Adjusting Journal Entries
Content
ADJUSTING JOURNAL ENTRIES – entries required at the end of the period to update the accounts before financial statements are prepared Purposes • To record any revenue earned or expense incurred that have not been recorded prior to the end of the period • To apportion revenues and expenses properly between accounting periods affected Characteristics • Adjusting Entries are based on the concepts of accrual accounting – states that revenues should be recognized when earned, regardless when cash is received and expense be recognized when incurred, regardless when cash is paid • Every adjusting entry involves the recognition of either revenues or expenses and a corresponding change in either assets or liabilities Adjusting Entries and GAAP • Revenue Realization Principle – states that revenue be recognized at the time foods are sold or services are rendered • Matching Principle – states that revenue earned during an accounting period is matched with the expenses incurred in generating this revenue Year-end adjustments 1. Accrued Expense 2. Accrued Income 3. Prepaid Expense 4. Unearned Income 5. Depreciation 6. Doubtful Accounts 7. Merchandise Inventory Accruals – recognizes unrecorded revenues and expenses • Accrued Expense • Accrued Income 1. Accrued expenses – expenses already incurred but not yet paid Purpose • To record unrecognized expense Adjustment required • Recognizes expense incurred but not yet paid • Records liability account
Adjusting Entry Expense Liability (Payable) * Liability = Payable db? So to make it easy EXPENSE-PAYABLE lagi pag Accrued Expenses. Irerecord yung gastos na di pa nabayaran. 2. Accrued Income – Revenues already earned but not yet collected Purpose • To record unrecognized revenue Adjustment required • Recognizes revenue earned but not yet recorded • Records Asset (Income) account Adjusting Entry Asset Income * Asset = Receivable or Cash db? So to make it easy RECEIVABLE/CASHINCOME lagi pag Accrued Income. Irerecord yung income na hindi pa narecord. SO SA ACCUALS, IT’S ALWAYS “EXPENSE-PAYABLE” “RECEIVABLE/CASH-INCOME”. YUN TATANDAAN NIYO Deferrals – delays the recognition of revenues and expenses • Prepaid Expense • Unearned Income 3. Prepaid Expenses – expenses already paid but not yet incurred Purpose • To allocate a portion of the asset to expense Nature of initial transaction • Paid future expense in advance OR
ASSET METHOD: recorded the advance payment as asset Adjustment Required • Recognizes portion of asset used as expense • Reduces balance of Asset Account Journal Entry: Asset (Prepaid) Cash or Liability (Payable) Adjusting Entry: Expense Asset (Prepaid)
Ung nagamit na portion ng prepaid expense for the year, gagawing expense. So babawasan yung prepaid para marecord yung nagamit na. ung nagamit na, magiging expense. Yung amount ng expense, un yung ibabawas sa “prepaid” (kaya naka.credit na ang prepaid na debit sa journal entry). So ang icocompute dito is yung part ng asset na nagamit na. Yung amount ng expense, nakadepend sa amount ng “prepaid” na nagamit na. Example: kunwari may nirecord ka na prepaid asset na 5,000. Kung 2,000 lang nagamit mo, dapat yung balance ng prepaid rent is 3,000 by the end of the accounting period. So ang mangyayari, babawasan mo yung prepaid expense ng 2,000 sa AJE. Kaya, credit na yung prepaid asset. T-account Prepaid Expense Debit Credit 5,000 JE 2,000 AJE _______________________ 3,000 prepaid expense for the end of the accounting period EXPENSE METHOD: recorded the advance payment as expense Adjustment Required • Recognizes portion of expense unused as asset • Reduces balance of Expense Account Journal Entry: Expense Cash or Liability Adjusting Entry: Asset (Prepaid) Expense
Sa expense method naman, baliktad. Irerecord mo yung part ng expense na hindi pa nagamit during the year. Yung icocompute mo dito ang expense. yung asset, nakadepend dun sa expense. Kung ano yung expense, yun na rin yung asset.
