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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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