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

Accrued Expense an expense that is already ____ Expense XXXXX

incurred but not yet paid in cash and not yet recorded Accrued ____ Expense XXXXX
in the books. To record expenses incurred
- prior to adjustment, liabilities and expenses are but not yet paid
understated
- 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 ASSET

Prepaid Expenses XXXXX Expense XXXXX

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

2. Expense Method (Nominal-Account) the prepayments are initially recorded as EXPENSES

Expense XXXXX Prepaid Expense XXXXX

Cash XXXXX Expense XXXXX
To record advance payments To record adjusting entry
of expenses (*** UNEXPIRED PORTION***)
- 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
1. Liability Method (Real-Account)

Cash XXXXX Unearned Income XXXXX

Unearned Income XXXXX Income XXXXX
To record advance collection from To record adjusting entry
customers (*** EARNED PORTION***)
(*** EXPIRED PORTION***)
2. Income Method (Nominal-Account)

Cash XXXXX Income XXXXX

Income XXXXX Unearned Income XXXXX
To record advance collection from To record adjusting entry
customers (*** UNEARNED PORTION***)
(*** EXPIRED PORTION***)
- 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
Interest Expense XXXXX
note is deducted in advance
Discount on Noted Payable XXXXX

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 measurement of the cost that has expired
 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 when ther is Doubtful Accounts Expense XXXXX
certainty that the accounts Accounts Receivable XXXXX
receivable is already worthless
or uncollectible
2. Allowance Method
- estimate of amounts which are
deemed to be uncollectible is Doubtful Accounts Expense XXXXX
made at the end of each Allowance for Doubtful Accounts XXXXX
accounting even before the
accounts become uncollectible

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

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