Example: kunwari may nirecord ka na Expense na 5,000. Kung 2,000 lang nagamit mo, dapat yung balance ng expense is 2,000. So ang mangyayari, babawasan mo yung expense ng 3,000 sa AJE. Yung 3000 naman, malilipat sa Prepaid Expense for next year. Gets? Kaya, credit na yung prepaid expense. T-account “” Expense Debit 5,000 Credit JE AJE Expense for the accounting period 3,000 _______________________ 2,000
Sa asset method, irerecord yung part na nagamit na sa AJE. Sa expense method naman, irerecord yung hindi pa nagamit sa AJE. 4. Unearned Revenue – revenues already received but not yet earned. (meaning: nagbayad na yung customer, pero di mo pa nagagawa o di pa tapos ang service. Pampagulo kasi yung description nila eh. haha) Purpose • To allocate a portion of the liability to revenue Nature of initial transaction (Journal Entry) • Collected cash from customers in advance LIABILITY METHOD: recorded the advance receipt as liability Adjustment Required to • Recognize portion of the liability earned as revenue • Reduce balance of liability account Journal Entry: Cash/Receivable Unearned Revenue Adjusting Entry: Unearned Revenue Income
Sa liability method, since nakarecored siya as unearned income (meaning utang sa part ng company) sa journal entry, sa AJE irerecord mo kung magkano yung nagawa mo na na service (meaning yung nabawas sa utang mo na service sa kanila). Ung income nakadepend sa amount na nagawa mo ng service.
Example: yung nirecord mo sa unearned income is 5,000. Tapos ang nagawa mo lang talaga is 2,000. Ung 2,000 na yun overstated liability na. So ang irerecord mo sa adjusting entry is 2,000 para 3,000 lang matitira sa utang mo. Gets? Kung titignan mo yung t-account niyan. Ganito Unearned Revenue (Liability) Debit Credit 5000 JE 2000 AJE ________________________ 3000 Remaining Liability
INCOME METHOD: recorded the advance receipt as income/revenue Adjustment Required to • Recognize portion of income unearned as liability • Reduce balance of revenue account Journal Entry: Cash Income/Revenue Adjusting Entry: Income/Revenue Unearned Revenue
Sa income method, since nakarecord siya as income kahit na di pa naman talaga income yun kasi di mo pa nagagwa yung service, kailangan iadjust. Sobra kasi yung income pag hindi inadjust. So, sa AJE, kailangan bawasan yung income. So hahanapin mo yung amount na hindi mo pa nagagawa para ang marerecord ay yung amount na nagawa mo na. Example: yung nirecord mo sa income is 5,000. Tapos ang nagawa mo lang talaga is 2,000. Ung 3,000 overstated income yun. So ang irerecord mo sa adjusting entry is 3,000 para 2,000 lang matitira. Gets? Or magulo pa rin… hmmm.. eto mas clear. Kung titignan mo yung t-account niyan. Ganito “something” Income Credit 5000 JE 3,000 AJE _________________________ 2000 Income for the year Debit So by recording yung amount na di mo pa nagagawa na service sa AJE, makukuha mo yung tamang income ng nagawa ng service within the year.
Sa liability method, yung kukunin mo is yung amount na nagawa mo ng service para sa AJE. Sa income method, kukunin mo yung amount na di mo pa nagagawa para sa AJE. 5. Depreciation – Gradual decrease in value of fixed assets due to use, inadequacy (decrease in value caused by a business expansion such that the asset although in good condition can no longer fulfill the needs of the business) and obsolescence (decrease in value caused by introduction of new models or inventions) Purpose • To offset a reasonable portion of the asset’s cost against revenue in each period of the asset’s useful life Adjusting Entry Depreciation Expense Accumulated Depreciation Depreciation Expense – Assigned portion of the cost of fixed asset to the period during which it is used Accumulated Depreciation – total accumulated amount of depreciations that has been recorded for the fixed asset Straight-line method – depreciation method wherein an equal portion of the asset’s cost is allocated to depreciation expense in every period of the asset’s estimated useful life
Note: be careful sa fractional depreciation (depreciations computed for less than a year). Madaming ganyan sa exam.
Scrap Value/Salvage Value/Residual Value – estimated amount at which the asset can be sold or exchanged at the end of its serviceable life; an estimate of the asset’s value at the end of its benefit period.
Net Carrying Value – difference between the cost of the fixed asset and the accumulated depreciation 6. Bad Doubtful Accounts – loss due to worthless or bad accounts caused by unforeseen events or errors in granting credit (I’m not sure kung ACTBAS1 to or hindi) Methods of Accounting for Doubtful Accounts 1. Allowance Method – recognizes estimated losses in the period in which the credit sales are made regardless of when the specific accounts are determined to be uncollectible 2. Direct write-off method – recognizes a loss only when specific accounts are determined to be uncollectible Purpose • To record an estimated amount of uncollectible accounts resulting from failure to collect accounts receivable in the period in which the related sales took place. Adjustment Required Bad Debts Expense Allowance for Bad Debts Doubtful Accounts Expense – amount of receivables estimated to be doubtful of collection Allowance for Doubtful Accounts – a valuation account which is deducted from the Accounts Receivable Methods of estimating probable loss from Doubtful Accounts a. Income Statement Approach Bad Debts is based on percentage of Gross sales or credit sales Bad Debts estimate = Gross Sales x percentage Bad Debts is based on percentage of Net Sales (or Net Credit Sales) Bed Debts estimate = Gross Sales less Sales, Returns & Allowances and Sales Discount x percentage b. Balance Sheet Approach Allowance for Bad Debts is based on percentage of Accounts Receivable Bad Debts estimate = Accounts Receivable x percentage Less: Allowance for Doubtful Accounts, beg. Allowance for Bad Debts is increased by a certain percentage of Accounts Receivable
Bad Debts estimate =
Accounts Receivable x percentage
Allowance for Bad Debts is increased to a certain percentage of Accounts Receivable Bad Debts estimate = Accounts Receivable x percentage Less: Allowance for Doubtful Accounts, beg.
