Effects to NI

WHAT IS THE ADJUSTING ENTRY FOR ACCRUED EXPENSES?

Dr Expense

Cr Payable

Expense happened but not yet paid

WHAT IS THE ADJUSTING ENTRY FOR ACCRUED INCOME?

Dr Receivable

Cr Income

Income earned but not yet received

PREPAID EXPENSE USED: WHAT IS THE ENTRY?

Dr Expense
Cr Prepaid Asset

Asset was used → becomes expense

PREPAID EXPENSE UNUSED: WHAT IS THE ENTRY?

Dr Prepaid Asset
Cr Expense

Amount not yet used → asset

UNEARNED INCOME ALREADY EARNED: WHAT IS THE ENTRY?

Dr Unearned Income
Cr Income

Liability becomes income when earned

WHAT IS THE ADJUSTING ENTRY FOR DEPRECIATION?

Dr Depreciation Expense
Cr Accumulated Depreciation

Recognize periodic depreciation

WHAT IS THE ADJUSTING ENTRY FOR ESTIMATED BAD DEBTS?

Dr Bad Debt Expense
Cr Allowance for Doubtful Accounts

ACCRUED EXPENSE NOT ADJUSTED: EFFECT ON NI?

Expense ↓ → Net Income ↑

Expense missing = NI overstated

ACCRUED INCOME NOT ADJUSTED: EFFECT ON NI?

Income ↓ → Net Income ↓

Income missing = NI understated

EXPIRED PREPAID EXPENSE NOT ADJUSTED: EFFECT ON NI?

Expense ↓ → Net Income ↑

The expired portion should have become expense

EARNED UNEARNED INCOME NOT ADJUSTED: EFFECT ON NI?

Income ↓ → Net Income ↓

ADJUSTING ENTRIES — WHAT ARE THE 6 MAIN PATTERNS?

Accrued Expense

• Dr Exp / Cr Payable

Accrued Income

• Dr Receivable / Cr Income

Prepaid Used

• Dr Exp / Cr Prepaid

Unearned Earned

• Dr Unearned / Cr Income

Depreciation

• Dr Dep Exp / Cr Accum. Dep

Bad Debt

• Dr Bad Debt Exp / Cr ADA

IF ENDING INVENTORY IS UNDERSTATED

Net Income is UNDERSTATED

IF ENDING INVENTORY IS OVERSTATED

Net Income is OVERSTATED

IF DEPRECIATION IS UNDERSTATED

Net Income is OVERSTATED

IF DEPRECIATION IS OVERSTATED

Net Income is UNDERSTATED