Adjusting Journal Entries study notes, Study notes of Financial Accounting

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Adjusting Entries

CHAPTER 4

Adjusting Entries Adjusting journal entries are made to update the accounts and bring them their correct balances. The preparation of adjusting entries is an application of the accrual concept of accounting. At the end of the accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a need to update the accounts.

3. Depreciation Expense – is the decrease in the value of fixed asset due to the ordinary wear and tear (with a passage of time) and charged to expense. 4. Allowance for Doubtful Accounts – refers to that portion of the receivables estimated to be uncollectible and considered as an expense. Types of Adjusting Entries

Making the Adjustments Type of Adjustment Adjusting Entry Effects if Adjustment is not made

1. Accrued Revenue Debit Asset Assets under, Owner’s Equity under Credit Revenue Revenue under, Profit under 2. Accrued Expense Debit Expense Expenses under, Profit over Credit Liability Liability under, Owner’s Equity over 3. Unearned Revenue Debit Liability Liability over, Owner’s Equity under Credit Revenue Revenue under, Profit under 4. Prepaid Expense Debit Expense Expenses under, Profit over Credit Asset Asset over, Owner’s Equity over 5. Depreciation Expense Debit Expense Expenses under, Profit over Credit Contra Asset Asset over, Owner’s Equity over 6. Doubtful Accounts Expense Debit Expense Expenses under, Profit over Credit Contra Asset Asset over, Owner’s Equity over

Adjusting Entries for Accrued Expense

Pro-Forma Entry:

Example: For the month of December 31 , 2018 , Ramos Network Services used a total of P 1 , 800

worth of electricity and water. The company received the bills on January 10 , 2019. When ahould

the expense recorded?

Month dd Particular Debit Credit Expense account* P x, xxx Liability account* P x, xxx Month dd Particular Debit Credit Dec. 31 Utilities Expense P1, 800 Utilities Payable P1, 800

Adjusting Entries for Unearned/Deferred Revenue

Liability Method of Unearned/Deferred Revenue

Pro-forma Entry:

Income Method of Unearned/Deferred Revenue

Pro-forma Entry:

Month dd Particular Debit Credit Liability account* P x, xxx Revenue/Income account* P x, xxx Month dd Particular Debit Credit Revenue/Income account* P x, xxx Liability account* P x, xxx

Adjusting Entry for Depreciation Expense

Formula:

Depreciable Cost – Salvage Value

Useful Life

Pro-forma Entry:

Month dd Particular Debit Credit Depreciation Expense acct* P x, xxx Accumulated Depreciation acct* P x, xxx

Adjusting Entry for Bad Debts Expense

Pro-forma Entry:

Or

Month dd Particular Debit Credit Doubtful Accounts Expense acct.* P x, xxx Allowance for Doubtful acct.* P x, xxx Month dd Particular Debit Credit Bad Debts Expense* P x, xxx Allowance for Bad Debts* P x, xxx