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Questions and Answers
What primarily prompts the creation of adjusting entries in accounting?
What primarily prompts the creation of adjusting entries in accounting?
- To update account balances to reflect accurate information before preparing financial statements. (correct)
- To record every daily transaction of the business.
- To prepare the accounts for closure at the end of the year.
- To correct errors found in the initial journal entries.
Which of the following is the most accurate definition of adjusting entries?
Which of the following is the most accurate definition of adjusting entries?
- Entries made to correct mistakes found in the general ledger.
- Entries to record the purchase of new assets.
- Entries used to close out temporary accounts at the end of the accounting period.
- Journal entries made at the end of an accounting period to update certain revenue and expense accounts. (correct)
Why might a company's financial statements be misleading if adjusting entries are not made?
Why might a company's financial statements be misleading if adjusting entries are not made?
- The statement of cash flows will not balance.
- The income statement and balance sheet may present an inaccurate picture of the company's financial performance and position. (correct)
- The cash balance will be overstated.
- The retained earnings will always be understated.
Which accounting principle necessitates adjusting entries?
Which accounting principle necessitates adjusting entries?
What is the primary goal of recording adjusting entries?
What is the primary goal of recording adjusting entries?
What is the implication of failing to record necessary adjusting entries at the end of an accounting period?
What is the implication of failing to record necessary adjusting entries at the end of an accounting period?
What are the broad classifications of adjusting entries?
What are the broad classifications of adjusting entries?
If a company receives cash in advance for services it will provide later, how should this be initially recorded?
If a company receives cash in advance for services it will provide later, how should this be initially recorded?
Which situation exemplifies an accrued expense?
Which situation exemplifies an accrued expense?
What type of adjusting entry is needed when a business has used a portion of its prepaid insurance?
What type of adjusting entry is needed when a business has used a portion of its prepaid insurance?
Why are uncollectible accounts considered in adjusting entries?
Why are uncollectible accounts considered in adjusting entries?
If a company fails to adjust its books for depreciation expense, what is the impact on the financial statements?
If a company fails to adjust its books for depreciation expense, what is the impact on the financial statements?
A company purchases supplies for $1,000 on January 1st and records it as an asset. By the end of January, $600 of the supplies have been used. What adjusting entry is required on January 31st?
A company purchases supplies for $1,000 on January 1st and records it as an asset. By the end of January, $600 of the supplies have been used. What adjusting entry is required on January 31st?
On December 1, a company receives $3,000 for services to be performed over the next three months. By December 31, one-third of the services have been completed. What adjusting entry should be made?
On December 1, a company receives $3,000 for services to be performed over the next three months. By December 31, one-third of the services have been completed. What adjusting entry should be made?
A business provides services to a client on March 25 but does not bill the client until April 5. Payment is received on April 15. In which month should the revenue be recognized if adhering to accrual accounting?
A business provides services to a client on March 25 but does not bill the client until April 5. Payment is received on April 15. In which month should the revenue be recognized if adhering to accrual accounting?
At the end of the year, a company has not paid its employees for the last two weeks of work. What type of adjusting entry is needed?
At the end of the year, a company has not paid its employees for the last two weeks of work. What type of adjusting entry is needed?
A company initially recorded a $2,000 payment for a two-year insurance policy as an asset. At the end of the first year, what adjusting entry is required?
A company initially recorded a $2,000 payment for a two-year insurance policy as an asset. At the end of the first year, what adjusting entry is required?
Which of the following is NOT a typical adjusting entry?
Which of the following is NOT a typical adjusting entry?
What is the impact on a company's net income if it fails to make an adjusting entry for accrued revenues?
What is the impact on a company's net income if it fails to make an adjusting entry for accrued revenues?
Which of the following accounts would NOT normally be part of an adjusting entry?
Which of the following accounts would NOT normally be part of an adjusting entry?
What is the purpose of adjusting entries for deferrals?
What is the purpose of adjusting entries for deferrals?
What is the correct adjusting entry for accrued salaries of $5,000 at the end of the accounting period?
What is the correct adjusting entry for accrued salaries of $5,000 at the end of the accounting period?
On July 1, a company pays $12,000 for a one-year insurance policy. What adjusting entry should be made on December 31?
On July 1, a company pays $12,000 for a one-year insurance policy. What adjusting entry should be made on December 31?
A company estimates that 2% of its accounts receivable will be uncollectible. If accounts receivable total $100,000, what adjusting entry should be made?
A company estimates that 2% of its accounts receivable will be uncollectible. If accounts receivable total $100,000, what adjusting entry should be made?
What is the effect on the accounting equation if an adjusting entry for depreciation is not recorded?
What is the effect on the accounting equation if an adjusting entry for depreciation is not recorded?
A company receives $6,000 on November 1 for rent covering six months (November through April). What adjusting entry is made on December 31?
