Module 8. FAR
Module 8. FAR
Module 8. FAR
At the end of the accounting period, some accounts in the general ledger
would require updating. The journal entries that bring the accounts up to date
are called adjusting entries. One purpose of adjusting entries is for income and
expenses to be reported in the correct period.
Adjusting entries ensure that both the revenue recognition and matching
principles are followed. Prior to your lecture, recall the previous discussion on
accounting principles and concepts, specifically the matching principle. This
concept explains that some costs are initially recognized as assets and
charged as expenses only when the related revenue is recognized. While the
Revenue Recognition principle in accounting standards requires that revenue
is recognized when it is earned and the amount can be measured reliably.
Now on our 5th step in the accounting cycle, this chapter would help in the
preparation of entries in taking up unrecorded income and expenses for the
period, and to split mixed accounts into their real and nominal elements prior to
the preparation of financial statement.
Take the following Quiz on Adjusting Entries and then check the answers after you
have studied this chapter:
3. T or F: All adjustments affect both the Balance Sheet and the Income
Statement.
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Financial Accounting and Reporting Adjusting Entries
Presentation of Content
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Financial Accounting and Reporting Adjusting Entries
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Financial Accounting and Reporting Adjusting Entries
1. How accrued salaries occur—accrued salaries occur only when the last
day of the payroll period and the last day of the accounting period are
different days.
2. Steps to accrue salaries:
a. Determine the days to accrue: BE CAREFUL determining the
number of days to accrue salaries. Best way to determine the number
of days to accrue is to set up a calendar of the week and notate what
day the year ends. YOU ARE ACCRUING THE EXPENSE FOR
THE CURRENT YEAR (2019) NOT THE FOLLOWING YEAR
(2020). If P 20,000 is the weekly payroll, the daily amount for a five-
day work week would be P 4,000:
2019 2020
Dec. 29 30 31 Jan. 1 2
Monday Tuesday Wednesday Thursday Friday Total
P4,000 P4,000 P4,000 P4,000 P4,000 P20,000
P12,000 is Accrued P8,000 is NOT Accrued
3. An adjusting entry, such as one for an accrued expense, affects both the
income statement and the balance sheet) as it results in an increase (debit)
to an expense account and an increase (credit) to a liability account. In the
case of an accrued expense such as accrued salaries, the income statement is
affected because an expense account (Salaries Expense) is debited; a
balance sheet account is affected because a liability account (Salaries
Payable) is credited.
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Financial Accounting and Reporting Adjusting Entries
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Financial Accounting and Reporting Adjusting Entries
b. Calculate the interest from the date of the note to the end of the
accounting period.
Principal x Rate X Time = Interest
P12,000 X 14% X 60/360 = P280
c. Make the adjusting entry:
General Journal Page 1
Date Account Title P.R. Debit Credit
20-- Adjusting Entries
Dec. 31 Interest Expense 280.00
Interest Payable 280.00
The accrual of revenue creates assets. Accrued revenue has been earned
in the current accounting period but the cash will NOT BE RECEIVED until
the next period. Accrued revenue is also called an Accrued Asset as the debit
will be to a Receivable (an asset) account when accrued revenue is credited).
Helpful hint to remember what is done with Accruals: The “A” in Accrual
means add to expense or revenue as the adjusting entry will be adding to
expenses or to revenues in this case.
Application
Congratulations! You have just completed Chapter 8.
I prepared some activities for you to assess your learning. Please
answer/accomplish the following activity/ies
MATCHING TYPE
a) unearned revenue
b) cash-basis accounting
c) revenue principle
d) accrual-basis accounting
e) accrued expense
f) matching principle
g) accrued revenue
h) depreciation
i) contra account
j) book value
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Financial Accounting and Reporting Adjusting Entries
II. State the effect on net income, total assets and total liabilities if the following
adjustments were not made.
a) Depreciation on buildings, 26,000.
b) Utilities expense incurred but not yet recorded, 2,200.
c) Unearned revenue earned during the period, 3,600.
d) Supplies used during the period, 1,700.
e) Service revenue earned, but not yet collected, 2,400.
III. Wilson Company initially records all prepaid expenses as expenses and all unearned
revenues as revenues. Given the following information, prepare the necessary
adjusting entries at year-end, December 31, 20X9.
Unit Summary
Accounts are also classified into the following; 1. Real Accounts 2. Nominal
accounts and 3. Mixed accounts
Advanced collections of income are recorded using either the 1. Liability method
or 2. Income method
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Financial Accounting and Reporting Adjusting Entries
References: