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Questions and Answers
What is the primary purpose of the deferred income method?
What type of account is Unearned Income/Revenue?
Under the liability method, what type of account is credited in the adjusting entry for accrued expense?
What is the adjusting entry for ABC Properties on December 31, 2020?
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What is the term for advance payment of expense?
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Under the income method, what type of account is debited in the adjusting entry for accrued income?
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What is the purpose of the adjusting entry for accrued income?
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What is the term for the accounting method that recognizes income when received?
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What type of account is credited in the adjusting entry for deferred income under the liability method?
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What is the adjusting entry for ABC Properties on December 31, 2020, for the rent received in advance?
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Study Notes
Depreciation
- Accumulated depreciation has a normal balance of credit.
- Depreciation affects operating expense, net income, non-current assets, and total assets on the financial statement.
- Omission of adjusting entry for depreciation results in:
- Operating expense being understated
- Net income being overstated
- Non-current assets and total assets being overstated
- Equity being overstated
Depreciation Table
- Depreciation table is used to compute the carrying value of equipment per year.
- Example: ABC Company purchased an equipment worth P220,000 on January 1, 2020, with a residual value of P20,000 and a useful life of 5 years.
Sale of a Depreciable Asset
- Journal entry for the sale of an equipment with a historical cost of P150,000 and accumulated depreciation of P100,000 for P75,000.
Doubtful Accounts
- Normal balance of allowance for doubtful accounts is credit.
- Allowance for doubtful accounts is a contra-current asset account.
- Doubtful accounts expense is a nominal or temporary account presented in the income statement.
- Adjusting entry for doubtful accounts consists of:
- Permanent account – Allowance for doubtful accounts (contra-asset account)
- Nominal account – Doubtful accounts expense
Recognition of Doubtful Accounts
- Aging of accounts receivable method is used to estimate doubtful accounts expense.
- Example: ABC Company started its operation on January 1, 2020, with a year-end balance of accounts receivable of P1,200,000.
Methods of Estimating Doubtful Accounts Expense
- Aging of accounts receivable method classifies accounts receivable as not due or past due.
- Example: Note due, 1 to 30 days past due, 31 to 60 days past due, and so on.
Accruals
- Accrual involves recognizing income and expenses prior to cash collection and payment.
- Income is recognized when earned, regardless of when it is received.
- Expense is recognized when incurred, regardless of when it is paid.
- Two classifications of accrual:
- Accrual of income – accounting for uncollected income
- Accrual of expense – accounting for unpaid expense
Adjusting Entry for Accrued Income and Accrued Expense
- Accrued income adjusting entry consists of:
- Permanent account – Asset account
- Nominal account – Income account
- Accrued expense adjusting entry consists of:
- Permanent account – Liability account
- Nominal account – Expense account
Deferral of Expense
- Accounting for advance payment of expense.
- Two methods for deferral of income:
- Income method
- Liability method
Effect of Omission of Adjusting Entry
- Omission of adjusting entry for accrued income and accrued expense affects the financial statement.
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Description
This quiz covers the concept of accumulated depreciation, its normal balance, and its presentation on the financial statement, including examples and tables.
