ACCOUNTING – FINALS101
Terms to Remember:
Adjusting Entries (AE)
Definition
-
Accrual Method / Principle
-
5th step of accounting cycle
First activity to perform at end of accounting
cycle.
Performed to correct balances / unadjusted trial
balance.
Heavily implementing Accrual Principle /
Method.
Are entries prepared at the end of the
accounting period to update some accounts
and ensure their accuracy before preparing the
financial statements
-
-
-
Also called Revenue Recognition Principle /
Expense Recognition Principle.
Income – recognized as earned at the time
service is rendered regardless of if cash is
collected.
Expense – recognized as incurred at the time
service is used up regardless of when cash is
paid.
Matching principle – expenses (representing
the efforts of the business) should be matched
against the income (representing the
accomplishments of the business).
Periodicity
STEPS IN ACCOUNTING CYCLE
-
Done before end of accounting cycle
Done after the end of accounting cycle
Gathering of Documents
Analyze and Record
Posting on the Ledger
Prepare a Trial Balance
Repeat Till END OF ACCOUNTING PERIOD
Prepare Worksheet for Adjustment and Financial
Statements(FA)
Prepare an Adjusted Trial Balance
Prepare Financial Statements
Journalize and Post the Closing Entries
Prepare a Post Closing Trial Balance
Journalize and Post the Reversing Entries
-
Basic Accounting period = 1 year
At the end of the chosen type of accounting
period, financial statements are prepared.
o 3 Types of accounting periodicity
1. Calendar accounting period
 12-month period that ends on 12/31
2. Fiscal accounting period
 12-month period ends on any month
other than 12/31.
3. Interim accounting period –
 Chosen division of life of the
business into uniform period.
Business discretion.
 Less than 1 year; Quarterly; SemiAnnual
Common accounts
being adjusted
that
are
1. Accrued Income – income already
earned but not yet collected.
2. Accrued Expenses – expenses already
incurred but not yet paid.
3. Unearned Income – advance collection
recorded (usually) as liability, but a
portion of which has already been
earned.
4. Prepaid Expense – advance payment
recorded as an asset but a portion of
which has already been used up.
5. Doubtful Accounts – Estimate amount
of client accounts of which will not or is
doubtful of being collected.
ACCOUNTING – FINALS101
6. Depreciation Expense – declining utility
value of asset cost that should be
expensed.
Unearned / Deferred Income
(Liability)
-
Methods
of Adjustment
and
additional information for each
The following below has clues on the
Unadjusted Trial Balance on what method was
used IF there are no adjustments for trial
balances but instead you need to create a new
account, use whatever is on the instructions or
the silent method (SM).
-
-
Transaction
Date
Accrued Income
-
-
-
-
income already earned but not yet collected.
Samples: Accounts Receivable, Interest
Receivable – interchangeable to Accrued
(Entry) Income.
For Interest Receivable: Formula for obtaining
is PRT = Principal x Rate x Time = Interest.
PERFORMA ENTRY:
Accrued Income
Income
xx
xx
Affect
Understated (SFP)
Understated (SFP)
Understated (SI)
Understated (SI)
-
-
-
expenses already incurred but not yet paid.
Samples: Salaries Payable, Interest payable,
Utilities
Payable,
Taxes
Payable
–
interchangeable to Accrued (Entry) Expense.
PERFORMA ENTRY:
Expense
Liability / Accrued __ Expense
xx
xx
IF NOT RECOGNIZED?
Accounting Value
Current Liabilities
Owner’s Equity
Expenses
Net Income
Affect
Understated (SFP)
Overstated (SFP)
Understated (SI)
Overstated (SI)
Income
Method
Prepaid Expense (Asset)
-
Accrued Expense (Liability)
Liability
Method
*Recognize all
*Recognize all
as income
as liability
Performa
(Actual Journal Performa
Entry
Entry (JE))
Entry
Cash
**
Cash
**
Income
Liability **
**
*Credit earned *Debit earned
portion
portion
Performa
Performa
Year-end (AE) Entry
Entry
Liability **
Income
**
Income
Liability
**
**
IF NOT RECOGNIZED?
Accounting Value
Current Assets
Owner’s Equity
Revenue
Net Income
Advance collection recorded (usually) as a
liability, but a portion of which has already been
earned.
Unearned service revenue, unearned rent
income, etc.
Liability Method (SM) – if not adjusted,
overstate = Unearned income, Understate =
income, owner’s equity.
Income Method – if not adjusted, overstate =
income, owner’s equity, Understate = Unearned
income.
-
-
Advance payment recorded as an asset but a
portion of which has already been used up.
Prepaid advertisement, supplies, prepaid rent,
prepaid insurance.
Asset method (SM): if not adjusted, understate
= Rent Expense, Overstate = net income,
owner’s equity, prepaid rent.
Expense method: if not adjusted, overstate =
Rent expense, Understate = net income,
owner’s equity, prepaid rent.
Transaction
Date
Asset
Method
*Recognize all
as asset
Performa
(Actual Journal
Entry
Entry (JE))
Asset
**
Cash
**
*Credit used
Year-end (AE)
portion
Expense
Method
*Recognize all
as expense
Performa
Entry
Expense **
Cash
**
*Debit unused
portion
ACCOUNTING – FINALS101
Performa
Entry
Expense
Asset
**
**
Performa
Entry
Asset
**
Expense **
Doubtful Accounts (Allowance
Method)
-
-
-
-
It can be defined as Bad Debts.
The estimated amount of client accounts of
which will not or is doubtful of being collected.
They are determined by estimation based on
the company’s experience or the experience of
other companies within the same industry.
At the adjusted trial balance, Net realizable
value is what is recorded instead of Accounts
receivable’s principal amount.
Allowance Method credits Accounts Receivable
to decrease it indirectly by using a contra asset
account called Allowance for Doubtful
Accounts.
PERFORMA ENTRY
Doubtful Accounts Expense
Allowance for Doubtful Accounts
xx
xx
Net Realizable Value
- Difference between Accounts Receivable
(Asset) and Allowance for Doubtful
Accounts (Contra Asset).
- Formula:
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
− 𝐴𝑙𝑙𝑜𝑤𝑎𝑛𝑐𝑒 𝑓𝑜𝑟 𝐷𝑜𝑢𝑏𝑡𝑓𝑢𝑙 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠
𝑁𝑒𝑡 𝑅𝑒𝑎𝑙𝑖𝑧𝑎𝑏𝑙𝑒 𝑉𝑎𝑙𝑢𝑒
ACCOUNTING – FINALS101
Depreciation Expense
-
-
declining utility value of asset cost that should
be expensed.
Not an adjustment of Market value (realizable
value if asset is sold).
𝐶𝑜𝑠𝑡−𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
= 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝐸𝑥𝑝𝑒𝑛𝑠𝑒
Initially, you will calculate the depreciation
expense, to add to the Accumulated
Depreciation (contra asset which is a decrease
in the cost of the asset) during Adjusting entries
period (EOY), once added, you will obtain the
Book Value.
Start depreciating the asset from the acquisition
date.
Scrap Value is not recorded until the end of the
useful life.
Book Value
- Difference
between
cost
and
accumulated depreciation.
- Represents the unexpired cost or the net
utility value of the asset.
Utility Value
- Ability to yield service of an Account
- Decreases over time due to wear and
tears, obsolescence, inadequacy.
Samples of Depreciation Accounts (Assets)
*Are accounts of which are being used for more
than 1 year (long-term).
*Also called Property, Plants and Equipment
(PPE)



Land
Bldg.
Equipment



Computer
Machines
Vehicle
ACCOUNTING – FINALS101