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Adjusting journal entries discussion notes

Adjusting journal entries discussion notes

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Adjusting Journal Entries – Discussion Notes

Why is there a need for adjustment?

Adjustments are necessary because some of the financial statement elements’ balances are not

properly presented.

What are the basic adjustments encountered in a business?

1. Prepaid expense

2. Unearned income

3. Accrued expense

4. Accrued income

5. Bad debts/uncollectible accounts

6. Depreciation

Prepaid Expense

✓ Those are expenses paid in advance.

✓ Two methods of recording: a) Asset method b) Expense method

✓ Asset method – the payment is initially recorded as an asset and eventually adjusted to

remove the used part.

▪ Initial entry: to record the payment

Prepaid asset xx

Cash xx

▪ Adjusting entry: to remove/reclassify the used portion

Expense xx

Prepaid asset xx

✓ Expense method – the payment is initially recorded as an expense and eventually adjusted

to reclassify the unused part.

▪ Initial entry: to record the payment

Expense xx

Cash xx

▪ Adjusting entry: to remove/reclassify the unused portion

Prepaid asset xx

Expense xx

Unearned Income

✓ Those are income in which cash is received before the service is rendered, or before the

goods are delivered.

✓ Two methods of recording: a) Liability method b) Income method

✓ Liability method – the cash received is initially recorded as a liability and eventually adjusted

to reclassify the earned portion to income.

▪ Initial entry: to record the receipt of cash

Cash xx

Unearned Income xx

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▪ Adjusting entry: to remove/reclassify the earned portion

Unearned income xx

Income xx

✓ Income method – the cash received is initially recorded as an income and eventually

adjusted to reclassify the unearned portion as a liability.

▪ Initial entry: to record the receipt of cash

Cash xx

Income xx

▪ Adjusting entry: to remove/reclassify the unearned portion

Income xx

Unearned income xx

Accrued Expense

✓ It is an expense that is incurred already but remains unpaid by the company.

✓ Adjusting entry:

Expense xx

Payable xx

Accrued Income

✓ It is an income already earned, but cash is yet to be received by the company.

✓ Adjusting entry:

Receivable xx

Income xx

Bad debts/Uncollectible accounts

✓ It is the amount of receivables that are deemed uncollectible by the company.

✓ Why does it arise? Companies usually grants credit to its clients to increase its sales and

profit. Because of this, some of the customers fail to pay, thus resulting to uncollectible

accounts.

✓ Two methods of accounting for bad debts/uncollectible accounts: a) direct write-off b)

allowance method.

✓ Direct write-off method – the bad debt expense is directly deducted from the receivables. It

is allowed for income tax purposes.

▪ Adjusting entry: to write-off the bad debts

Bad debts expense xx

Accounts receivable xx

▪ Journal entry: if there is a recovery of accounts written-off

Accounts receivable xx

Bad debts recovery xx

Cash xx

Accounts receivable xx

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Adjusting Journal Entries – Discussion Notes Why is there a need for adjustment? Adjustments are necessary because some of the financial statement elements’ balances are not properly presented. What are the basic adjustments encountered in a business? 1. 2. 3. 4. 5. 6. Prepaid expense Unearned income Accrued expense Accrued income Bad debts/uncollectible accounts Depreciation Prepaid Expense ✓ Those are expenses paid in advance. ✓ Two methods of recording: a) Asset method b) Expense method ✓ Asset method – the payment is initially recorded as an asset and eventually adjusted to remove the used part. ▪ Initial entry: to record the payment Prepaid asset xx Cash xx ▪ Adjusting entry: to remove/reclassify the used portion Expense xx Prepaid asset xx ✓ Expense method – the payment is initially recorded as an expense and eventually adjusted to reclassify the unused part. ▪ Initial entry: to record the payment Expense xx Cash xx ▪ Adjusting entry: to remove/reclassify the unused portion Prepaid asset xx Expense xx Unearned Income ✓ Those are income in which cash is received before the service is rendered, or before the goods are delivered. ✓ Two methods of r ...
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