Adjusting Entries: Deferrals, Accruals, Depreciation, and Doubtful Accounts

Comprehensive vocabulary flashcards covering the concepts, methods, formulas, and journal entry rules for adjusting entries, including prepaid expenses, unearned revenues, accruals, depreciation, and doubtful accounts.

Adjusting Entries

Entries made at the end of an accounting period to update accounts and bring them to their correct balances by matching costs incurred against revenues earned to correctly determine profit.

Deferrals

A category of adjusting entries for transactions in which cash is paid or collected before the corresponding expense is incurred or the revenue is earned (e.g., prepaid expenses and unearned revenues).

Accruals

A category of adjusting entries for transactions in which expenses are incurred or revenues are earned before any cash is paid or collected (e.g., accrued expenses and accrued revenues).

Prepaid Expense

Payments made in advance for expenses that have not yet been incurred, consumed, or expired; classified on the balance sheet as a current asset due to future economic benefits.

Asset Method (Prepaid Expenses)

A method of recording prepaid expenses where an asset account is debited upon initial cash payment, requiring an end-of-period adjusting entry to debit an expense account and credit the prepaid asset account for the used portion.

Expense Method (Prepaid Expenses)

A method of recording prepaid expenses where an expense account is debited upon initial cash payment, requiring an end-of-period adjusting entry to debit a prepaid asset account and credit the expense account for the unused portion.

Unearned Revenue

Revenue collected from customers before goods are delivered or services are rendered, classified on the balance sheet as a current liability representing an obligation to perform.

Liability Method (Unearned Revenue)

A method of recording advance collections where an unearned revenue account (liability) is credited upon receipt, requiring an end-of-period adjusting entry to debit unearned revenue and credit a revenue account for the earned portion.

Income Method (Unearned Revenue)

A method of recording advance collections where a revenue account is credited upon receipt, requiring an end-of-period adjusting entry to debit the revenue account and credit an unearned revenue account for the unearned portion.

Accrued Expense

An expense that has already been incurred during the period but has not yet been paid, reported on the balance sheet as a liability (payable).

Accrued Income

Income that has already been earned by rendering services or delivering goods but has not yet been collected or billed, reported on the balance sheet as an asset (receivable).

Fixed Assets

Economic resources owned by a business that cannot be quickly converted into cash, initially recorded on the balance sheet at historical cost rather than as an immediate expense.

Depreciation

The gradual charging to expense of a fixed asset's cost over its expected useful life to match the cost of the asset with the revenue it generates.

Historical Cost

The purchase price plus all incidental costs necessary to acquire and prepare a fixed asset for its intended use.

Residual Value (Scrap Value)

The estimated value of a fixed asset at the end of its useful life.

Useful Life

The estimated period of time, measured in months or years, during which a fixed asset can be utilized productively by a business.

Straight-Line Depreciation Method

A depreciation method that allocates an even rate of depreciation expense every year over the asset's useful life using the formula: $\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$

Accumulated Depreciation

A contra-asset account presented on the balance sheet paired against a specific non-current asset to reflect the cumulative depreciation recognized to date.

Doubtful Account

An account receivable that is estimated to be uncollectible in the future due to a customer's default or inability to pay.

Doubtful Account Expense

An expense account presented in the income statement to recognize estimated uncollectible credit sales made during the current accounting period.

Allowance for Doubtful Accounts

A contra-asset account presented on the balance sheet against Accounts Receivable to reflect the estimated portion of total receivables that will not be collected.

Percentage of Sales Method

A method of estimating uncollectible accounts that applies an estimated percentage directly to total credit sales for the period using the formula: $\text{Doubtful Account Expense} = \text{Total Credit Sales} \times \text{\% of estimated uncollectible}$