Aging of Accounts Receivable – thorough analysis of every Accounts Receivable account to determine past due accounts and establish estimates for uncollectible accounts Bad debts estimate = Amount based on Aging Analysis Less: Allowance for Doubtful Accounts, beg. Net Realizable Value – difference between the Accounts Receivable and the Allowance for Doubtful Accounts Writing-Off Worthless Accounts – occurs when an account is definitely known to be uncollectible JE: Allowance for Bad Debts Accounts Receivable Write off
Recovery of worthless accounts – occurs when an account previously written-off as uncollectible is later paid by the customer JE: Accounts Receivable Allowance for Bad Debts Recovery Cash Accounts Receivable Collection
SUMMARY:
TYPE OF ADJUSTMEN T Accrued Expense REASON FOR ACCOUNTS ADJUSTMENT BEFORE ADJUSTMENT Expenses have Expenses been incurred understated but not yet paid Liabilities in cash or not understated yet recorded Revenues have Assets understated been earned Income but not yet understated collected or recorded ASSET METHOD (Prepaid Assets overstated expense initially Expenses recorded in understated asset accounts have been used) EXPENSE METHOD (Prepaid expenses initially recorded in expense accounts have not been used) LIABILITY METHOD (Unearned Revenues initially recorded in liability accounts have been earned) Assets understated Expenses overstated JOURNAL ENTRY ADJUSTING ENTRY Dr. Expense Cr. Payable
Accrued Income
Dr. Receivable Cr. Income
Prepaid Expense
Dr. (Prepaid)
Asset Dr. Expense Cr. Asset Cr. (Prepaid) Cash/Payable
Dr. Expense Cr. Cash/Payable
Dr. Asset (Prepaid) Cr. Expense
Unearned Income
Liabilities overstated Revenues understated
Dr. Cash Dr. Unearned Cr. Unearned revenue R Cr. Income
INCOME METHOD (Unearned Revenues initially recorded in revenue accounts have not been earned)
Liabilities understated Revenues overstated
Dr. Cash Cr. Income
Dr. Income Cr. Unearned R
Adjusting Entry Expense Liability (Payable) * Liability = Payable db? So to make it easy EXPENSE-PAYABLE lagi pag Accrued Expenses. Irerecord yung gastos na di pa nabayaran. 2. Accrued Income – Revenues already earned but not yet collected Purpose • To record unrecognized revenue Adjustment required • Recognizes revenue earned but not yet recorded • Records Asset (Income) account Adjusting Entry Asset Income * Asset = Receivable or Cash db? So to make it easy RECEIVABLE/CASHINCOME lagi pag Accrued Income. Irerecord yung income na hindi pa narecord. SO SA ACCUALS, IT’S ALWAYS “EXPENSE-PAYABLE” “RECEIVABLE/CASH-INCOME”. YUN TATANDAAN NIYO Deferrals – delays the recognition of revenues and expenses • Prepaid Expense • Unearned Income 3. Prepaid Expenses – expenses already paid but not yet incurred Purpose • To allocate a portion of the asset to expense Nature of initial transaction • Paid future expense in advance OR
ASSET METHOD: recorded the advance payment as asset Adjustment Required • Recognizes portion of asset used as expense • Reduces balance of Asset Account Journal Entry: Asset (Prepaid) Cash or Liability (Payable) Adjusting Entry: Expense Asset (Prepaid)
Ung nagamit na portion ng prepaid expense for the year, gagawing expense. So babawasan yung prepaid para marecord yung nagamit na. ung nagamit na, magiging expense. Yung amount ng expense, un yung ibabawas sa “prepaid” (kaya naka.credit na ang prepaid na debit sa journal entry). So ang icocompute dito is yung part ng asset na nagamit na. Yung amount ng expense, nakadepend sa amount ng “prepaid” na nagamit na. Example: kunwari may nirecord ka na prepaid asset na 5,000. Kung 2,000 lang nagamit mo, dapat yung balance ng prepaid rent is 3,000 by the end of the accounting period. So ang mangyayari, babawasan mo yung prepaid expense ng 2,000 sa AJE. Kaya, credit na yung prepaid asset. T-account Prepaid Expense Debit Credit 5,000 JE 2,000 AJE _______________________ 3,000 prepaid expense for the end of the accounting period EXPENSE METHOD: recorded the advance payment as expense Adjustment Required • Recognizes portion of expense unused as asset • Reduces balance of Expense Account Journal Entry: Expense Cash or Liability Adjusting Entry: Asset (Prepaid) Expense
Sa expense method naman, baliktad. Irerecord mo yung part ng expense na hindi pa nagamit during the year. Yung icocompute mo dito ang expense. yung asset, nakadepend dun sa expense. Kung ano yung expense, yun na rin yung asset.
