TOPIC 1 - Accounting and Its number of shares bought and are

evidenced by certificates of stock.

Environment
Accounting – “Language of the Business” TYPES OF BUSINESS OPERATIONS
– the art of recording,  Service Business
classifying, and summarizing - simplest type of business which
in a significant manner and in performs service, for a fee, to a
terms of money, transactions client or customer. Examples are
and events the schools, airlines, travel
– the process of identifying, agencies, barbershops, beauty
measuring and communicating parlors and the like.
economic information  Merchandising Business
- buys goods or merchandise that
– a service activity. Its function are physically ready for sale and
is to provide quantitative sells these products at higher
information, primarily financial prices. A good example of this is a
in nature, about economic bookstore.
entities  Manufacturing Business
- buys raw materials first and after
Business – economic unit that controls changing the form sells the
resources and engages in product to the customer. Ex.
buying and selling of goods Factories.
or services.
TYPES OF BUSINESS (SMM+RIFI)
FORMS OF BUSINESS ORGANIZATIONS
 Service
 Soles Proprietorship  Merchandising/ Trader
 a business organized by one  Manufacturer
person who usually acts as  Raw Materials
manager. As sole owner he enjoys  Infrastructure
all the profits by himself. Most  Financial
small businesses such as beauty  Insurance
parlors, dress shops, barbershops
and bakeries are sole proprietor- ACTIVITIES IN BUSINESS
owned since only a small amount ORGANIZATION (FIO)
of capital is needed.
 Partnership  Financing Activities
 business owned by two or more - The methods an organization uses to
individuals who contribute money, obtain financial resources from
property and talent. These financial markets and how it manages
individuals are called partners. these resources.
They manage the business and  Investing Activities
share the profits among - Managers use capital to acquire
themselves. other resources used in the
transformation process---that is, to
 Corporation transform resources from one form to
- business organized as a separate a different form.
legal entity from the owners. The  Efficient Business
word corporation comes from the - Provides goods and services
Latin word “corpus” meaning body. at low costs relative to their
As a legal entity, it can enter into selling prices.
contracts, own property and issue
stocks. The investors are called
stockholders whose rights over the
business are expressed in the
 Effective Business
 - Successful in providing goods report information about how a business has
and services demanded by the performed.
customers.
 Operating Activities  Investors
- Involve the use of resources to - who may invest in a business and
design, produce, distribute, and acquire a part ownership in it are
market goods and services. interested in its past success and its
potential earnings.
 OBJECTIVES OF ACCOUNTING
- judge the prospects for profitable
 To keep systematic records investment.
 To protect business properties
 Creditors
 To ascertain operational profit - who lend money or deliver goods and
or loss services before being paid, are
 To ascertain the financial interested mainly in whether a
company will have the cash to pay
position of the business
interest charges and to repay the debt
 To facilitate rational decision at the appropriate time.
making
Users with an Indirect Financial Interest
FATHER OF ACCOUNTING
- , society as a whole, through
LUCA PACIOLI governmental and public groups,
has become one of the largest and
 Franciscan Friar and a celebrated most important users of
mathematician accounting information. Users who
need accounting information to
 Generally associated with double-entry make decisions on public issues
bookkeeping. include tax authorities, regulatory
 Regarded as the father of double entry agencies, and various other
groups.
accounting
 He stated that the purpose of  Tax Authorities
bookkeeping was “ to give the trader - Government at every level is
without delay information as to his financed through the collection
of taxes. Companies and
assets and liabilities”. individuals pay many kinds of
THE USERS OF ACCOUNTING taxes, including national and
INFORMATION local taxes, business and
income taxes; social security
Owner - may be the single capitalist in a sole and other payroll taxes; excise
proprietorship business or an existing co- taxes; and transfer taxes.
owner in a partnership or corporation. The
owner or shareholder’s primary concern from  Regulatory Agencies
