FOA CHAPTER 7 - COMPLETING THE ACCOUNTING CYCLE FOR A SERVICE PROVIDER

Accrued Income

Income already earned but were not yet collected nor recorded. Income already earned but not yet received and therefore an ASSET.

Accrued Expenses

Expenses already expired but were not yet paid or recorded. Expenses already incurred but not yet paid and therefore a LIABILITY.

Unearned/Deferred Income

Advance collection recorded as a liability, but a portion of which has already been earned. Or income already received but not yet earned and therefore a LIABILITY.

Prepaid Expenses

Advance payment recorded as an asset but a ortion of which has allready expired. Already paid but not yet incurred and therefore an ASSET.

Bad Debts

Client accounts that may not be collected anymore or are doubtful of collection.

Depreciation Expense

Transfer of asset cost (cost allocation) to expense basd on its declining utility value.

Adjusting Entries

These are entries prepared at the end of the accounting period to update some accounts and ensure their accuracy before preparing the financial statements.

Accrual Principle

Otherwise known as Revenue Recognition Principle and the Expense Recognition Principle.

Revenue Recognition Principle

recognized as earned at the time service is rendered and this is recorded regardless fo when cash is collected.

Expense Recognition Principle

recognized as incurred at the time ervice is received or used up regardless of when cash is paid.

Matching Principle

Expense (representing the effort of the business) should be matched against the income (representing the accomplishment of the business) during the period it was earned.

ASSET METHOD

This represents a right of received service for cash paid. At the end of the year, if there is already an expired portion or if service has been received, transfer this amount from the expired portion or if service has been receives, transfer this amount from the Prepaid Expense account to the Expense Account.

EXPENSE METHOD

An alternative method to record the advance payment is to immediately DEBIT IT TO AN EXPENSE ACCOUNT.

LIABILITY METHOD

The advance collection is credited to a liability account called Unearned or Deferred Revenue; this is more preferred, again because it follows the conceptual flow of recognizing first the liability until the amount is earned.

DIRECT WRITE OFF METHOD

This method recognizes bad debts expense only when it is certain that the company will not be able to collect the account anymore; simple to apply and is more acceptable by the BIR.

ALLOWANCE METHOD

The doubtful account are determined by the estimation based on the company’s past experience of other companies within the same business industry; a certain percentage or ratio is derived between the bad debts expense of the company and its outstanding receivable for the previous year.

Ways of estimating bad debts:

a. Increase the allowance by a certain percentage of REVENUE. (10% of Service Income)

b. Increase allowance by a certain percentage of the outstanding ACCOUNTS RECEIVABLE. (5% of the outstanding AR)

Allowance for Doubtful Account

This is a contra account which is deducted from the principal account.

Net Realizable Value

This is the difference between the accounts receivable and the allowance for doubtful.

INCOME METHOD

An alternative method is to record the advance collection immediately with a credit to an Income Account.

Depreciation

This is the systematic allocation of the depreciable amount of the property, plant, and equipment over the useful life (except for LAND).

FORMULA:

COST - SCRAP VALUE (If any) / Useful life (no. of years) = ______

Cost Allocation

It is not so much a matter of valuation as it is a matter of ____ _________ in recognition of the exhaustion of the life of an item of property, plant, ad equipment used in business operations.

Market Value

The realizable if the asset is to be sold. And depreciation is not an adjustment of this.

Accumulated Depreciation

A contra asset account is deducted from the cost price to arrive at net book value (Asset Cost - __ = Net Book Value).

Worksheet

This is a columnar paper where the first two column are provided for the trial balance, which is the starting point for the preparation of the financial statement.