Example: kunwari may nirecord ka na Expense na 5,000. Kung 2,000 lang nagamit mo, dapat yung balance ng expense is 2,000. So ang mangyayari, babawasan mo yung expense ng 3,000 sa AJE. Yung 3000 naman, malilipat sa Prepaid Expense for next year. Gets? Kaya, credit na yung prepaid expense. T-account “” Expense Debit 5,000 Credit JE AJE Expense for the accounting period 3,000 _______________________ 2,000
Sa asset method, irerecord yung part na nagamit na sa AJE. Sa expense method naman, irerecord yung hindi pa nagamit sa AJE. 4. Unearned Revenue – revenues already received but not yet earned. (meaning: nagbayad na yung customer, pero di mo pa nagagawa o di pa tapos ang service. Pampagulo kasi yung description nila eh. haha) Purpose • To allocate a portion of the liability to revenue Nature of initial transaction (Journal Entry) • Collected cash from customers in advance LIABILITY METHOD: recorded the advance receipt as liability Adjustment Required to • Recognize portion of the liability earned as revenue • Reduce balance of liability account Journal Entry: Cash/Receivable Unearned Revenue Adjusting Entry: Unearned Revenue Income
Sa liability method, since nakarecored siya as unearned income (meaning utang sa part ng company) sa journal entry, sa AJE irerecord mo kung magkano yung nagawa mo na na service (meaning yung nabawas sa utang mo na service sa kanila). Ung income nakadepend sa amount na nagawa mo ng service.
Example: yung nirecord mo sa unearned income is 5,000. Tapos ang nagawa mo lang talaga is 2,000. Ung 2,000 na yun overstated liability na. So ang irerecord mo sa adjusting entry is 2,000 para 3,000 lang matitira sa utang mo. Gets? Kung titignan mo yung t-account niyan. Ganito Unearned Revenue (Liability) Debit Credit 5000 JE 2000 AJE ________________________ 3000 Remaining Liability
INCOME METHOD: recorded the advance receipt as income/revenue Adjustment Required to • Recognize portion of income unearned as liability • Reduce balance of revenue account Journal Entry: Cash Income/Revenue Adjusting Entry: Income/Revenue Unearned Revenue
Sa income method, since nakarecord siya as income kahit na di pa naman talaga income yun kasi di mo pa nagagwa yung service, kailangan iadjust. Sobra kasi yung income pag hindi inadjust. So, sa AJE, kailangan bawasan yung income. So hahanapin mo yung amount na hindi mo pa nagagawa para ang marerecord ay yung amount na nagawa mo na. Example: yung nirecord mo sa income is 5,000. Tapos ang nagawa mo lang talaga is 2,000. Ung 3,000 overstated income yun. So ang irerecord mo sa adjusting entry is 3,000 para 2,000 lang matitira. Gets? Or magulo pa rin… hmmm.. eto mas clear. Kung titignan mo yung t-account niyan. Ganito “something” Income Credit 5000 JE 3,000 AJE _________________________ 2000 Income for the year Debit So by recording yung amount na di mo pa nagagawa na service sa AJE, makukuha mo yung tamang income ng nagawa ng service within the year.
