adj entries

• Adjusting entries


  Entries made to update the accounts and bring them to their correct balances
• Accrual concept


  Income is recognized when earned regardless of when collected and expense is recognized when incurred regardless of when paid
• Matching principle


  Aims to align expenses with revenues. Expenses should be recognized in the period when the revenues generated by such expenses are recognized
• Purpose of adjusting entries


  To update the accounts to conform with the accrual concept. At the end of the accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a need to update the accounts
• Types of adjusting entries


  • Accrued income
  • Accrued expense
  • Deferred income
  • Prepaid expense
  • Depreciation
  • Doubtful accounts or bad debts, and other allowances
• Accrued income


  Income already earned but has not yet been collected
• Adjusting entry for accrued income


  1. Debit appropriate receivable account

  2. Credit income account
• Accrued expense


  Expenses that are already incurred but have not yet been paid
• Adjusting entry for accrued expense

  1. Debit appropriate expense account

  2. Credit appropriate liability account
• Deferred income


  Revenue already collected but not yet earned
• Prepaid expense


  Payments made for expenses which have not yet been incurred
• Depreciation


  The cost of a fixed asset is allocated as expense to the periods in which the asset is used
• Doubtful accounts or bad debts


  Accounts receivable should be presented in the balance sheet at net realizable value, i.e. the most probable amount that the company will be able to collect
• Adjusting entry for bad debts

  1. Debit bad debts expense or doubtful accounts expense

  2. Credit allowance for bad debts or allowance for doubtful accounts
• Difference between bad debts expense and allowance for bad debts

  Bad debts expense is an income statement account while allowance for bad debts is a balance sheet account
• Nominal account


  An account whose balance is measured from period to period
• Real account


  An account that has a balance that is measured cumulatively, rather than from period to period
• Calculating straight-line depreciation


  Depreciable Cost - Residual Value / Estimated Useful Life
• Recording depreciation


  1. Debit Depreciation Expense

  2. Credit Accumulated Depreciation
• Doubtful Accounts/Bad Debts


  Accounts receivable that are unlikely to be collected
• Recording bad debt expense

  1. Debit Bad Debts Expense

  2. Credit Allowance for Bad Debts
• Accounts Receivable - Net Realizable Value = Gross Accounts Receivable - Allowance for Bad Debts
• Accounting Cycle of a Service Business


  1. Prepare trial balance

  2. Prepare adjusting entries

  3. Prepare adjusted trial balance

  4. Prepare financial statements

  5. Prepare closing entries
• Worksheet


  A document prepared to help determine whether the operation of the business results in net income or net loss without preparing financial statements
• Steps in preparing a worksheet

  1. Prepare a trial balance on the worksheet

  2. Enter the adjustments in the adjustment columns

  3. Enter adjusted balances in the adjusted trial balance columns

  4. Extend adjusted trial balance amounts to appropriate financial statements columns

  5. Total the statement columns, compute net income (or loss), and complete the worksheet
• Income Statement


  A formal statement showing the financial performance of the business for a given period of time
• Statement of Changes in Equity


  A formal statement that shows the movements in the equity accounts in the given period of time
• Balance Sheet


  A statement that shows the financial position or condition of an entity by listing the assets, liabilities and owner's equity at a specific date
• Closing Entry


  A journal entry made at the end of an accounting period to transfer the temporary account balances to the permanent accounts
• Income Summary


  A summary account used to close the income and expense accounts
• Closing Entry Journal Entries


  1. Close revenue accounts to Income Summary

  2. Close expense accounts to Income Summary

  3. Close Income Summary to Owner's Capital if net income

  4. Close Income Summary to Owner's Capital if net loss

  5. Close Owner's Drawings to Owner's Capital
• Closing entries


  The importance or purpose is to reduce the balances of the temporary accounts to zero from the general ledger, and prepare the permanent accounts for another accounting period
• Making closing entries


  All nominal or temporary accounts are closed out to the owner's capital account, through the income summary account
• Income summary


  A summary account used to close the income and expense accounts, and then the net income amount shall be transferred to the equity accounts of the owner
• Closing entries procedure


  Close revenue accounts to income summary

  2. Close expense accounts to income summary

  3. Close income summary to owner's capital if net income

  4. Close income summary to owner's capital if net loss

  5. Close owner's drawings to owner's capital
• Owner's drawings are not included in the income statement as it is purely a transaction with the owner
• Closing entries example


  • Close service revenue to income summary

  2. Close expenses to income summary

  4. Close net loss to owner's capital
• Posting the closing entries to the general ledger updates the accounts
• After posting the closing entries, a post-closing trial balance is prepared with only the permanent accounts remaining
• The post-closing trial balance balances will be brought forward as the beginning balances in the next accounting period