the financial reports is to check the financial - Most companies must report
position and performance of the company and periodically to one or more
monitor his ownership interest over the regulatory agencies at the
entity’s net assets. national and local levels. For
example, all publicly traded
Managers – Internal users of information corporations must report
– plan, organize, and run the periodically to the Securities
business. and Exchange Commission
(SEC).
Users with a Direct Financial Interest
- Another group of decision makers
who need accounting information are those Other Groups
with a direct financial interest in a business.
They depend on accounting to measure and  Labor Unions
 - study the financial produce and sell a product or
statements of corporations as service.
part of preparing for contract - emphasis is on cost
negotiations; a company’s determination, cost analysis
income and costs often play an and cost control.
important role in these  Managerial Accounting
negotiations. - presentation of accounting
data primarily for internal
 Financial Analysts, Brokers, users.
Underwriters, Lawyers,  Auditing
Economists, & Financial - deals with independent
Press verification and examination of
the accounting records for the
- who advise investors and
purpose of giving an opinion
creditors.
on the fairness of its operation.
- also have an indirect interest  Government Accounting
in the financial performance - uses fund accounting, deals
and prospects of a business. with the administration or use
of funds to bring about service
 Consumer Groups, to the community. Its objective
Customers, & General is more on how the funds are
Public used to service the people
rather than to earn profit.
- have become more concerned
 Taxation/Tax Accounting
about the financing and
- includes the preparation of
earnings of corporations as
tax returns and the
well as the effects that
consideration of the tax
corporations have on inflation,
consequences of proposed
the environment, social issues,
business transactions or
and the quality of life.
alternative courses of action.
 Economic Planners
ACCOUNTANCY ACT OF 2004
- use aggregated accounting
 Also known as RA No. 9298
information to set and evaluate
 signed by President Gloria Macapagal
economic policies and
Arroyo on May 13, 2004.
programs.
 provides that the practice of
BRANCHES OF ACCOUNTING accountancy shall include, but not
limited to :
 Bookkeeping  Public Accountancy
- routine activity of recording,  Commerce and Industry
classifying and summarizing  Education/Academe
business transactions in a  Government
systematic manner. It is the
procedural aspect of
accounting. (The Accountancy Profession Practices on
 Financial Accounting page 1-27)
- involves the preparation and
ACCOUNTING ASSUMPTIONS
interpretation of financial
statements primarily for  Business Entity Concept
external users. - assumes that a business
 Cost Accounting enterprise is separate and
- deals with the recording, distinct from the owner or
classifying and summarizing investor. It is assumed that in
the details of materials, labor preparing the financial
and overhead necessary to statements only the properties,
liabilities, income and
 expenses of a particular overstated or liabilities to be
business are reported therein. understated, sales revenues to
Personal properties and be overstated, or expenses to
liabilities of the owner are not be understated.
included in the business - The inventory valuation
financial statements. should be lower rather than
 Going Concern higher. Conservatism in this
- expected that the business is situation increases the cost of
a continuing concern or that it sales and decreases the gross
has an indefinite existence. margin (also called the gross
This is the reason why profit).
properties are recognized at  Historical Cost Principle
cost without regard to the - Assets should be recorded
change in their market values based on cost which is the
in subsequent periods. This amount exchanged at the time
concept supports the exchange the item was acquired.
price or cost principle.  Accrual Principle
 Revenue Recognition Principle
 Periodicity - – Revenue is
- since that statement users recognized when it is
need financial information on a earned. For a service
regular basis and the success business, revenue is
of its business operation earned when service
depends on financial has been rendered. For
information contained in the merchandising or
accounting reports, then its life manufacturing
has to be divided into specific concern, revenue is
