Podcast
Questions and Answers
Why are adjusting entries necessary at the end of an accounting period?
Why are adjusting entries necessary at the end of an accounting period?
- To simplify the bookkeeping process by postponing certain entries.
- To ensure that all transactions have been recorded, regardless of when cash changes hands.
- To update account balances to reflect the correct amounts for financial statements. (correct)
- To correct errors discovered in the initial journal entries.
What is the primary difference between accruals and deferrals in adjusting entries?
What is the primary difference between accruals and deferrals in adjusting entries?
- Accruals involve recognizing revenue or expense before cash changes hands, while deferrals involve recognizing revenue or expense after cash changes hands. (correct)
- Accruals involve cash changing hands before the recognition of revenue or expense, while deferrals involve cash changing hands after the recognition of revenue or expense.
- Accruals are only used for income, while deferrals are only used for expenses.
- Accruals are optional, while deferrals are mandatory for accurate financial reporting.
In the context of adjusting entries, what does the term 'prepayment' refer to?
In the context of adjusting entries, what does the term 'prepayment' refer to?
- An expense that has been paid but not yet incurred or used. (correct)
- An income that has been earned but not yet received.
- An expense that has been incurred but not yet paid.
- An income that has been received but not yet earned.
What type of adjusting entry is required when a company has earned revenue for services provided but has not yet received payment?
What type of adjusting entry is required when a company has earned revenue for services provided but has not yet received payment?
Which of the following describes the purpose of a depreciation adjusting entry?
Which of the following describes the purpose of a depreciation adjusting entry?
XYZ Company initially recorded a $1,200 insurance policy as an asset. At the end of the accounting period, $300 of the insurance has expired. What adjusting entry should XYZ Company make?
XYZ Company initially recorded a $1,200 insurance policy as an asset. At the end of the accounting period, $300 of the insurance has expired. What adjusting entry should XYZ Company make?
A company receives $5,000 in advance for services to be performed in the future. How does this transaction impact the accounting equation when the cash is received?
A company receives $5,000 in advance for services to be performed in the future. How does this transaction impact the accounting equation when the cash is received?
What is the effect on the financial statements if a company fails to record depreciation expense?
What is the effect on the financial statements if a company fails to record depreciation expense?
On December 31, a company owes $800 for utilities used in December, which will be paid in January. What adjusting entry is required?
On December 31, a company owes $800 for utilities used in December, which will be paid in January. What adjusting entry is required?
Which of the following accounts would most likely require an adjusting entry due to accrual?
Which of the following accounts would most likely require an adjusting entry due to accrual?
How does recording adjusting entries ensure compliance with the matching principle?
How does recording adjusting entries ensure compliance with the matching principle?
What is the purpose of adjusting entries related to uncollectible accounts (bad debts)?
What is the purpose of adjusting entries related to uncollectible accounts (bad debts)?
A business paid $2,400 for a one-year insurance policy on April 1. What would be the adjusting entry on December 31 to reflect the expired insurance?
A business paid $2,400 for a one-year insurance policy on April 1. What would be the adjusting entry on December 31 to reflect the expired insurance?
If a company fails to make an adjusting entry for accrued revenue, what is the impact on the balance sheet?
If a company fails to make an adjusting entry for accrued revenue, what is the impact on the balance sheet?
What type of error occurs if an adjusting entry is made twice?
What type of error occurs if an adjusting entry is made twice?
A company purchases office supplies worth $500 on January 1 and records it as an asset. By December 31, $300 of the supplies have been used. What is the adjusting entry?
A company purchases office supplies worth $500 on January 1 and records it as an asset. By December 31, $300 of the supplies have been used. What is the adjusting entry?
What is the result if a company incorrectly classifies a 'prepaid expense' as an expense at the time of purchase, and no adjusting entry is made?
What is the result if a company incorrectly classifies a 'prepaid expense' as an expense at the time of purchase, and no adjusting entry is made?
Which type of adjusting entry involves recognizing revenue that was initially recorded as a liability?
Which type of adjusting entry involves recognizing revenue that was initially recorded as a liability?
If a company omits the adjusting entry for accrued salaries, what is the impact on the current period's financial statements?
If a company omits the adjusting entry for accrued salaries, what is the impact on the current period's financial statements?
A company estimates that 2% of its $100,000 accounts receivable will be uncollectible. What adjusting entry should be made?
A company estimates that 2% of its $100,000 accounts receivable will be uncollectible. What adjusting entry should be made?
How does the use of adjusting entries affect the reliability of financial statements?
How does the use of adjusting entries affect the reliability of financial statements?
What is contra asset account?
What is contra asset account?
A company received $6,000 on November 1 for services to be performed evenly over the next six months. What adjusting entry is required on December 31?
A company received $6,000 on November 1 for services to be performed evenly over the next six months. What adjusting entry is required on December 31?
A company historically has found that customers pay an average of 98% of the value of the service provided. If accounts receivable are $100,000 what is the adjusting entry required?
A company historically has found that customers pay an average of 98% of the value of the service provided. If accounts receivable are $100,000 what is the adjusting entry required?
Which of the following is not a common type of adjusting entry?
Which of the following is not a common type of adjusting entry?
On February 28, Matapang repaired the computer of Pedro for PHP15,000. Matapang has already earned the PHP15,000 but was not paid as of the end of February. What is the correct way to journalize this transaction?
On February 28, Matapang repaired the computer of Pedro for PHP15,000. Matapang has already earned the PHP15,000 but was not paid as of the end of February. What is the correct way to journalize this transaction?