Sa liability method, yung kukunin mo is yung amount na nagawa mo ng service para sa AJE. Sa income method, kukunin mo yung amount na di mo pa nagagawa para sa AJE. 5. Depreciation – Gradual decrease in value of fixed assets due to use, inadequacy (decrease in value caused by a business expansion such that the asset although in good condition can no longer fulfill the needs of the business) and obsolescence (decrease in value caused by introduction of new models or inventions) Purpose • To offset a reasonable portion of the asset’s cost against revenue in each period of the asset’s useful life Adjusting Entry Depreciation Expense Accumulated Depreciation Depreciation Expense – Assigned portion of the cost of fixed asset to the period during which it is used Accumulated Depreciation – total accumulated amount of depreciations that has been recorded for the fixed asset Straight-line method – depreciation method wherein an equal portion of the asset’s cost is allocated to depreciation expense in every period of the asset’s estimated useful life
Note: be careful sa fractional depreciation (depreciations computed for less than a year). Madaming ganyan sa exam.
Scrap Value/Salvage Value/Residual Value – estimated amount at which the asset can be sold or exchanged at the end of its serviceable life; an estimate of the asset’s value at the end of its benefit period.
Net Carrying Value – difference between the cost of the fixed asset and the accumulated depreciation 6. Bad Doubtful Accounts – loss due to worthless or bad accounts caused by unforeseen events or errors in granting credit (I’m not sure kung ACTBAS1 to or hindi) Methods of Accounting for Doubtful Accounts 1. Allowance Method – recognizes estimated losses in the period in which the credit sales are made regardless of when the specific accounts are determined to be uncollectible 2. Direct write-off method – recognizes a loss only when specific accounts are determined to be uncollectible Purpose • To record an estimated amount of uncollectible accounts resulting from failure to collect accounts receivable in the period in which the related sales took place. Adjustment Required Bad Debts Expense Allowance for Bad Debts Doubtful Accounts Expense – amount of receivables estimated to be doubtful of collection Allowance for Doubtful Accounts – a valuation account which is deducted from the Accounts Receivable Methods of estimating probable loss from Doubtful Accounts a. Income Statement Approach Bad Debts is based on percentage of Gross sales or credit sales Bad Debts estimate = Gross Sales x percentage Bad Debts is based on percentage of Net Sales (or Net Credit Sales) Bed Debts estimate = Gross Sales less Sales, Returns & Allowances and Sales Discount x percentage b. Balance Sheet Approach Allowance for Bad Debts is based on percentage of Accounts Receivable Bad Debts estimate = Accounts Receivable x percentage Less: Allowance for Doubtful Accounts, beg. Allowance for Bad Debts is increased by a certain percentage of Accounts Receivable
Bad Debts estimate =
Accounts Receivable x percentage
Allowance for Bad Debts is increased to a certain percentage of Accounts Receivable Bad Debts estimate = Accounts Receivable x percentage Less: Allowance for Doubtful Accounts, beg.
Aging of Accounts Receivable – thorough analysis of every Accounts Receivable account to determine past due accounts and establish estimates for uncollectible accounts Bad debts estimate = Amount based on Aging Analysis Less: Allowance for Doubtful Accounts, beg. Net Realizable Value – difference between the Accounts Receivable and the Allowance for Doubtful Accounts Writing-Off Worthless Accounts – occurs when an account is definitely known to be uncollectible JE: Allowance for Bad Debts Accounts Receivable Write off
Recovery of worthless accounts – occurs when an account previously written-off as uncollectible is later paid by the customer JE: Accounts Receivable Allowance for Bad Debts Recovery Cash Accounts Receivable Collection
SUMMARY:
TYPE OF ADJUSTMEN T Accrued Expense REASON FOR ACCOUNTS ADJUSTMENT BEFORE ADJUSTMENT Expenses have Expenses been incurred understated but not yet paid Liabilities in cash or not understated yet recorded Revenues have Assets understated been earned Income but not yet understated collected or recorded ASSET METHOD (Prepaid Assets overstated expense initially Expenses recorded in understated asset accounts have been used) EXPENSE METHOD (Prepaid expenses initially recorded in expense accounts have not been used) LIABILITY METHOD (Unearned Revenues initially recorded in liability accounts have been earned) Assets understated Expenses overstated JOURNAL ENTRY ADJUSTING ENTRY Dr. Expense Cr. Payable
Accrued Income
Dr. Receivable Cr. Income
Prepaid Expense
Dr. (Prepaid)
Asset Dr. Expense Cr. Asset Cr. (Prepaid) Cash/Payable
Dr. Expense Cr. Cash/Payable
Dr. Asset (Prepaid) Cr. Expense
Unearned Income
Liabilities overstated Revenues understated
Dr. Cash Dr. Unearned Cr. Unearned revenue R Cr. Income
INCOME METHOD (Unearned Revenues initially recorded in revenue accounts have not been earned)
Liabilities understated Revenues overstated
Dr. Cash Cr. Income
Dr. Income Cr. Unearned R