time intervals called earned when the
accounting period. merchandise or
 Unit of Measure (Monetary) product has been sold
- – All business transactions or delivered to the
are measured and recorded customer.
using only one unit of
measurement. Since money is
used as a medium of exchange,
it is therefore the most  Expense Recognition Principle
practical unit of measuring - There can be no
financial data. Note that in revenue earned
accounting, only data without expenses being
measurable in terms of money incurred. (3 ways of
are recognized and recorded in recognizing):
its books.  Expense is
recognized
when revenue
ACCOUNTING PRINCIPLES is recognized
because it is
 Objectivity
directly
- requires that financial data
associated to it,
entered in the records must be
meaning the
verifiable and supported by
expense would
documents such as invoices,
not have been
vouchers, or official receipts.
incurred if
 Conservatism
there was no
- A business should never
revenue.
prepare financial statements
 Resources or
that will cause balance sheet
assets that will
items such as assets to be
benefit the
 business over a
number of
years should be TOPIC 2 - Accounting Concepts
spread out as and Principles
expense over
the years that
will benefit
from its use. BASIC PRINCIPLES OF ACCOUNTING
 Periodic
 Objectivity Principle
expenses are
- accounting records are based
necessary to
on information that flows from
operate the
activities documented by
business such
objective evidence.
as salary of
 Historical Cost
your
- assets should be recorded at
employees,
their actual cost.
rent of your
 Revenue Recognition
store,
Principle
telephone, light
- revenue is to be recognized in
and water
the accounting period when
used.
goods are delivered or services
 Materiality & Aggregation
are rendered or performed.
- An entity shall present
 Expense Recognition
separately each material class
Principle
of similar items and shall
- expense should be recognized
present separately items of
in which goods and services
dissimilar nature or function
are used to produce revenue
unless they are immaterial.
and not when the entity pays
 Full Disclosure Principle
for those goods or services.
- Means that the financial
 Adequate Disclosure
reports should include any
- requires that all relevant
information that could affect
information that would affect
the decisions made by external
the user’s understanding and
users. Of course, the benefits
assessment must be disclosed
of that information should
in the reports.
exceed the costs of providing
 Materiality
the information.
- financial reporting is only
 Substance Over Form
concerned with information
- Dictates that assessment of
that is significant enough to
business transaction is based
effect evaluations and
on its economic substance
decisions.
even if it will conflict with its
 Consistency Principle
legal form.
- firms uses the same
accounting method from time
ACCOUNTING STANDARDS IN THE to time.
PHILIPPINES
UNDERLYING ASSUMPTIONS
- Accounting standards are
 Accrual
authoritative statements of how
 Going Concern
particular type of transactions and
 Economic Entity
other events should be reflected in
 Accounting Period
financial statements.
 Monetary Unit
- Accordingly, compliance with
accounting standards will normally
be necessary for the fair
presentation of financial statements.
QUALITATIVE CHARACTERISTICS OF - These are claims against
FINANCIAL INFORMATION customers arising from sale
of services or goods on
Relevance credit. This type of
Faithful Representation receivable offers less
Completeness security than a promissory
Neutrality note.
Freedom from Error  Inventories
Verifiability - Assets which are:
Comparability (a) held for sale in the
Understanding ordinary course of business
Timeliness (b) in the process of
production for such sale;
(c) in the form of materials
FINANCIAL STATEMENTS or supplies to be consumed
in the production process or
 Income Statement in the rendering of services
- Statement of Financial Performance  Prepaid Expenses
 Balance Sheet - Expenses paid for by the
- Statement of Financial Position business in advance.
 Statement of Changes in Owner’s  Non-Current Assets
Equity  Property, Plant &
 Statement of Cash Flow Equipment
- Tangible assets that are
ELEMENTS OF FINANCIAL STATEMENTS held by an enterprise for use
 Assets in the production and supply
 Liabilities of goods or services, or for
 Equity rental to others, or for
 Revenue administrative purposes and
which are expected to be
 Expenses
used during more than one