Matapang received the electric bill for the month of February amounting to PHP3,800. Matapang will pay this bill on March 2016. How would Matapang journalize this transaction?
Matapang received the electric bill for the month of February amounting to PHP3,800. Matapang will pay this bill on March 2016. How would Matapang journalize this transaction?
Recall that Matapang acquired office equipment on February 15, 2016 for his repair shop business. The cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is estimated that after five years, the office equipment can be sold at a scrap value of PHP1,000. What is the annual depreciation expense?
Recall that Matapang acquired office equipment on February 15, 2016 for his repair shop business. The cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is estimated that after five years, the office equipment can be sold at a scrap value of PHP1,000. What is the annual depreciation expense?
Recall that Matapang acquired office equipment on February 15, 2016 for his repair shop business. The cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. Applying this formula to the exercise: Annual Depreciation = (Acquisition Cost Salvage or Residual Value) / Useful Life. What is needed to journalize this entry?
Recall that Matapang acquired office equipment on February 15, 2016 for his repair shop business. The cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. Applying this formula to the exercise: Annual Depreciation = (Acquisition Cost Salvage or Residual Value) / Useful Life. What is needed to journalize this entry?
Flashcards
Adjusting Entry
Adjusting Entry
Entries to update accounts before financial statements.
What are adjusting entries?
What are adjusting entries?
Journal entries to adjust records of a business.
Purposes of adjusting entries
Purposes of adjusting entries
To recognize unrecorded income and expenses, record expenses/prepayments, correct errors.
Accruals
Accruals
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Deferrals
Deferrals
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Prepayments
Prepayments
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Deferrals
Deferrals
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Accrued Expenses
Accrued Expenses
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Accrued Income
Accrued Income
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Depreciation
Depreciation
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Bad debts
Bad debts
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Deferred/Prepaid expenses
Deferred/Prepaid expenses
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Deferred/Unearned Revenue
Deferred/Unearned Revenue
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Accrued Income/Revenue
Accrued Income/Revenue
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Accrued Expenses
Accrued Expenses
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Depreciation
Depreciation
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Bad/Doubtful debt expense
Bad/Doubtful debt expense
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Study Notes
- Adjusting entries are crucial journal entries to bring business records up-to-date
- These entries are made at the end of an accounting period before closing to update asset, liability, revenue, and expense account balances
Importance of Adjusting Entries
- Ensuring financial statements are accurate and reliable, reflecting correct balances
- Correcting over or understatements of income and expenses
- Presenting an accurate representation of the business's financial status
Purposes of Adjusting Entries
- Acknowledging unrecorded income and expenses
- Documenting actual expenses and prepayments
- Making necessary corrections to any errors
Types of Adjusting Journal Entries
- There are two main categories: accruals and deferrals
Accruals
- Represent payments or expenses that are still owed
Deferrals
- Represent prepayments for services or products that have not yet been delivered
Adjusting Entries
- Prepayments are expenses already paid but not yet incurred or used
- Deferrals are income already received, but not yet earned
- Accrued Expenses are expenses that have been incurred or used, but not yet paid
- Accrued Income is income already earned but not yet received
- Depreciation Expenses are the allocation of plant assets cost over their estimated useful life
- Bad Debts/Doubtful Accounts are losses due to uncollectible accounts
Most Common Types of Adjusting Entries
- Prepaid/Deferred expenses
- Deferred revenue/income
- Accrued revenue/income
- Accrued expenses
- Assets depreciation
- Uncollectible accounts
Deferred Expenses or Prepaid Expenses
- These are initially recorded as assets but become expenses over time through business operations
- Example: Bebeh Company purchased office supplies on August 1, 2020, for P100,000, paid immediately
- By December 31, 2020, inventory records show P40,000 remaining
Deferred Income/Revenue or Unearned Income/Revenue
- Initially recorded as liabilities but become income over time
- Example: On February 15, 2016, Matapang contracts with Makisig for computer maintenance for two months at PHP40,000
- Makisig pays the full amount upfront
- By February 29, 2016, Matapang adjusts the books to reflect the service revenue earned for the first 15 days
Accrued Income/Revenue or Accrued Assets
- Income earned but not recorded or paid by the customer, essentially business receivables
- Example: On February 28, 2016, Matapang repairs Pedro's computer for PHP15,000
- Pedro cannot pay immediately, promising payment on March 1, 2016
- Matapang recognizes this income in February despite not being paid yet
Accrued Expenses or Accrued Liabilities
- Expenses incurred but not recorded or paid
- Example: On February 29, 2016, Matapang receives an electric bill of PHP3,800 for February, payable in March
- Matapang records electricity cost as an expense in February, even before payment
Depreciation
- Allocation of the asset's cost (purchase amount) over its useful life
- Common assets are buildings, equipment, furniture, and fixtures
- Example: Matapang acquired office equipment on February 15, 2016, costing PHP25,000 with an estimated useful life of five years and a salvage value of PHP1,000
- Using the straight-line method, annual depreciation is (25,000 - 1,000) / 5 = PHP4,800
Example of Adjusting Entries for Interest
- XYZ Co. issues a 10%, P50,000, one-year note payable on November 2, 20xx,
- The principal and interest are due the following year
- Total interest for one year is P5,000 (P50,000 x 10%)
- From November to December, the company has incurred two months of interest expense
- The two months interest is P833.33 (P50,000 x 10% x 2/12)
Bad Debt Expense (Doubtful Accounts)
- Refers to the estimated portion of accounts receivable that is unlikely to be collected
- For example, if a company estimates that P3,000 out of P40,000 accounts receivable will be uncollectible
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