2.12 Accounting Cycle: Adjusted Trial Balance and Financial Statements

Step Six: Adjusted Trial Balance

• The adjusted trial balance is created after all adjusting journal entries are completed.
• It's similar to the unadjusted trial balance but reflects adjustments.
• The balances in the adjusted trial balance are used to prepare the financial statements.
• One more entry is needed before financial statements: calculation of income before taxes and income tax expense.

Step Seven: Prepare Financial Statements

• Financial statements are prepared in a specific order because they are interconnected.
• Information from one financial statement is required to prepare another.

Order of Financial Statements:

1. Income statement or statement of comprehensive income
2. Retained earnings statement or statement of changes in equity or shareholder equity statement
3. Balance sheet
4. Statement of cash flows

Review of Accounting Cycle (First Seven Steps)

1. An event occurs.
2. The event is recorded in the journal.
3. The event is posted to the ledger.
4. At the end of the period, an unadjusted trial balance is prepared.
5. Adjusting journal entries are made.
6. An adjusted trial balance is prepared.
7. Financial statements are created.

• The next part of the accounting cycle is the closing process.