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Questions and Answers
What is the primary purpose of the deferred income method?
What is the primary purpose of the deferred income method?
What type of account is Unearned Income/Revenue?
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?
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?
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?
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?
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?
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?
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?
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?
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.
