Study Notes on Adjusting Entries and Chart of Accounts

Chart of Accounts (COA)

• Divided into five categories:
  • Assets: Cash, Accounts Receivable, Inventory, Equipment
  • Liabilities: Accounts Payable, Loans Payable
  • Equity: Owner's Capital, Retained Earnings
  • Income/Revenue: Sales, Service Income
  • Expenses: Rent, Utilities, Salaries

Adjusting Entries Overview

• Journal entries made to update accounts at the end of the accounting period.
• Ensure accurate financial reporting on financial statements.
• Usually impact at least one income statement account and one statement of financial position account.

Purpose of Adjusting Entries

• Corrects data for accurate reporting in the correct accounting period.
• Depict sensible financial statements and ensure accurate ledger account balances.

Reasons for Adjustments

• Understated or overstated accounts.
• Asset portions may have expired, or liabilities may have been paid.

Depreciation Adjusting Entry

• Asset Cost: Amount paid for the asset.
• Estimated Salvage Value: Amount asset can be sold for at end of its useful life.
• Straight-Line Method Calculating Depreciation:
  $ext{Depreciation Expense} = \frac{\text{Asset Cost} - \text{Estimated Salvage Value}}{\text{Estimated Useful Life}}$

Bad Debts Adjusting Entry

• Doubtful Accounts Expense: Estimated uncollectible accounts recorded as expense.
• Allowance for Doubtful Accounts: Contra-asset account to estimate and track uncollectible accounts.

Accruals Adjusting Entry

• Accrued Revenue: Revenue earned but not collected; represents a receivable.
• Accrued Expense: Expense incurred but not paid; represents a payable.

Deferrals Adjusting Entry

• Unearned Revenue: Cash received before service is provided; liability until earned.
• Prepaid Expense: Cash paid for expenses not yet incurred; recorded as an asset.

Financial Statements Adjustments

• Adjust entries ensure the proper matching of revenues and expenses, resulting in accurate financial statements at the end of the period.