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Chapter 3: The Accounting Cycle at the End of the Period

About 45 minutes of reading and working. Read in order, and stop at every Pause and work box. The problems are the point, the prose is the setup.

The question this chapter answers

Netflix pays billions up front for shows it will stream for years. When a season drops, has Netflix incurred an expense? All of it, some of it, none of it yet? Nothing changes hands at month end, and yet the answer decides whether the company reports a profit. End-of-period accounting exists to answer exactly that kind of question, and this chapter is where you learn to do it.

What you'll be able to do

  • LO3.1. Explain accrual-basis accounting: revenue is recorded when earned and expenses when incurred, whichever period the cash moves in. (we'll spend class time here)
  • LO3.2. Compare accrual-basis and cash-basis net income for the same set of events and explain why they differ.
  • LO3.3. Record the four kinds of adjusting entries: prepaid expenses (including depreciation), deferred revenues, accrued expenses, and accrued revenues. (we'll spend class time here)
  • LO3.4. Post adjusting entries and prepare an adjusted trial balance.
  • LO3.5. Prepare the income statement, statement of stockholders' equity, and classified balance sheet from an adjusted trial balance. (we'll spend class time here)
  • LO3.6. Record closing entries, explain why temporary accounts are closed, and prepare a post-closing trial balance.

Sections

  1. Timing is everything
  2. Adjusting what was paid or received in advance
  3. Adjusting for what hasn't been paid or billed yet
  4. The adjusted trial balance
  5. From adjusted trial balance to financial statements
  6. Closing the books
  7. Summary, practice, and an exam-style warm-up

How to read this chapter

  • Check yourself boxes are ungraded. Answer before you reveal, then read the explanation even if you were right.
  • Pause and work boxes come in three flavors: a worked example, a faded example where you finish the last step, and a your turn with fresh numbers. Hit New numbers until it feels routine.
  • Nothing you type here is recorded anywhere. Practice as much as you like.
  • The last section has a practice set and a five-question, closed-book warm-up. Do the warm-up with no notes and a timer. It's the best predictor of how the exam will feel.