ACCOUNTING TERMINOLOGIES period.
 Accumulated Depreciation
 Statement of Financial Position - A contra account that
 Current Assets contains the sum of the
 Cash periodic depreciation
- Any medium of exchange charges.
that a bank will accept for  Intangible Assets
deposit at face value. It - Nonmonetary assets
includes coins, currency, without physical substance
checks, money orders, bank held for use in the
deposits and drafts. production or supply of
 Cash Equivalents goods or services, for rental
- Short term, highly liquid to others, or for
investments that are readily administrative purposes.
convertible to known  Current Liabilities
amounts of cash and which  Accounts Payable
are subject to an - represents the reverse
insignificant risk of changes relationship of accounts
in value. receivable. By accepting the
 Notes Receivable goods and services, the
- A note receivable is a buyer agrees to pay for them
written pledge that the in the near future.
customer will pay the  Notes Payable
business a fixed amount of - Is like a notes receivable
money on a certain date. but in the reserve sense. The
 Accounts Receivable business entity is the maker
 of the note; that is, the - increased by the amount of
business entity is the party profit earned during the year
who promises to pay the or is decreased by loss.
other party a specified - Cash or other assets that
amount of money on a the owner may withdraw
specified future date. from the business ultimately
 Accrued Liabilities reduce it.
- Amounts owed to others for -This account title bears the
unpaid expenses. This name of the owner.
account includes salaries  Withdrawals
payable, utilities payable, - When the owner of a
interest payable and taxes business withdraws cash or
payable. other assets such are
 Unearned Revenues recorded in the drawing or
- When the business entity withdrawal account rather
receives payment before than directly reducing the
providing customers with owner’s equity account
goods or services.  Income Summary
 Current Portion of Long - A temporary account used
Term Debt at the end of the accounting
- Portions of mortgage notes, period to close income and
bonds and other longterm expenses. This account
indebtedness which are to be shows the profit or loss for
paid within one year from the period before closing to
the balance sheet data. the capital account.
 Non-Current Liabilities
 Mortgage Payable  Income Statement
- This account records long-  Income
term debt of the business  Service Income
entity for which the business - Revenues earned by
entity has pledged certain performing services for a
assets as security to the customer or client.
creditor  Sales
 Bonds Payable - Revenues earned as a
- Business organizations result of sales of
often obtain substantial merchandise.
funds of money from lenders  Expenses
to finance the acquisition of  Cost of Sales
equipment and other needed - The cost incurred to
assets. They obtain these purchase or to produce the
funds by issuing bonds. The products sold to customers
bond is a contract between during the period.
the issuer and the lender  Salaries or Wages
specifying the terms of Expense
repayment and the interest - Includes all payment as a
to be charged. result of an employer-
employee relationship.
 Telecommunications,
 Owner’s Equity Electricity, Fuel and Water
 Capital Expenses /Utilities
- Latin capitalist, meaning Expense
property - Expenses related to
- used to record the original telecommunications
and additional investments facilities, consumption of
of the owner of the business electricity, fuel and water.
entity.  Rent Expense
 - Expense for space,  Assets
equipment or other asset + Increases in debit side
rentals. - Decreases in credit side
 Supplies Expense  Liabilities
- Expense of using supplies + Increases in credit side
in the conduct of daily - decreases in debit side
business.
 Insurance Expense
- Portion of premiums paid INCOME STATEMENTS
on insurance coverage which
 Income
has expired.
+ Increases in credit side
 Depreciation Expense
- decreases in debit side
- The portion of the cost of a
 Expenses
tangible asset allocated or
+ Increases in debit side
charged as expense during
- Decreases in credit side
an accounting period.
 Uncollectible Accounts NORMAL BALANCE OF AN ACCOUNT
Expense
- The amount of receivables
estimated to be doubtful of
collection and charged as Account Increases Normal
expense during an Recorded By Balances
accounting period. Debit Credit Debit Credit
 Interest Expense
- An expense related to the
Assets X X
use of borrowed funds.

