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Step 5
Learning Objectives
LO1 Define and explain what is an accrual basis accounting is
LO2 Explain periodicity concept and give the revenue and expense
recognition principles
LO3 Explain the importance and nature of adjusting entries
LO4 Explain and illustrate accruals and deferrals
LO5 Discuss the effects of omitting adjustments
ACCOUNTING CYCLE
Step 1 Identify Transactions
Step 2 Record Transactions in Journal
Step 3 Post Journal to Ledger
Step 4 Prepare Trial Balance
Step 5 Record Adjusting Entries
Step 6 Prepare Adjusted Trial Balance
Step 7 Prepare Financial Statements
Step 8 Post Closing Entries
Accrual Basis of Accounting
Expense recognition:
Expense is recognized in the period in which related revenue is recognized (Matching Principle).
-Direct association
-Systematic and rational allocation
-Immediately
Periodicity Concept
❑ Depreciation
Dr. Depreciation expense xx
Cr. Accumulated depreciation xx
Practice!
Classify the following items (PE) prepaid expense, (UR) unearned revenue, (AR) accrued revenue, or (AE) accrued expense.
Accrued revenues
a. decrease assets.
b. decrease liabilities.
c. increase assets.
d. increase liabilities.
Practice!
Accrued expenses
a. decrease assets
b. decrease liabilities.
c. increase assets.
d. increase liabilities.
Practice!
The word “accrued” implies which of the following?
a. Money has been received and the service has been provided.
b. Money has been paid but no services have been provided.
c. Money has been paid for a service to be performed during the next
period.
d. Money has not been paid or received but the service has already been
performed or rendered.
Practice
Illustration of Accrual Adjustments
On May 31, 2020, the following data were accumulated to assist the accountant in preparing the adjusting
entries for Oceanside Realty:
On May 31, 2020, the following data were accumulated to assist the accountant in preparing the adjusting
entries for Oceanside Realty:
a. The supplies account balance on May 31 is P12,300. The supplies on hand at May 31 are P4,150.
DR. CR.
b. The unearned rent (L)account balance at May 31 is P9,000, representing the receipt of an advance
payment on May 1 of three months’ rent from tenants.
DR. CR.
ADJUSTING JOURNAL ENTRIES
Use excel sheet for practice. ☺
Methods for Recording Deferrals
Prepaid expenses (Co. 5000 prepaid rent, 3 months expired, 2 months unexpired)
a. Asset method (usual) Date Description Debit Credit
Original entry (A) Prepaid rent 5,000
Cash 5,000
Adjusting entry(E) Rent expense 3,000
Prepaid rent 3,000
Matthew 7:7
“Ask, and it will be given to you; seek, and you will find;
knock, and it will be opened to you.
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