Adjustments: part of the accounting cycle

Janis Weber here, talking about financial accounting topics at the overview level. As I said today, we will be continuing the talks and this topic is about adjustments that we'll cover today. This is a critical piece of the accounting cycle that we need to understand at least some level in order to make good financial statements.

Before I start, I want to introduce myself. I have had two careers in accounting. The first one, as a CPA in public practice, and then following that, I converted to academia, and now I'm an accounting educator at a public university. I've enjoyed both of these adventures in accounting, and I really think it's a great field to study. So I'm hoping to spark some interest in you guys to make you want to study further.

The accounting cycle is something that runs throughout the accounting process. We haven't discussed it in any of the talks yet, but it's very prevalent. It's just that we haven't acknowledged it so far. The topic today will be what I'm thinking of as Step 3 in the accounting cycle. Now, just a caveat, there are a lot of ways to number the accounting cycle processes. So I have just chosen to group different activities to come up with a six-step accounting cycle. Other authors or speakers might come up with a totally different number. Many have more steps than this. Probably a few have less steps. But what we're doing is saying what has to happen within a period of accounting in order to make everything right. The first step would be, something happens in the company, and we have to analyze what just happened, so that we can make a journal entry to record it in the accounting records. We've talked about that in a previous talk. The second piece that has to happen is we have to post those journal entries to each individual account, so that we would know what the ending balance of every account is, and that is a step that includes pulling what we call a trial balance, which is just a summary of all the accounts and their balances. So that Step 2 is essential to be able to get the accounting process correct. Then we step into today's topic, which is the adjusting entries, the adjustments, in other words. That is where we take this original trial balance or a list of the balances of every account and analyze all those accounts to the degree that we can say, "Yes, that looks reasonable." So the adjusting entries are there for those instances where the balances in the original trial balance, do not actually reflect the current balance of those accounts. So we would look at each one and see if it needs an adjustment. If it does, we make a journal entry to record that. Then we pull another list or trial balance that is called an adjusted trial balance, which will then be used to form the financial statements from those balances, which will be our next steps after that. Step 4 will be those financial statements, followed by Step 5, which is the reset or closing of the accounts. Then Step 6 is to start all over, and we'll go back to Step 1. With all that, I will talk about the adjustments.