THE ACCOUNTING EQUATION Liabilities X X

Assets = Liabilities + Owner’s Equity Owner’s X X

Equity/Capital
Withdrawals X X
DOUBLE ENTRY SYSTEM

- Accounting is based on the double

Income X X
entry system which means the dual
effects of a business transaction is
Expenses X X
recorded.

 A debit side must have the

corresponding credit side.
 For every transaction there must
be one or more accounts debited
and one or more accounts credited.
 Each transaction affects at least
two accounts. TOPIC 3 – Accounting for
THE ACCOUNT
Service Business

- Basic summary device of accounting.

 3 Parts: THE ACCOUNTING CYCLE

 Account Title
 Left Side/Debit Side - refers to a series of sequential steps or
(latin=debere=Dr) procedures performed to accomplish the
 Right Side/Credit Side accounting process.
(latin=credere=Cr)

BALANCE SHEET ACCOUNTS

ACCOUNTING FOR BUSINESS relating to a sale transaction and
TRANSACTIONS indicating the products, quantities,
and agreed prices for products or
- Business Transaction is the occurrence services the seller had provided the
of an event or a condition that affects buyer. Payment terms are usually
financial position and can be reliably stated on the invoice.
recorded.  Cash Register Tapes
- Official Receipts
 Identifying of Events to be
 Bank Deposit Slips
Recorded.
- a form supplied by a bank for a
 Journalization
depositor to fill out, designed to
 Posting
document in categories the items
 Trial Balance
included in the deposit transaction.
 Preparation of the Worksheet
 Bank Statements
including Adjusting Entries
- a printed record of the balance in a
 Preparation of the Financial
bank account and the amounts that
Statements
have been paid into it and withdrawn
 Adjusting Journal Entries are
from it, issued periodically to the
Journalized and Posted
holder of the account.
 Closing Entries are Journalized and
 Checks
Posted
- A cheque (or check in American
 Preparation of a Post Closing Trial
English)
Balance
is a document that orders a bank to
 Reversing Journal Entries are
pay a specific amount of money from a
Journalized and Posted
person's account to the person in
FINANCIAL TRANSACTION WORKSHEET whose name the cheque has been
issued.
- Every financial transaction can be  Purchase Requisition
analyzed or expressed in terms of its - Purchase Request is a precise
effects on the accounting equation. document generated by an internal or
external organization to notify the
- The financial transactions will be analyzed
purchasing department of items it
by means of a financial transaction
needs to order, their quantity, and the
worksheet which is a form used to analyzed
time frame that will be given in the
increases and decreases in the assets,
future.
liabilities, or owner’s equity of a business
 Purchase Orders
entity.
- a commercial document and first
official offer issued by a buyer to a
seller, indicating types, quantities, and
agreed prices for products or services.

 Receiving Report
SOURCE DOCUMENTS - an internal document used to record
what materials and inventory were
- Transactions and events are the starting received by the company.
points in the accounting cycle.  Credit Memorandum(memo)/Credit
Note
- These are the bases for the journal - a commercial document issued by a
entries some of the more common sources seller to a buyer. The seller usually
are sales invoices, cash register tapes, issues a credit memo for the same or
official receipts, bank deposit slips, bank lower amount than the invoice, and
statements, checks, purchase orders, then repays the money to the buyer or
timecards, and statement of accounts. sets it off against a balance due from
other transactions.
 Sale Invoice
- An invoice, bill or tab is a commercial TRANSACTION ANALYSIS (Four Basic
document issued by a seller to a buyer, Steps)
 1. Identify the transactions from source - Other books of account
documents.
2. Indicate the accounts-either assets, - purpose of the ledger is to summarize the
liabilities, equity, income or expenses- effects
affected by the transaction. of all business transactions of the
3. Ascertain whether each account is company on a
increased or decreased by the specific account. For this reason, the
transaction. ledger is also
4. Using the rules of debit and credit, known as the book of final entry.
determine whether to debit or credit
THE TRIAL BALANCE
the account to record its increase or
decrease. - After obtaining the ending balances of all
accounts from posting in the ledger, the next
JOURNALIZATION
step in the accounting cyle is to prepare the
- The journal is one of the books of accounts. It trial balance.
is also known as the book of original entry as - In a trial balances, all open accounts are
the company records all the transactions in summarized.
chronological order in this book. - An account is considered open if it has a
balance (either debit or credit), and an
- A company may have various kinds of account is considered closed if it has a zero
journals, but most companies will most likely balance (debit is equal to credit).
have a general journal. This is the most basic
form of journal. Its functions are: - The goal of the trial balance is to ensure
that all debits are equal to all credits after
1. To disclose the complete effects of a journalizing and posting. This is based on the
transaction. concept of double entry bookkeeping where
2. To provide a chronological record of the debit must always equal credits.
transactions.
3. To assist in the prevention or location of  Notice that the accounts are presented
errors which may have been omitted. with the following order: assets,
liabilities, equity, income, expense.
THE ACCOUNT After footing the balances, the total
debit should be equal to the total
- The general journal is the simplest journal. credit.
Format  Also notice that not all accounts in the
1. Date chart of accounts appear in the trial
2. Account Titles and Explanation balance. Again, this is because only
3. P.R. (posting reference) open accounts appear in the trial
4. Debit balance.
5. Credit
If the total debit is not equal to total credit,
 Simple Journal Entry then an error has most likely been committed
- Which involves only of two accounts somewhere in the recording phase.
(debit and credit)
 Compound Journal Entry  Some possible areas where these had
- A transaction will involve more than occurred can be in journaling the
two accounts transaction where debits should
 Memorandum Entry always equal to credit. Another set of
- (memo entry) is a narrative entry possibilities is
with the  transferring a wrong amount from the
purpose of simply reminding or journal to the ledger,
explaining an event that has occurred  posting to the wrong account,
in the company, but did not affect the  posting to the debits instead of the
company’s financial position. credits or vice versa, or
 simply omitting an entry when posting.

