ADJUSTING ENTRIES

- adjustments used to bring the assets, liabilities, revenues and expenses up-to-date
at the end of accounting period
- prepared at the end of accounting period\

ACCRUALS
Accrued Income/Revenue a revenue
Accrued ____ Income XXXXX
that is considered earned but not yet
____ Income XXXXX
received in cash and not recorded in the
To record income earned
books.
but not yet collected
- prior to adjustment, assets and revenues
are understated
- asset-revenue account relationship exists

Accrued Expense an expense that is ____ Expense XXXXX

already incurred but not yet paid in cash Accrued ____ Expense
and not yet recorded in the books. XXXXX To record
- prior to adjustment, liabilities and expenses incurred
expenses are understated but not yet paid
- liability-expense account relationship
exists

DEFERRALS
PREPAYMENT
Prepaid Expenses advanced payments of business expenses or supplies to be
used in business operations
expires either with the passage of time or through usage
Asset-Expense account relationship
2 Methods to Account
1. Asset Method (Real-Account) the prepayments are initially recorded as

Prepaid Expenses XXXXX Expense XXXXX

Cash Prepaid Expense XXXXX
XXXXX To record adjusting entry
To record advance payments (*** EXPIRED
of expenses PORTION***)
ASSET

Expense XXXXX Prepaid Expense XXXXX

Cash Expense XXXXX
XXXXX To record adjusting entry
To record advance payments (*** UNEXPIRED
of expenses PORTION***)
2. Expense Method (Nominal-Account) the prepayments are initially recorded
as EXPENSES
- at the end of the accounting period, the ASSET/EXPENSE account is overstated
prior to any adjustments.
- the adjusting entry is prepared to separate the expired and unexpired portion of
the payment.
EXPIRED portion EXPENSE and UNEXPIRED portion - ASSET

PRECOLLECTION
Unearned Income - income received or collected in advance, before they are
earned
- represents advanced collections from customers
- Liability-Income account relationship
2 Methods to Account

Cash XXXXX Unearned Income XXXXX

Unearned Income Income
XXXXX XXXXX
To record advance collection from To record adjusting entry
customers (*** EARNED
1. Liability Method (Real-Account)
2. Income Method (Nominal-Account)
- at the end of the accounting period, the LIABILITY/INCOME account is overstated
prior to any adjustments.
- the adjusting entry is prepared to separate the expired and unexpired portion of
the payment.
- EARNED portion INCOME and UNEARNED portion LIABILITY
AMORTIZATION OF DISCOUNT
- interest on discounting of own note is deducted in advance

Cash XXXXX Income XXXXX

Income Unearned
XXXXX Income XXXXX
To record advance collection from To record adjusting entry
customers (*** UNEARNED
DEPRECIATION
- is the systematic allocation of the cost of fixed asset over its estimated useful life
Depreciation as a Cost Allocation provides for the proper matching expenses with
revenues in accordance with the matching principle.
- Depreciation is a non-cash expenditure
- Usefulness may decline because of wear and tear or obsolescence
- Land is the only plant asset that is not depreciated
- Depreciation is an estimate
rather than a factual Interest Expense XXXXX
measurement of the cost Discount on Noted Payable
that has expired XXXXX

Depreciation Expense XXXXX

Accumulated Depreciation
XXXXX To
record depreciation for the
period

3 factors that affect the computation of Depreciation are:

1. Cost all expenditures necessary to acquire the asset & make it ready for
intended use
2. Useful Life - use judgment in determining useful life, estimate of the
expevted life based on need for repair, service life & vulnerability to
obsolescence.
3. Salvage Value or Scrap or Residual Value estimate of the assets
value at the end of its useful life
Straight-Line Method
- depreciation is the same for each year of the assets useful life
- measured solely by the passage of time

Annual Depreciation Expense = Depreciation Cost ( Cost Salvage Value) /

Estimated Useful Life

ESTIMATED UNCOLLECTIBLE ACCOUNTS

- when accounts receivable become long overdue, some portions of such
receivable becomes doubtful as to collectability
Doubtful Accounts/Bad Debts - expense arising from selling on credit, due to
accounts which are most likely to be uncollected
1. Direct Write Off Method
- doubtful accounts
expense is recorded only Doubtful Accounts Expense XXXXX
when ther is certainty that Accounts Receivable
the accounts receivable is XXXXX
already worthless or uncollectible
2. Allowance Method
- estimate of amounts which are deemed to be uncollectible is made at
the end of each accounting
Doubtful Accounts Expense
even before the accounts XXXXX
become uncollectible Allowance for Doubtful Accounts

Approaches:
1. Percent of Sales (not used in the Philippines) - apportions a
percentage of sales for a given period as the estimated uncollectible
accounts expense
*Income Statement Approach, uses IS accounts (net sales, sales), get
the doubtful accounts expense and not the allowance
2. Percent of Accounts Receivable apportions a percentage of the
ending Accounts Receivable as the required balance of the allowance
for bad debts at the end of accounting period
* Statement of Financial Statements Approach
3. Aging of Accounts Receivable this method calculated a more
scientific computation of the allowance for doubtful accounts because
it is based on classified past due receivables for a given period which is
multiplied by its specific uncollectible percentage
- the results of the aging analysis serves as the balance of the
allowance for doubtful accounts at the end of the period

WRITE OFF & RECOVERY

Write off Accounts Receivable
- occurs when an entity has exhausted all possible means to collect a past
due account & collection seems impossible
- if an entity uses the allowance method, the write off of Accounts Receivable
is effected through the Allowance
account Allowance for Doubtful Accounts XXXXX
Accounts Receivable
** Net Realizable value does not XXXXX To
change record write off of Accounts Receivable
Recovery of Accounts Written Cash XXXXX
off Miscellaneous Income
- never affect Accounts Receivable & /Bad Debts Expense
Allowance for Doubtful Accounts XXXXX
- will only effect cash & profit/loss
To record recovery of accounts written

MERCHANDISE INVENTORY
- only for periodic inventory system
- in other books: first closing entry Merchandise Inventory XXXXX
- to establish the balance of Income Summary
merchandise inventory at the year-end XXXXX
where physical count will be made