A company receives $6,000 on November 1 for rent covering six months (November through April). What adjusting entry is made on December 31?
A business owes $1,000 for utilities used in December, which will be paid in January. What adjusting entry is required on December 31?
A business owes $1,000 for utilities used in December, which will be paid in January. What adjusting entry is required on December 31?
If a company records prepaid expenses as expenses when paid, what is the effect on the financial statements when adjusting entries are not made at year-end?
If a company records prepaid expenses as expenses when paid, what is the effect on the financial statements when adjusting entries are not made at year-end?
Flashcards
Adjusting Entry
Adjusting Entry
Entries made at the end of an accounting period to update balances.
Accruals in adjusting entries
Accruals in adjusting entries
Payments/expenses on credit.
Deferrals in adjusting entries
Deferrals in adjusting entries
Prepayments where service/products aren't yet rendered or delivered.
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 expenses
Depreciation expenses
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Bad Debts/Doubtful Accounts
Bad Debts/Doubtful Accounts
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Deferred Expenses
Deferred Expenses
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Deferred Income/Revenue
Deferred Income/Revenue
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Accrued Income/Revenue
Accrued Income/Revenue
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Accrued Liabilities
Accrued Liabilities
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Depreciation
Depreciation
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Bad debt expense
Bad debt expense
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Study Notes
Adjusting Entries Overview
- Adjusting entries are journal entries used to update business records
- They are made at the end of the accounting period, before closing procedures
- Adjustments update asset, liability, revenue, and expense account balances
- Balances are updated for financial statement preparation
Importance of Adjusting Entries
- Some trial balance accounts require updated balances before issuing financial statements
- Making journal entries before financial statement issuance creates an adjusting entry
- Failure to adjust entries may overstate or understate income and expenses, leading to inaccurate financial statements
Purposes of Adjusting Entries
- To recognize unrecorded income and expenses
- To record actual expenses and prepayments
- To make necessary adjustments to errors
Types of Adjusting Journal Entries
- Primarily accruals and deferrals
Accruals
- Refer to payments or expenses on credit that are still owed
Deferrals
- Refer to prepayments where the service/products have not yet been rendered/delivered
Prepayments
- Expenses already paid but not yet incurred or used
Deferrals
- Income already received but not yet earned
Accrued Expenses
- Expenses already incurred or used but not yet paid
Accrued Income
- Income already earned but not yet received
Depreciation Expenses
- Allocation of plant assets cost over its estimated useful life
- Expenses allotted for wear and tear of property, plant, and equipment over time
Bad Debts/Doubtful Accounts
- Losses due to uncollectible accounts
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
- Items initially recorded as assets, expected to become expenses over time
- Example: Bebeh Company purchases office supplies - August 1, 2020, for P100,000 cash
- Remaining supplies are valued at P40,000 on December 31, 2020
- Adjusting entry recognizes the expense of supplies used
Deferred Income/Revenue or Unearned Income/Revenue
- Items initially recorded as liabilities, expected to become income over time
- Example: Matapang enters a contract with Makisig on February 15, 2016, for PHP40,000
- It is for computer maintenance for two months
- Makisig pays total contract amount in full on the same date
- Adjusting entry recognizes service revenue earned by end of February
Accrued Income/Revenue or Accrued Assets
- Income items earned but not recorded or paid by the customer; receivables of the business
- Example: Matapang repairs Pedro's computer on February 28, 2016, for PHP15,000
- Pedro could not pay due to an out-of-town trip promising payment on March 1, 2016
- Adjusting entry recognizes income earned in February
Accrued Expenses or Accrued Liabilities
- Expenses incurred but not recorded or paid
- Example: Matapang receives an electric bill on February 29, 2016, for PHP3,800
- Payment due in March 2016
- Adjusting entry records the cost of electricity used in February
Depreciation
- Allocation of cost or purchase amount of assets (buildings, equipment, furniture, etc.) subject to depreciation
- Example: Matapang acquired office equipment for PHP25,000 on February 15, 2016 with a useful life of 5 years, and a potential scrap value of PHP1,000
- Annual Depreciation = (Acquisition Cost – Salvage Value) / Useful Life
- Annual Depreciation = (25,000 - 1,000) / 5 = PHP4,800
Bad Debt Expense Details
- An expense reflecting the portion of accounts receivable unlikely to be collected
- Often, the company policy dictates the percentage for a doubtful account
- Assume estimation of doubtful accounts out of PHP40,000 accounts receivable is PHP3,000
Note Payable Interest Example
- XYZ Co. issues a 10%, ₱50,000, one-year note payable on November 2, 20xx, with principal and interest due the next year
- ₱50,000 x 10% = ₱5,000 is total interest for one year
- November to December is equivalent to two months
- Company already incurred two months interest expense from November to December.
- To compute the 2 months interest ₱50,000 x 10% x 2/12 = ₱833.33
- This amount needs adjusting entries.
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