UNIT 4: THE ACCOUNTING CYCLE 4.7 Journalizing and posting adjusting entries Adjustments Definition Basis Purposes Premise Characteristic Updating accounts that were not recorded during the accounting period Accrual accounting -To record any income earned or expense incurred that have not been recorded prior to the end of the period - To apportion revenues and expenses properly between accounting periods affected Financial transactions affect the revenues and expenses of more than one accounting period Involves the recognition of either revenues or expenses and a corresponding change in either assets or liabilities Adjusting entries Entries recorded at the end of the accounting period to update accounts before financial statement are prepared 1. Accrued Expense 2. Accrued Revenue 3. [Deferred] Prepaid Expense 4. [Deferred] Unearned Revenue 5. Depreciation 6. Doubtful Accounts 7. Merchandise Inventory, end TYPE OF ADJUSTMENT Accrued Expense REASON FOR ADJUSTMENT Expenses have been incurred but not yet paid ACCOUNTS BEFORE ADJUSTMENT Expenses understated Liabilities understated ADJUSTING ENTRY _____ Expense Accrued Expense [L] Accrued Revenue Revenues have been earned but not yet received Assets understated Revenues understated Accrued Revenue [A] _____ Revenue Prepaid Expense [Asset method] Pre-payments initially Expenses understated _____ Expense recorded in asset account Assets overstated Prepaid Expense [A] have been used Unearned Revenue Pre-collections initially Liabilities overstated Unearned Revenue [L] [Liability method] recorded in liability account Revenues understated _____ Revenue have been earned Depreciation Expense A portion of the cost of the Expenses understated Depreciation Expense non-current asset has been Assets overstated Accumulated Depreciation* used Doubtful Accounts A portion of the Accounts Expenses understated Doubtful Accounts Expense Allowance for Doubtful Accounts* Expense Receivable may not be Assets overstated collected due to the risk involved in granting credit Merchandise A portion of the goods Assets understated Merchandise Inventory [A] Inventory, end purchased during the year Cost of sales overstated Income Summary remains unsold * Accumulated Depreciation and Allowance for Doubtful Accounts are Contra-Asset accounts. 1 | Fundamentals of Accounting / AY2025-2026 Trinidad, Editha O. ACCRUED EXPENSE Expense already used, but not yet paid [unpaid; due; owed; owing; outstanding] Purpose To record unrecognized expense Adjusting entry _______ Expense Accrued _______ Expense / _______ Payable adjust for accrued expense xxx xxx ACCRUED REVENUE Revenue already earned, but not yet received Purpose To record unrecognized revenue Adjusting entry Accrued _______ Revenue / _______ Receivable _______ Revenue adjust for accrued revenue xxx xxx [DEFERRED] PREPAID EXPENSE Expense paid in advance, but not yet used (includes [Office] Supplies) Purpose To allocate the used portion of the pre-payment as expense Adjusting entry _______ Expense Prepaid _______ Expense adjust for used portion of prepaid expense Adjusting entry [Office] Supplies Expense [Office] Supplies adjust for used portion of [office] supplies xxx xxx xxx xxx [DEFERRED] UNEARNED REVENUE Revenue received in advance, but not yet earned Purpose To allocate the earned portion of the pre-collection as revenue Adjusting entry Unearned _______ Revenue _______ Revenue adjust for earned portion of unearned revenue 2 | Fundamentals of Accounting / AY2025-2026 xxx xxx Trinidad, Editha O. DEPRECIATION • The systematic allocation of the depreciable amount of a non-current asset over its useful life • The gradual decrease in value of a non-current asset Value, not the cost Causes • wear and tear (normal usage, erosion, rust, rot, decay); • inadequacy (caused by a business expansion or government regulations such that the asset although in good condition can no longer fulfil the needs of the business); • obsolescence (caused by introduction of new technology); • lapse of time (assets with fixed legal life due to legal contract); Ex. lease • depletion (wasting nature of the assets). Ex. mining sites Note: All non-current assets, except for land, depreciate in value. Land is not depreciated because it has an indefinite life and does not deteriorate or get used up. Purpose To offset a portion of the cost of the non-current asset against revenue in each period of the asset’s useful life à Matching Adjusting entry Depreciation Expense Accumulated Depreciation adjust for depreciation xxx xxx Definition of Terms: • Cost – the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised à For FDNACCT, Cost is just the PURCHASE PRICE • Residual value / Salvage value / Scrap value – the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life à Residual value is the selling price at end of useful life • Depreciable amount / Depreciable value / Depreciable cost – the cost of an asset, or other amount substituted for cost, less its residual value à Depreciable amount is the amount subject to depreciation • Useful life – the estimated period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained • Depreciation expense – depreciation recognized for the period, that is, the part of the cost of the asset used • Accumulated depreciation / Provision for depreciation / Aggregate depreciation – total accumulated amount of depreciation that has been recorded for the asset Note: In accounting, a provision is an estimated amount based on different methods of valuation. • Carrying amount / Carrying value / Book value / Net book value – the amount at which an asset is recognised after deducting any accumulated depreciation • Fair value / Market value – the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Reminder: The depreciation method used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. STRAIGHT LINE METHOD Method for accounting for depreciation that estimates equal use of the asset over its useful life and charges an equal Depreciation Expense in every period of the asset’s useful life Depreciation = Cost - Residual value Useful life, in years 3 | Fundamentals of Accounting / AY2025-2026 or Depreciation = (Cost - Residual value) x Depreciation rate Where, Depreciation rate = 1 / Useful life, in years Trinidad, Editha O. DOUBTFUL ACCOUNTS / DOUBTFUL DEBTS / UNCOLLECTIBLE ACCOUNTS Accounts Receivable which may not be collected due to the risk involved in granting credit to customers Purpose To record an estimated amount of doubtful debts Adjusting entry Doubtful Accounts Expense Allowance for Doubtful Accounts adjust for doubtful accounts xxx xxx Definition of Terms: • Allowance [Provision] for Doubtful Accounts / Allowance for Doubtful Debts / Allowance for Uncollectible Accounts – a valuation account that represents the expected amount of Accounts Receivable that may not be collected at the date of the Statement of Financial Position • Valuation account – an account that is revalued in light of reasonable expectations • Net realizable value – amount that is expected to be realized or collected – calculated as Accounts Receivable less Allowance for Doubtful Accounts ALLOWANCE METHOD Method for accounting for doubtful accounts that estimates losses from uncollectible accounts à Conservatism and charges Doubtful Accounts Expense in the period when sales are recorded à Matching • Statement of Financial Position approach / Balance Sheet Approach o Considers the balance of the Allowance account in making the provision o The amount that is first computed is the required Allowance for Doubtful Accounts § Total Accounts Receivable at period-end § Aging of Accounts Receivable at period-end - Analyses the Accounts Receivable into not due or past due 4 | Fundamentals of Accounting / AY2025-2026 Trinidad, Editha O. Based on ACCOUNTS RECEIVABLE balance The allowance is determined by multiplying the Accounts Receivable balance at the end of the period by an assigned rate. If Allowance for Doubtful Accounts has a normal CREDIT balance before adjustment Accounts Receivable Multiply by: Estimated uncollectible rate Allowance for Doubtful Accounts, end Less: Allowance for Doubtful Accounts, beg xxx % xxx xxx Doubtful Accounts Expense xxx Based on AGING ANALYSIS The allowance is determined by multiplying the ‘age groups’ of the Accounts Receivable at the end of the period by assigned rates. Step 1: Classify accounts into ‘age groups’ of not due or past due Step 2: Calculate the Allowance for Doubtful Accounts, end by multiplying the total of each ‘age group’ by assigned rates Step 3: Calculate the Doubtful Accounts Expense If Allowance for Doubtful Accounts has a normal CREDIT balance before adjustment Allowance for Doubtful Accounts, end Less: Allowance for Doubtful Accounts, beg xxx xxx Doubtful Accounts Expense xxx MERCHANDISE INVENTORY, END / CLOSING INVENTORY Unsold goods at the end of the period Purpose To record unsold goods at the end of the period and deduct the same from cost of sales Adjusting entry Merchandise Inventory Income Summary adjust for ending inventory xxx xxx --------------------------------------------------------------------------------------------------------------------------------------------------REFERENCES • IFRS Foundation (2017, May) IAS 16 – Property, Plant and Equipment • Fortes, Hilary J. (2011). Accounting Simplified. Pearson Education Limited • Price, J., Haddock, M., & Farina, M., (2024). College Accounting, 17th edition. McGraw-Hill Education. • Robinson, Sheila & Wood, Frank. (2010). Edexcel IGCSE. Pearson Company. • Valix, Conrado T., Peralta, Jose F., and Valix, Christian Aris M. (2020). Intermediate Accounting (Volume 1), GIC Enterprises & Co., Inc. 5 | Fundamentals of Accounting / AY2025-2026 Trinidad, Editha O.
