TLE 2Q reviewer

TLE REVIEWER

There may be transactions that can continue to exist for an extended period. And there will be some cases where accounts will have to be updated to reflect the “true amount” at the end of the accounting period. To do this, adjusting entries are prepared.

Adjusting entries

• These are journal entries prepared at the end of the accounting period to update accounts with transactions spanning more than one accounting period.
• This is to fix inaccurate data
• Prepared at the end of the accounting period

Failure to provide adjusting entries at the end of the accounting period when the business has transactions spanning for more than one period may result in one of two consequences:

OVERSTATED

• An account is overstated when the account’s unadjusted balance is more than the true, adjusted amount.

UNDERSTATED

• An account is understated when the account’s unadjusted balance is less than the true, adjusted amount.

4 basic kinds of adjusting entries:

1. Accruals
2. Deferrals
3. Bad Debts
4. Depreciation

2 methods of accounting:

1. Cash basis accounting

• Only sari-sari stores follow this method

1. Accrual basis accounting

Reasons of adjusting entries:

1. To have results of business operations accurately
2. To know if ALORE is overstated or understated
3. To fix inaccurate data

ADJUSTMENT FOR ACCRUALS

The key word “accrual” comes from the base word “accrue” which means “to accumulate” or “to grow”. This means the value of the account will increase over time until the end of the transaction in which cash will be used to settle its value.

Two kinds of accruals:

ACCRUED EXPENSE

• An accrued expense is an expense already incurred or used, but cash is not yet paid.
• Liability
• Will be dependent on the expense based on the problem.
• “Payable” can also be used as this is more practical and simpler.
• Pro formula = Debit: _______ expense, Credit: _______ Payable

INTEREST - Referes to the amount charged to the borrower for the borrowing of money.

*account title will be “Interest Expense” if it is looking for the interest*

ACCRUED INCOME

• Cash has not yet been received for income that was already earned from providing services.
• Asset
• Will be dependent on the expense based on the problem.
• “Receivable” can also be used as it is more practical and simpler.
• Pro formula = Debit: ______ receivable, Credit: ______ income

ADJUSTMENT FOR DEFERRALS

The keyword “deferrals” comes from the base word “defer” which means “to delay” or to “postpone.” This is a stark contrast to accruals.

2 kinds of deferrals:

PREPAID EXPENSE

• This is an expense already paid in advance but not yet incurred.
• Can be recorded in two ways: asset method and expense method
• Expenses paid in advance [asset] but not yet incurred

PREPAYMENTS

• Unearned income in which cash is already received in advance for services yet to be provided.
• Can be recorded in two ways: liability method and income method

Asset method

• The account used to record the original entry is “prepaid expense”
• The amount reflects the EXPIRED or USED portion of the prepaid expense
• OJE recognizes prepaid expense which is an asset
• AJE recognizes the used/expired of the asset account

Expense method

• The account used to record the original entry is the expense itself
• The amount reflects the UNEXPIRED or UNUSED portion of the prepaid expense

Precollection

LIABILITY METHOD

INCOME METHOD

ADJUSTMENT FOR BAD DEBTS

Bad debts

• Anticipated losses of a business arising from doubtful accounting
• When the customer does not obligate to pay to the business
• Possibility that not all cash is bad debts

Allowance for bad debts

• Contra-asset account affecting the accounts receivable

Computing for bad debts:

Bad debts = ______ sales x %

[e.g. bad debts = 40,000 (gross sales) x 0.15]

Increase to

• Difference of the newly adjusted balance and the old balance

Increase by

• Replace the old balance with the newly adjusted balance

ADJUSTMENT FOR DEPRECIATION

Depreciation

• Annual portion of the cost of a fixed asset charged as expense

Annual depreciation - per year

Monthly depreciation - per month

Depreciation expense - acquisitioned

First: Historical value - salvage value

—---------------------------------------

Estimated useful life /

Annual depreciation rate

Second: Annual depreciation

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12 months

Third: monthly depreciation x months passed