kwfa2e_ch03_im - Chapter 3 Overview Adjusting and Closing Entries This chapter introduces the student to the adjusting and closing processes The first

kwfa2e_ch03_im - Chapter 3 Overview Adjusting and Closing...

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Chapter 3: OverviewAdjusting and Closing EntriesThis chapter introduces the student to the adjusting and closing processes. The first part of the chapterexplains the revenue recognition and matching principles. Cash and accrual accounting are differentiated.Adjusting entries are defined. Accruals and deferrals are compared. The five categories of adjustingentries—accrued revenues, accrued expenses, unearned revenues, prepaid expenses, and depreciation—are illustrated and described in detail. The text provides examples of adjusting entries for accruingservice revenue, accruing salary expense, unearned (deferred) revenue, prepaid rent, supplies, anddepreciation of equipment. Accumulated depreciation and book value are explained. Students learn how to prepare an adjusted trial balance and then use it to prepare the financial statements.The relationship among the financial statements is emphasized. The last part of the chapter explains how the final major step in the accounting cycle—closing the books—prepares the accounts for use in the next accounting period. The authors discuss how closing entriestransfer revenues, expenses, and dividends into the retained earnings account. Temporary accounts andpermanent accounts are defined. Closing entries are illustrated. Students learn how to prepare a post-closing trial balance.The chapter concludes with a summary of the adjusting and closing processes. A Demo Doc problemreviews adjusting entries, the adjusted trial balance, preparation of the financial statements, closingentries, and the post-closing trial balance. Decision Guidelines assist the student in understanding theadjusting and closing processes.Learning ObjectivesAfter studying Chapter 3, your students should be able to:1.Understand the revenue recognition and matching principles.2.Understand the four types of adjustments and prepare adjusting entries. 3.Prepare financial statements from an adjusted trial balance. 4.Prepare closing entries and a post-closing trial balance.3-1
Teaching Outline1)Explain accrual accounting.a) Revenue recognition principleb) Matching principle2) Explain the purpose of adjusting entries. a) Accrualsb) Deferrals3) Journalize and post adjusting entries.i) Salary expensei) Unearned revenuei) Prepaid rentii) Suppliesiii) Depreciation4) Explain how financial statements are prepared from an adjusted trial balance.a) Exhibit 3-2, 3-3 Account balances and adjusted trial balanceb) Exhibit 3-4, 3-5, and 3-6 Financial Statements5) Discuss the closing process.a) Distinguish between temporary and permanent accountsb) Explain the purpose of closing entriesc) Explain the three-step process to close the temporary accountsd) Exhibit 3-7 Post-closing Trial Balance3-2
Key TopicsWhen explaining cash versus accrual accounting, it may be helpful to list examples of cash and accrualtransactions side by side in order to point out the differences.

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