Summary, practice, and an exam-style warm-up¶
Every company that closes its books, from Riverbend Dog Grooming to Netflix, runs the same four extra steps this chapter added on top of the cycle you learned in Chapter 2: figure out what accrual accounting actually requires this period, adjust the accounts that timing left stale, build the statements from those adjusted balances, and close the books so next period starts clean. This section pulls all four back together, gives you room to practice each one again, and closes with a closed-book warm-up you should try before the real exam.
What you can now do¶
- LO3.1 Explain accrual-basis accounting: revenue is recorded when earned and expenses when incurred, in whichever period the cash happens to move.
- LO3.2 Compare cash-basis and accrual-basis net income for the same set of events, the way you did for a service company's month, and explain why the two numbers differ.
- LO3.3 Record adjusting entries for prepaid expenses, including straight-line depreciation, and for deferred revenue partially earned.
- LO3.3 Record adjusting entries for accrued expenses, including interest computed as principal times rate times time, and for accrued revenue earned but not yet billed.
- LO3.4 Post a set of adjusting entries and prepare an adjusted trial balance that still balances, the same way an unadjusted one does.
- LO3.5 Build the income statement, statement of stockholders' equity, and classified balance sheet from an adjusted trial balance, in that order.
- LO3.6 Record closing entries that zero out revenues, expenses, and Dividends into Retained Earnings, and prepare a post-closing trial balance.
Concept checklist¶
| Section | Concepts to have solid |
|---|---|
| 1 · Timing is everything | accrual-basis accounting, cash-basis accounting, revenue recognition, expense recognition (matching), accounting period |
| 2 · Adjusting what was paid or received in advance | adjusting entry, prepaid expense adjustment, depreciation (straight-line, Accumulated Depreciation, book value), deferred revenue adjustment |
| 3 · Adjusting for what hasn't been paid or billed yet | accrued expense, accrued revenue, interest formula (principal x rate x time) |
| 4 · The adjusted trial balance | adjusted trial balance |
| 5 · From adjusted trial balance to financial statements | classified balance sheet, statement order |
| 6 · Closing the books | temporary vs. permanent accounts, closing entries, post-closing trial balance |
Pause and work¶
Seven rounds, cycling through every skill from this chapter instead of drilling one at a time.
Sorting one month's events into cash-basis and accrual-basis net income.
Recording a full set of period-end adjusting entries from plain-English facts.
Computing accrued interest on a note and the adjusting entry it produces.
One more round of adjusting entries, fresh company, fresh facts, until it's routine.
Carrying an unadjusted trial balance through to an adjusted one that still balances.
Building all three financial statements from one adjusted trial balance.
Closing the books and finding the post-closing trial balance.
Exam-style warm-up¶
Five questions, closed book, ten minutes, no going back to check the sections. Grab paper and try them cold.
Bridge to Chapter 4¶
You can now take a company all the way from its unadjusted balances to a full set of financial statements. But look back at the first check in this warm-up: accrual net income and the change in cash were two different numbers for the same month, and that was not a mistake. Costco's net income and its cash from operations are both in the billions most years, and they are almost never the same billions. Net income tells you what was earned; it does not tell you where the cash went. Chapter 4 builds the fourth financial statement, the statement of cash flows, which takes that same accrual-basis net income and reconciles it back to the one number every lender and investor checks first: how much actual cash the company generated.