The revenue recognition principle mandates that revenue be reported when earned, regardless of when the revenue is collected. For this reason, when revenue is earned but not yet collected, an accrual entry is required to accurately report revenue earned. For the same reason, when cash is collected, in advance of the earnings process, a deferral entry is required, to accurately report revenue earned.
Analyzing transactions (to enable journal entries) is the only analytical part of the accounting cycle. Analysis is required for both the original transaction entries and the adjusting entries. All of the other steps are just methodical posting of the entries, summarizing of the balances, regrouping of the accounts for financial reports, and closing of the accounts for year-end. Only the journal entries require decision-making processes.
Accruals—when cash has not moved, but it is time to record the transaction (examples: Accounts Payable or Accounts Receivable). Deferrals—when cash has moved, but it is not time to record the transaction (examples: Prepaid Insurance or Unearned Revenue).
Adjusting entries always include at least one income statement account and at least one balance sheet account, because the adjustment process is done to shift revenues and expenses between the Balance Sheet and the Income Statement, depending on whether it is the correct period to include that income or expense (report on the Income Statement) or not (report on the Balance Sheet).
An entry to adjust the supplies account to the $400 balance is needed; Debit Supplies Expense for 800; Credit Supplies for 800.
An entry to adjust the Prepaid Insurance account to $6,000 balance is needed; Debit Insurance Expense for 6,000; Credit Prepaid Insurance for 6,000.
The adjusted trial balance is the summary of account balances after the adjustments have been posted, so it reflects the corrected balances of all accounts.
(A) Income Statement; (B) Balance Sheet; (C) Balance Sheet; (D) Income Statement; (E) Retained Earnings Statement; (F) Balance Sheet