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ACCT Adjusting Entries

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143 views

ACCT Adjusting Entries

Uploaded by

Fiona Chelsea Merin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Adjusting entries

● Adjusting entries are entries made prior to the preparation of financial statements to update
certain accounts so that they reflect correct balances as of the designated time.
Purpose of adjusting entries
a. To take up unrecorded income and expense of the period.
b. To split mixed accounts into their real and nominal elements.
Real, Nominal and Mixed Accounts
a.Real Accounts (Permanent accounts) – accounts that are not closed at the end of the accounting
period. These accounts include all balance sheet accounts, except the “Owner’s drawings” account.
b.Nominal Accounts (Temporary accounts) – accounts that are closed at the end of the accounting
period. These accounts include all income statement accounts, drawings account, clearing accounts and
suspense accounts.
c.Mixed accounts – accounts that have both real and nominal account components. These accounts are
subject to adjustment.

Methods of Initial Recording of Income


1.Liability method – under this method, cash receipts from items of income are initially credited to a
liability account. At the end of the period, the earned portion is recognized as income while the
unearned portion remains as liability.
2.Income method – under this method cash receipts from items of income are initially credited to an
income account. At the end of the period, the unearned portion is recognized as liability while the
earned portion remains as income.

Types of Adjusting Entries


1.Accruals
a. Accrued Income – income already earned but not yet collected (receivable)
b. Accrued Expenses – expense already incurred but not yet paid (liability)
2.Deferrals
a. Pre-collection of Income – income already collected but not yet earned (liability)
b. Prepayment of Expenses – expenses are paid in advance (asset)
3.Provision for Estimated Uncollectible Accounts (Bad Debts)
4.Provision of Depreciation of Property Plant and Equipment
5.Adjustment on Merchandise Inventory
Methods of Initial Recording of Expenses
1.Asset method – under this method cash disbursements for items of expenses are initially debited to
an asset account. At the end of the period, the incurred portion (‘used up’ or ‘expired’) is recognized as
expense while the unused portion remains as asset.
2.Expense method – under this method, cash disbursements for items of expenses are initially debited
to an expense account. At the end of the period, the unused portion (‘not yet incurred’ or ‘unexpired’) is
recognized as asset while the incurred portion remains as expense.

1. Pre-collection of Income
To illustrate:
On October 1, 2021, Cordillera Realty Co. collected 12,000 from a tenant representing an advance
collection from building rental for one year. The accounting period ends on December 31, 2021.

2. Prepayments of Expenses
To illustrate:
On September 1, 2021, Visayan Commercial paid an insurance premium covering the period from
September 1, 2021 to September 1, 2022 in the amount of 3,600. The accounting period ends on
December 31, 2021.

3. Provision for Estimated Uncollectible Accounts (Bad Debts)


a. Allowance Method – Under this method, uncollectible account is being recognized in anticipation
that “what if the whole amount of Accounts Receivable cannot be collected?” An estimate should be
made to provide a certain percent as Allowance for Doubtful Accounts based on the company’s past
experiences. The estimated uncollectible accounts is being deducted to the Accounts Receivable to
arrive at the Estimated Realizable Value.
The most reasonable basis for calculating Uncollectible Account Expenses based on classified past due
accounts. The actual receivable being aged by category is multiplied by the uncollectible percentage to
arrive at a required estimate of uncollectible account expense.

AGING OF ACCOUNTS RECEIVABLE:


To illustrate:
Davao Ports and Stevedoring Services has an outstanding Accounts Receivable of 150,000 with recorded
Estimated Uncollectible Account of 2,000.

b. Direct Write-off Method – Under this method, the business adopts a policy of directly charging
to Uncollectible Accounts Expense( Bad Debts Expense) the account of the customer that could
not pay its balance anymore without providing Allowance for Doubtful Accounts.

To illustrate:
Mr. Ronald Desierto has left abroad leaving an unpaid account balance of 800.00.

4. Provision of Depreciation of Property Plant and Equipment


Methods of Computing Depreciation
There are three factors to be considered in determining depreciation. These are:
a. Acquisition Cost – the amount paid when the asset is being acquired. It includes the purchase
prices and other incidental cost of its acquisition.
b. Scrap Value – the estimated value of the asset at the end of its economic or useful life. This is
sometimes called the salvage value or residual value.
c. Estimated Economic Life or Useful Life – The estimated length of time usually stated in years
that the asset can be of use.
Straight-line method in computing depreciation using the formula:

To illustrate:

On Oct. 1, 2021, Metro Davao Commercial acquired air conditioning unit for office use costing 80,000.
Freight paid was 5,000 and cost of installation was 15,000. The estimated useful life is 5 years and the
salvage value is 10,000.

5. Adjustment on Merchandise Inventory


The most common method of inventory valuation that the accountants usually apply is to follow the
cost flow assumption from purchases to cost of goods sold.
To illustrate:

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