THE LEDGER Lastly, an error may also occur when footing

all the balances.
 - directs a company to report costs and
expenses on its statement of performance in
Common types of errors committed are the period in which the related revenues are
transplacement errors and transposition earned.
errors.
- Stated differently, it means revenues and
 Transplacement Errors related expenses be recognized simultaneously
- occur when the decimal point is in the same accounting period.
erroneously placed to the left or right
of the correct placement. This is - If an expense have no relation to revenues,
sometimes known as a slide error since the expense should be reported on the
the decimal point slides form its statement of performance in the accounting
correct placement. period in which it is used up.
 Transposition Errors
- occurs when an amount is recorded - If the future benefit of a cost cannot be
incorrectly as the result of switching determined, it should be charged to expense
the positions of two or more digits. immediately.

EXPENSE RECOGNITION PRINCIPLES

 Cause and Effect (Matching)

TOPIC 4 – Adjusting Entries - cost that is directly related to
and Worksheet Preparation revenue is recognized as expense
when the revenue is recognized in the
same accounting period.
 Systematic & Rational Allocation
ADJUSTING ENTRIES
- cost that are not directly linked to the
- entries made at the end of the accounting revenue are recognized as expense by
period to bring the balance of the accounts allocating the cost over the periods
(assets, liabilities, expense and revenue) up to benefited.
date and make it sure it comply with matching  Immediate Recognition
principle. - the cost incurred by the company
linked to any production revenue, nor
- made to report the revenues that have been provide future economic benefits or it
earned and expenses that have been incurred cease to qualify for the recognition in
during the period but not yet recognized in the the statement of financial position as
accounting records so that it comply with an asset. Therefore, it will be
accrual concept of accounting. recognized as expense outright.
PURPOSE OF ADJUSTING

