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Posting

Reflecting amounts recorded via journal entries in


the ledger.
The extended Accounting
Equation

BALANCE SHEET

Assets = Liabilities + Capital


+ Income - Expenses
INCOME STATEMENT
Adjusting Entries
Adjusting entries are made to update the accounts
in an accounting system. Some accounts are not
up-to-date hence requiring adjustments to get
them to their correct balances.
Adjusting Entries
Adjusting entries are made at the end of the accounting period for:

1. Accrual of income

2. Accrual of expenses

3. Deferred income

4. Prepayments

5. Depreciation

6. Allowances.
Accrual Concept
The accrual concept states that income is
recognized when earned regardless of when
collected and expense is recognized when
incurred regardless of when paid.
Matching Principle
The matching principle aims to align expenses with
revenues. Expenses should be recognized in the
period when the revenues generated by such
expenses are recognized.
Main Purpose of Adjusting
Entries
The main purpose of adjusting entries is 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 income earned but not yet received
(services were already performed but not yet billed)
Accrued Expense expenses incurred but not yet paid (a
billing statement is received that is not yet paid)

Deferred Income income received but not yet earned


(partial services have been performed between receipt of
cash and completion of services)
Prepaid Expense expenses paid but not yet incurred (the
used up portion of prepayments need to be transferred to
expense)
Composition of an
Adjusting Entry
Adjusting entries affect at least one nominal account and one
real account.
Nominal Account - is an account whose balance is measured
from period to period. Nominal accounts include all accounts
in the Income Statement, plus owner's withdrawal. They are
also called temporary accounts or income statement
accounts.
Real Account - has a balance that is measured cumulatively,
rather than from period to period. Real accounts include all
accounts in the balance sheet. They are also called
permanent accounts or balance sheet accounts.
The extended Accounting
Equation
REAL ACCOUNTS
BALANCE SHEET

Assets = Liabilities + Capital


+ Income - Expenses
INCOME STATEMENT
NOMINAL ACCOUNTS
Prepayments
Expenses paid for in advance but not used up

Initially recorded as asset (Asset Method)

Determine the amount used up

Ensure what is left as asset is the unused portion

Ex: Prepaid Rent, Prepaid Advertising


Prepayment - Entry
Date Particulars Debit Credit
yyyy

mmm dd Expense Account amount


Asset (Prepaid Asset) Account amount
Explanation/Description of entry
Accrued Expenses
Expenses already used up but not yet paid

Determine the amount used up

Recognize a liability for the amount that has


been used up and needs to be paid in the future

Ex: Utilities Payable, Rent Payable


Accrued Expenses - Entry
Date Particulars Debit Credit
yyyy

mmm dd Expense Account amount


Liability (Payable) Account amount
Explanation/Description of entry
Accrued Income
Income already earned but payment has not yet
been collected
Determine the amount earned
Recognize a receivable for the amount that has
been earned and needs to be collected in the
future
Ex: Rent Receivable, Interest Receivable
Accrued Income - Entry
Date Particulars Debit Credit
yyyy

mmm dd Asset (Receivable) Account amount


Revenue Account amount
Explanation/Description of entry
Deferred Income
Cash has been collected but income has not yet
been earned

Determine the amount that us unearned

Ensure what is left as liability is the unearned


portion

Ex: Unearned Revenue


Deferred Income - Entry
Date Particulars Debit Credit
yyyy

mmm dd Liability (Unearned) Account amount


Revenue Account amount
Explanation/Description of entry
Depreciation
Physical depreciation results from wear and tear
due to frequent use and/or exposure to elements
like rain, sun and wind.
Functional or economic depreciation happens
when an asset becomes inadequate for its
purpose or becomes obsolete. In this case, the
asset decreases in value even without any
physical deterioration.
Deferred Income - Entry
Date Particulars Debit Credit
yyyy

mmm dd Liability (Unearned) Account amount


Revenue Account amount
Explanation/Description of entry
Depreciation
Recorded to recognize the wear and tear of fixed assets.

To compute depreciation, you need the


Cost
Residual Value
Estimated Useful Life
Method of Depreciation
Record an Expense and a Contra-Asset Account
Ex: Depreciation Expense Building,
Depreciation Expense - Equipment
Depreciation - Issues
Differing methods
Easiest: Straight Line Method
Acquisitions made within the period

Acquisition made at the first/second half of the


month
Presentation Net Book Value
The Asset is NEVER credited unless sold or impaired
Depreciation - Entry
Date Particulars Debit Credit
yyyy

mmm dd Expense Account amount


Contra-Asset Account amount
Explanation/Description of entry
Bad Debts
Recorded to recognize that some of the accounts
receivable is doubtful of collection.
An estimate is made by management based on
past experience and knowledge of the customer
Record an Expense and a Contra-Asset Account
Ex: Allowance for Accounts Receivable,
Allowance for Notes Receivable
Bad Debts - Entry
Date Particulars Debit Credit
yyyy

mmm dd Expense Account amount


Contra-Asset Account amount
Explanation/Description of entry
REFERENCE
www.accountingverse.com

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