The Two Principles Of Accrual Accounting - 891 Words

In order to fully understand the accounting cycle and complete all eight steps, an accountant must understand the adjusting and closing process and be able to prepare trial balances. The unadjusted, adjusted, and post-closing trial balances are all prepared during the eight step accounting cycle. In order to maintain the most accurate financial statements, accrual accounting should be used. Accrual accounting is an â€Å"accounting method that records revenues when earned and expenses when incurred without regard to when cash is exchanged† (Kemp Waybright, 2013, p. 126). In order to master the eight step process of the accounting cycle, an accountant should use accrual accounting, understand the adjusting and closing process, and be able to†¦show more content†¦Adjusting entries are journal entries that adjust accounts to the correct balances. Accrual accounting records revenues and expenses when they are earned or incurred. Sometimes adjusting entries need to be ma de to adjust for unearned service revenue or depreciation expenses. The adjusting entries will correctly balance accounts and correct any understatement or overstatement in the revenue or expense accounts. If the adjusting entries are not made it can overstate or understate net income and completely misrepresent the financial statements. The fifth step in the accounting cycle is preparing an adjusted trial balance. Once all of the accounts have been adjusted, the balanced totals can be transferred over to the adjusted trial balance. The adjusted trial balance should give an accurate balance on all accounts. After completing the adjusted trial balance, the next step in the accounting cycle is preparing the financial statements. The totals from the adjusted trial balance will be used to prepare each financial statement. The seventh step is posting closing entries. Closing entries are journal entries that close revenues, expenses, and dividends. In order to close these accounts, the to tal balance needs to be entered into the opposite column of the accounts to zero them out. For instance, service revenue would be debited and retained earnings would be credited. All expense accounts and dividends wouldShow MoreRelatedAccrual Basis Vs. Cash Basis1737 Words   |  7 PagesAbstract This is a discussion of two types of accounting methods that most companies use, accrual basis or cash basis. A definition of both concepts and comparisons between the two methods will be discussed. In addition, it describes and examines the difference in the managing of those methods and which form of accounting method is more useful and beneficial to provide information to users for different purposes. 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