- to match income and expenses (matching TYPES OF ADJUSTING ENTRIES

principle) to appropriate accounting period. It  Accruals
certify that only relevant revenue earned and - the recognition of “an expense
expenses incurred during the period are already incurred but unpaid” or
reported in the financial statement. Its “revenue earned but uncollected”. This
preparation applies the accrual principle and adjustment deals with an amount
the time period concept of accounting. unrecorded in any account, the entry,
in effect, increases both a balance
- The adjusting journal entries is one of the sheet and an income statement
major steps in the accounting cycle. It is made account.
before the books are closed for the period and  Accruing expenses to reflect
the financial statements is issued. expenses incurred during the
accounting period that are
MATCHING PRINCIPLE unpaid and unrecorded.
- one of the basic underlying concepts in  Accruing expenses to reflect
accounting. expenses incurred during the
accounting period that are
unpaid and unrecorded.
 Accrued Revenue  Prepayments (Deferrals)
 company’s asset that exist at - include postponement of the
the end of the accounting recognition of revenues received but
period that the company has not yet earned and expenses paid but
not yet recorded as of the not yet incurred.
statement of financial position - represents accounts that were
date (balance sheet date). already recorded as an asset and
 The adjustment for accrued liability in the statement of financial
revenue both increases the position.
receivable account (for the  Unearned Revenue
unrecorded asset) and revenue - revenue already received by the
account (for the unrecorded company but not yet earned as of the
actual earnings) of the balance sheet date. Unearned revenue
company during a given is a liability account.
period.  Liability Method
 Ex. service already rendered - records initially the advance
but not yet collected, accrued collection as a liability
interest on notes receivable. (unearned revenue) then, at
 Adjusting Entry: the end of the accounting
Dr. Receivable period, the portion of
Cr. Income collection that has been earned
will be recorded as revenue.
 Accrued Expenses
 company’s liability that exists  Revenue Method
at the end of the accounting - records initially the advance
period that the company has collection as revenue (earned
not recorded as of the revenue) then, at the end of
statement of financial position the accounting period, the
(balance sheet date.) portion of collection that was
 adjustment for accrued not earned during the
expense both increase the accounting period will be
expense account (for the recorded as liability.
unrecorded actual expense) of
the current accounting period
and the liability account (for Liability Method Revenue Method
the unrecorded obligation. To Dr. Cash Dr. Cash
 Ex. accrued interest on notes record Cr. Unearned Cr. Revenue
payables, utility bills, salaries receipt Income
and wages, tax expenses that of cash
are incurred before payment is To Dr. Unearned Dr. Revenue
made. record Income Cr. Unearned
 Adjusting Entry: adjustin Cr. Revenue Income
g entry
Dr. Expense
Cr. Payable
 Prepaid Expenses
 Effects: If the adjustment
- assets purchased by the entity to be
for the accrued expenses
used in the business operations but
are not made, the expense
have not yet consumed as of the
and the liability accounts
statement of financial position date
will be understated at the
(expenses paid in advance.)
end of the accounting
- an asset account.
period, which in turn
- However, the portion of the asset that
overstate net income and
has expired through passage of time or
capital. Therefore, the
used through consumption during the
statement of financial
period will be recorded as an expense.
position and statement of
- Ex. Supplies, Prepaid Rent and
performance will be
Prepaid Insurance.
misstated.
 - assigns the same amount of the
 Asset Method deprecation to each period over the
- records initially the prepaid life of the asset.
expense as an asset account, - Formula
then at the end of the Depreciation Expense = Asset Cost -
accounting period, the expired Estimated Value/Estimated Life
portion of the asset will be - Adjusting Entry:
recorded as expense. Dr. Depreciation Expense
 Expense Method Cr. Accumulated Expense
- records initially the prepaid  Doubtful Accounts
expense as an expense - represents the portion of accounts
account, then at the end of the receivable which are considered
accounting period, the uncollectible.
unexpired portion will be - known as bad debts expense or
recorded as an asset account. doubtful accounts expense.

 Methods of Estimating Doubtful

Asset Method Expense Method Accounts
To Dr. Prepaid Dr. Expense
record Expense Cr. Cash - When it is highly probable that some
the accounts will prove to be uncollectible
initial Cr. Cash and the amount can be measured
paymen reliably, estimates of doubtful accounts
t of should be made and recorded in the
expens
accounting period in which the sale
e
takes place.
To Dr. Expense Dr. Prepaid
record Cr. Prepaid Expense - Three methods of estimating the
adjustin Expense Cr. Expense allowance for doubtful accounts:
g entry
 Percentage of Credit Sales
– under this method, the
 Depreciation doubtful accounts expense is
- the assigning of a plant asset’s cost based on the total sales
to expense over its useful life. multiplied by a certain rate.
- the systematic and rational allocation  Percentage of Ending Accounts
of the depreciable asset over its useful Receivable
life (PAS 16). The used portion of the - under this method, the
plant assets during the period is required balance (ending
known as Depreciation expense. balance) of the allowance
- Three Factors Involved In the account for doubtful account is
Computation of Depreciation Expense: based on the total ending
 Asset Cost balance of the trade accounts
- amount of cash paid to receivable.
acquire or purchase a - emphasizes the valuation of
depreciable asset. accounts receivable at net
 Estimate Realizable Value realizable value (NRV)
- amount that the company can  Aging of Accounts Receivable
probably sell the asset at the
end of its estimated useful life.
It is also known as the salvage
value, scrap value.
 Estimate Useful Life
- number of period that the
company can make use the
asset.
 Straight Line Method