Chapter 4 ( Worksheet and Financial

Statement Preparation) Next of the Adjusting Entries is Adjusted

Trial Balance then Financial Statements.
Two (2) Alternative Method of Keeping the
books of Account Adjusting Entries under Accrual Basis
1. Prepaid Expense/Expenses paid in
● Cash Basis advance
2. Unearned Income/Income received
> Income - Is recording only when cash is or collected in Advance - Advance
received (No matter when it is earned) payment from the Customer. Payment
received but didn't render any service
> Expense - Is recognized only when it is paid or goods to the customer.
(No matter when it is incurred) 3. Accrued Expense/Unpaid Expense -
Incurred but not yet paid .
> Not compliant with GAAP, much simpler than 4. Accrued Income/Uncollected Income
accrual basis but its financial statements - Earned but you haven't received the
result can be very misleading in the short run. cash yet.
5. Depreciation if Fixed Assets
> Commonly used in Small Business. 6. Estimated loss from Uncollectible
Account
● Accrual Basis 7. Ending merchandise inventory/unsold
> Income - Is recorded when it is earned even merchandise at the end of an
if cash hasn't been received accounting period

> Expense - Is recognized when it is incurred Prepaid Expense ( Deferred Expense )

even if it is not yet paid. - Are the payments or advance
payments made by an Entity.
> GAAP requires all Large business to use this
method (2) Alternative methods of recording the
payment
> Gives More accurate picture of profit and Asset Method and Expense Method
loss because it includes all revenues and
expenses, paid or unpaid. Original Entry:
A = Debit an asset account to record the
Adjusting Entries advance payment
- Journal entries that bring these B = Debit an Expense account to record the
accounts up to date at the end of the advance payment.
Accounting period.
All Adjusting entries affect at least one
nominal and One Real Account.
Adjusting Entry:
A = Debit an Expense Account for the portion Adjusting Entry:
of the payment already used up by the - DEBIT PREPAID INSURANCE
business or upon passage of the time has - CREDIT INSURANCE EXPENSE
already expired up to the date of the
adjusting entry. If an Expense account is in it's Normal
Balance it indicates the amount
E = Debit an asset account for the portion of corresponding to the used/Expired portion
the prepayment still unused or unexpired of the repayment.
which is the portion applicable to the next
accounting period. If an Asset Account is in its Normal
Balance it indicates the amount
Effect of Posting the Adjusting Entry to corresponding to the unused/unexpired
the General Ledger: portion of the repayment.
A = This will bring the balance of an asset
account equal to the unexpired or used (2) Alternative Method of recording an
portion of the repayment as of the end of the Advance Collection:
Current Account period. Liability Method and Income Method

The expense account is having a debit balance Original Entry:

equal to the used or expired portion of the L = Debit Credit and Credit Liability account
repayment to be recorded in the income to record the Advance Collection
statement of the current accounting period.
I = Debit Cash and Credit an Income Account
E= Same Effect as when you used the to record the Advance Collection
alternative method.
Adjusting Entry:
ASSET METHOD L = Debit to a Liability account to correct its
Original Entry: overstatement. Credit to an income account
- DEBIT PREPAID INSURANCE for the portion considered earned in the
- CREDIT CASH current accounting period

Adjusting Entry: I = Debit to an income account to correct its

- DEBIT INSURANCE EXPENSE overstatement. Credit to a liability account
- CREDIT PREPAID INSURANCE for the unearned portion of the advance
Collection or amount of income applicable to
EXPENSE METHOD the next accounting period
Original Entry:
- DEBIT INSURANCE EXPENSE
- CREDIT CASH
Effect of Posting the Adjusting Entry to > Also known as the Property, Plant, and
the General Ledger: Equipment
> Are those tangible assets of a relatively
L = This will bring the balance of a liability permanent nature which are owned by the
account equal to the unearned portion of the business, to be used in their operations and
advance Collection as of the end of the are not intended for sale.
current accounting counting period.
PAS 16, PARAGRAPH 6
I = Same effect as when you use the - Tells about the composition of
alternative method. property, plant and equipment.

