At which step of the accounting cycle are balances analyzed and adjusting entries, such as those for accrued expenses, recorded?

• A. Preparing the trial balance
• B. Adjusting entries step
• C. Closing entries step
• D. Posting to the ledger

Answer: (B)

Verified step by step guidance

1. Understand the accounting cycle: The accounting cycle is a series of steps that businesses follow to record and report financial transactions. Key steps include journalizing transactions, posting to the ledger, preparing a trial balance, making adjusting entries, preparing financial statements, and closing entries.
2. Identify the purpose of adjusting entries: Adjusting entries are made to ensure that revenues and expenses are recognized in the correct accounting period, following the accrual basis of accounting. These entries typically involve accrued expenses, accrued revenues, prepaid expenses, and depreciation.
3. Determine when adjusting entries are recorded: Adjusting entries are made after the trial balance is prepared but before the financial statements are finalized. This ensures that the trial balance reflects accurate and up-to-date account balances.
4. Analyze balances for adjustments: At this step, accountants review account balances to identify any discrepancies or unrecorded transactions that require adjustment. For example, accrued expenses (expenses incurred but not yet paid) are recorded as liabilities and expenses.
5. Recognize the step in the accounting cycle: The step where balances are analyzed and adjusting entries are recorded is specifically called the 'Adjusting entries step.' This step ensures that the financial statements are accurate and comply with accounting principles.