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Reviewer-IN-FAR - Lecture notes financial accounting and

reporting 1-10
ACCOUNTANCY (Our Lady of Fatima University)

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The Adjusting Entries Process Expense Method-recognition of expenses that are

incurred/used rather than unused or not yet occur
-made before the preparation of financial statements
THE TWO METHODS IN RECORDING DEFERRED
-AJE assigns revenues to the period in which they are INCOME
earned, and expenses to the period in which they are
incurred Liability Method- recorded when the amount is
collected.
-necessary so that asset, liability, revenue and expense
account balances are correctly recorded The common accounts used are: Unearned Revenue,
Deferred Income, and Advances from Customers
-without AJE financial statements may not fairly show
the solvency of the entity in the balance sheet and the Income Method- recognized when the amount has
profitability in the income statement been earned regardless when it was collected

Accrual Basis Matching Principle

-SFP and SCI are prepared on the accrual basis of
accounting in order to meet their objectives  The matching principle directs a company to
-recognized when they occur and not as cash is report an expense on its income statement in
received or paid the same period as the related revenues.
-inform users not only of past transactions but also the  The matching principle is associated with
obligation to pay cash in the future, and of resources
the accrual method of accounting and adjusting
that represent cash to be received in the future
‘an expense already incurred but unpaid’ entries
-(accrued expense)  The matching principle requires that
‘revenue earned but uncollected’ revenues and any related expenses be
-(accrued income) recognized together in the same period.
-increases both balance sheet and income statement
Accounting Cycle
Cash Basis
-does not recorded until the cash is paid or received 1) Analyzation and Identification of events to be
-cash receipts treated as revenues recorded
-cash payments as expenses 2) Transactions are recorded in the Journal
-no adjustments are made for prepaid, unearned, and 3) Journal Entries are posted to the ledger
accrued items
4) Preparation of Trial Balance
Deferral 5) Preparation of the Worksheet including AJE
‘an expense already paid but not yet incurred’ 6) Preparation of the Financial Statements
-(prepaid expenses) 7) Adjusting Journal entries are Journalized and
‘revenue already collected but not yet earned’ Posted
-(unearned income) 8) Closing Journal Entries are Journalized and
Posted
THE TWO METHODS IN RECORDING PREPAID 9) Preparation of a Post-Closing Trial Balance
ACCOUNTS 10) Reversing Journal Entries are Journalized and
Posted
Asset Method- a prepaid expense account (an asset) is
recorded when the amount is paid. * AS OF are used in Financial Position

Prepaid expense accounts include: Office Supplies, * FOR THE MONTH ENDED are used for Income
Prepaid Rent, Prepaid Insurance, and others. Statement and SCOE

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EFFECTS OF OMITTING ADJUSTMENTS Inflow-from sale of property and equipment,

investments in debt or equity securities, collections to
 Failure to do something especially a moral/ notes receivables
legal obligation
 When accountant failed to include the Outflow- to acquire property and equipment, acquiring
proper adjusting entries, the resulting debt/equity securities, to make loans to others generally
financial statements will not accurately in the form of notes receivables
reflect the financial position and the
performance of the entity FINANCING ACTIVITIES

STATEMENT OF CASH FLOWS -obtaining resources from owners and creditors

 Provides information about the cash receipts -generally long term liability and equity
and cash payments of an entity during the Inflows-from investment by owners, issuance of debt
period (bond and notes)
 Shows the net increase or decrease in cash
during the period and the cash balance at the Outflows- payments to owners in the form of
end of the period withdrawals, and to settle notes payable
 Helps project the net cash flows of the entity
Direct Method
OPERATING ACTIVITIES
 The entity’s net cash provided by operating
-involves providing services, producing and delivering activities is obtained by adding the individual
goods operating cash inflows and then subtracting the
individual operating cash outflows
-inflow/ outflow of cash from acquiring, selling, and
delivering goods Indirect Method

E.G.,  Derives the net cash provided by operating

activities by adjusting profit for incomes and
Inflow- from sale of goods and performance of services, expense items not resulting from cash
royalties, fees, commissions and other revenues transactions
Outflow-payments to suppliers of goods and services,  The adjustments begins with profit followed by
the addition of expense and charges
employees, taxes, interest expense, and etc.
PROFIT PXXX
INVESTING ACTIVITIES ADJUSTMENTS FOR:
NON CASH EXPENSE (DEP’N) XXX
- -include cash activities related to noncurrent assets. INCREASE IN ASSET (XXX)
Noncurrent assets include: long-term investments; DECREASE IN LIABILITY (XXX)
property, plant, and equipment; the principal amount of DECREASE IN ASSET XXX
loans made to other entities. INCREASE IN LIABILITY XXX
For example, cash generated from the sale of land and CASH FLOWS FROM OA PXXX
cash paid for an investment in another company are
included in this category.

*note that interest received from loans is included in

operating activities

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