Lesson 4

• Accounting Period - period of time that will be used for financial statement purposes
• Adjusting Process - to gather and put together data necessary to update the balances of some accounts
• Types of adjusting entries

  • Accrued Expenses
  • Accrued Revenue
  • Prepaid Expenses or Deferred Expenses
  • Unearned Revenues or Deferred Revenues
  • Depreciation of Property, Plant and Equipment
  • Uncollectible Accounts or Bad Debts
  • Merchandise Inventory
• Deferrals - postponement of the recognition of revenue the company has collected in advance and expense the company has paid in advance
• Accrual - recognition of expense already incurred though not yet paid and revenue already earned though not yet received
• Asset Method - account debited upon payment is an asset account. In adjustment, an expense account is debited  and asset account will be credited
• Expense method - account debited upon payment is an expense account. In adjustment, an asset account is debited  and expense account will be credited
• Liability Method - account credited upon receipt of cash is a liability account. In adjustment, a liability account is debited  and revenue account will be credited
• Revenue method - account credited upon receipt of cash is a revenue account. In adjustment, a revenue account is debited  and liability account will be credited
• Property, Plant & Equipment - physical resources that are owned

  and used by a business which are relatively fixed or permanent

  in nature that have along useful life(also called fixed/plant assets). These are used to generate income for the business and so

  a portion should be expensed in each accounting period of its life.
• Depreciation Accounting - process of allocating the depreciable cost of a fixed asset over its estimated useful life.
• Accumulated Depreciation- accumulated amount of depreciation

  expense from the year of recognition to the latest balance sheet date
• Several most common Methods of Computing Depreciation:

  • Straight-line method
  • Sum-of-the-years digit method
  • Declining balance method
  • Units of production method
• Factors to be considered in computing depreciation

  • Asset Cost
  • Estimated Residual Value
  • Estimated Useful life
• Asset Cost- purchase price plusother direct costsincurred in acquiring and bringing the asset to its intended use. (Other costs: freight or installation cost)
• Estimated Residual Value - estimated amount the fixed asset can be sold at the end of its useful life. Other terms for this are salvage value, scrap value or trade in value
• Estimated Useful life - expressed in yearsor number of units or hours the asset can be used
• Provision for Uncollectible Accounts - anticipated loss from uncollectible receivables
• Cash Basis - Without adjusting entries
• Accrual Basis - With adjusting entries
• One income statement account - Revenue or Expense
• Accrued Revenue/Accrued Assets - revenue earned but not yet received or collected at the end of the accounting period
• Unearned Revenues or Deferred Revenues - revenues collected or received in advance by the business
• Accrued Expenses / Accrued Liabilities - expenses incurred but not yet paid
• Prepaid Expenses or Deferred Expenses

  • Asset Method
  • Expense Method
• One balance sheet account - Asset or Liability account
• Unearned Revenues or Deferred Revenues

  • Liability Method
  • Revenue Method
• Prepaid Expenses or Deferred Expenses - expenses paid in advance