LIABILITY METHOD These assets will be used for more than a

Original Entry: year but they also decrease in value as it ages
- DEBIT CASH or as time passes by due to wear and tear
- CREDIT UNEARNED RENT INCOME from operations. Also decreases in value due
to inadequate and obsolescence.
Adjusting Entry:
- DEBIT UNEARNED RENT INCOME Plant Assets
- CREDIT RENT INCOME - Are a special type of deferred
expense.
INCOME METHOD
Original Entry: Depreciation
- DEBIT CASH - The gradual decrease in value of fixed
- CREDIT RENT INCOME assets due to use, inadequate or
obsolescence.
Adjusting Entry: - Except those land, and art collection
- DEBIT RENT INCOME and other collections.
- CREDIT UNEARNED RENT INCOME
Depreciation Expense and Crediting the
If an Income Account is on its normal Contra-Asset account Accumulated
Balance (Credit) it indicates the amount Depreciation:
corresponding to the earned portion of the - Depreciation Is an allocation of the
amount collected in advance. cost of a fixed asset over its
estimated useful life.
If a Liability Account is in its Normal
Balance (Credit) it indicates the amount Depreciating Fixed Assets
corresponding to the Unearned portion of - Is another type of adjustment to be
the amount collected in advance. made at the end of an accounting
period. (Presented at the end of the
Fixed Assets calendar year)
 is expressed in terms of # of Years
or oftentimes in # of months.
Physical Depreciation ● Salvage or Scrap Value - Fixed asset
- Occurs from wear and tear while in can be sold at the end of its useful
use and from the action of the life (Estimated useful life)
weather.
Formula in computing the Annual (12 months)
Functional Depreciation or Yearly yearly Depreciation :
- Occurs when a fixed asset is no longer
able to provide service at the level (Annual Depreciation) Depreciation Expense
for which it was intended. per Year = Original Cost - Salvage Value
(Depreciated on time) Estimated Useful Life in Year

Adjusting Entry to record Depreciation Or:

- Is usually made at the end of the Annual Depreciation rate × Depreciable Cost
accounting period.
To compute the annual depreciation rate:
Straight-line Method of Depreciation
- These are several methods of Annual Depreciation rate
depreciating fixed assets and the = Amount of annual Depreciation
simplest one. Depreciable Cost
Or:
Appropriate Depreciation Method 1________
- Is selected based on the pattern of Estimated Useful Life
utilization of a class of property,
plant, equipment. Formula for Depreciable Cost:

Factors that should be considered in Depreciable Cost = Original Cost - Salvage

computing depreciation: Value/Scrap Value

● Original Cost - refers to the invoice Depreciation Cost

price less discounts and/or allowances - Is the amount that is spread over the
plus the incidental costs related to its assets useful life as depreciation
acquisition or purchase such as VAT, Expense.
freight and installation cost. If an Asset has no salvage value, then it's
depreciable cost is equal to its original cost.
● Estimated Useful Life - The
Accountant (Engineer) has to use or Example problem in the book!
apply his own judgment in estimating
the useful life of a fixed asset which
 - This method uses a
predetermined percentage of
Estimated Uncollectible Accounts: receivables to estimate the
- These are accounts receivable that allowance for doubtful
are deemed unlikely to be collected. accounts. The allowance is
adjusted to bring the balance
Matching Principle: to the calculated amount.
- This principle states that
expenses should be recognized Aging the Receivables:
in the same period as the - This method analyzes the age of
revenue they help generate. In outstanding receivables, classifying
the context of uncollectible them as either not yet due or past
accounts, the expense is due. A sliding scale of percentages,
recognized when the related based on industry experience, is
sales are realized, even if the applied to each age group to estimate
actual collection of the the uncollectibles. The total amount
receivables is uncertain. determined is then used to adjust the
allowance balance.
Methods for Estimating Uncollectible
Accounts: In inventory adjustment until the end adto
nalang sa book Kay gikapoy nako
Sales Percentage Method: NYAHAHAHAHAHAH
- When the base used in
computing the charge to
doubtful accounts is sales
(Either gross profit or net
sales), the debit goes to
doubtful accounts expense and
the credit to the allowance
for doubtful accounts.

Percentage of Receivables Method:

- This method uses a
percentage of accounts
receivable to estimate the
amount of uncollectible
accounts.