Adjusting Entries Notes  An estimate of receivable that cannot

be collected by the business from

Note: In adjustments, there must be at least customers/clients.
one nominal account and one real account.  
   Method of estimating doubtful
Depreciation accounts
  o Aging of Accounts Receivable
 Deterioration of an asset through the o Percentage of A/R
passage of time. Only reflected to o Percentage of credit sales
property, plant, and equipment (PPE)  
except land.  Methods of recording doubtful accounts
   
 Depreciation starts when the asset is in o Allowance Method (preferred method)
use. Doubtful   XXX  
  Accounts
 Adjusting Entry: Expense
 
  Allowance   XXX
Depreciation   XXX  
for
Expense
doubtful
  Accumulated   XXX accounts
depreciation  
  o Direct Write-Off Method
 Computing for depreciation: Bad   XXX  
o Straight line method debts
Depreciation = Cost -
Estimated Salvage Value   Accounts   XXX
Estimated Receivable
Useful Life  
   
 Income Statement  Income Statement
Expenses: Expenses:
Depreciation Expenses Doubtful accounts expense
XXX XXX
   
 Balance Sheet  Balance Sheet
Assets: Assets:
Property Plant and Equipment Accounts Receivable
XXX XXX
Accumulated Depreciation Allowance for doubtful
(XXX) accounts (XXX)
Book Value Net realizable value
XXX XXX
   
  Prepaid Expenses
Doubtful Accounts  
 
  Expenses already paid but not yet Prepaid Expense
incurred, hence an asset. XXX
   
 Methods Accrued Expense
o Asset Method (preferred  
method)  Expenses already incurred but not yet
  paid, hence a liability.
 Initial entries:  
 Adjusting Entries:
Prepaid   XXX  
 
Expenses
(Asset) Expenses   XXX  

  Cash   XXX   Accrued   XXX

Expenses or
 
other liability
 Adjusting entries:
accounts
Expens   XX  
 
e X
 Income Statement
  Prepaid   XX Expense:
Expens X Expense
e XXX
 
 
o  Balance Sheet
Expense Method
Liability:
 
Payable or accrued expense
 Initial entries:
XXX
Expenses   XXX    
Accrued Income
  Cash   XXX
 
   Income already earned but the
 Adjusting entries: payment is not yet collected, hence
Prepaid   XX   there is a receivable.
Expens X  
e  Adjusting Entries
 
  Expens   XX
Receivables   XXX  
e X
    Income   XXX
   
 Income Statement  Income Statement
Expense: Income:
Expense Service Revenue
XXX XXX
   
 Balance sheet  Balance Sheet:
Assets: Assets:
 Receivables  Balance sheet
XXX Liabilities:
  Deferred Income (Unearned
Deferred Income (Unearned Income) Income) XXX
   
 Income collected already but the Steps After Adjustment
services is not yet rendered, hence a  
liability.  Post the adjustment to the ledger
   
 Methods  Prepare the adjusted trial balance
o Income method  
 Initial entries:  Prepare Financial Statements
Cash   XXX    
 The above steps may be facilitated
  Revenue   XXX using "worksheet"
(Income)
 
 Adjusting entries:
Incom   XX  
e X

  Deferre   XX
 
d X
 
Income
 
o Liability Method
 Initial entries:
Cash   XXX  

  Deferred   XXX
Income
(liability)
 
 Adjusting entries
Deferre   XX  
d X
Income

  Incom   XX
e X
 
 Income Statement
Income:
Service Revenue
XXX