded by
debiting Cash and by crediting a liability account for unearned
revenue. This liability is sometimes called Customer Deposits,
Advance Sales, or Deferred Revenue. As unearned revenue
becomes earned, an adjusting entry is made at the end of each
period to transfer an appropriate amount from the liability
account to a revenue account. This adjustment reflects the fact
that all or part of the company’s obligation to its customers has
been fulfilled and that revenue has been realized.
4-64
Learning Objective Summary LO4-5
LO4-5: Prepare adjusting entries to accrue
unpaid expenses. Some expenses accumulate (or
accrue) in the current period but are not paid until a
future period. These accrued expenses are recorded
as part of the adjusting process at the end of each
period by debiting the appropriate expense (e.g.,
Salary Expense, Interest Expense, or Income Taxes
Expense), and by crediting a liability account (e.g.,
Salaries Payable, Interest Payable, or Income Taxes
Payable). In future periods, as cash is disbursed in
settlement of these liabilities, the appropriate liability
account is debited and Cash is credited.
4-65
Learning Objective Summary LO4-6
LO4-6: Prepare adjusting entries to accrue
uncollected revenue. Some revenues are earned
(or accrued) in the current period but are not
collected until a future period. These revenues are
normally recorded as part of the adjusting process at
the end of each period by debiting an asset account
called Accounts Receivable, and by crediting the
appropriate revenue account. In future periods, as
cash is collected in settlement of outstanding
receivables, Cash is debited and Accounts Receivable
is credited.
4-66
Learning Objective Summary LO4-7
LO4-7: Explain how the principles of
realization and matching relate to adjusting
entries. Adjusting entries are the tools by which
accountants apply the realization and matching
principles. Through these entries, revenues are
recognized as they are earned, and expenses are
recognized as resources are used or consumed in
producing the related revenue.
4-67
Learning Objective Summary LO4-8
LO4-8: Explain the concept of materiality. The
concept of materiality allows accountants to use
estimated amounts and to ignore certain accounting
principles if these actions will not have a material
effect on the financial statements. A material effect is
one that might reasonably be expected to influence
the decisions made by the users of financial
statements. Thus, accountants may account for
immaterial items and events in the easiest and most
convenient manner.
4-68
Learning Objective Summary LO4-9
LO4-9: Prepare an adjusted trial balance and
describe its purpose. The adjusted trial balance
reports all of the balances in the general ledger after
the end-of-period adjusting entries have been made
and posted. Generally, all of a company’s balance sheet
accounts are listed, followed by the statement of
retained earnings accounts and, finally, the income
statement accounts. The amounts shown in the
adjusted trial balance are carried forward directly to
the financial statements.
4-69
End of Chapter 4
4-70