2. Time Period Assumption
Revenue Recognition
Principle
Expense Recognition
Principle
Economic life of a
business can be divided
into artificial time
periods.
Revenue recognised in
the accounting period in
which it is earned.
Expense recognised in
the accounting period
when incurred.
3. In order for revenues to be recorded in the
period in which it is earned, and for expenses to
be recognised in the period in which they are
incurred, adjusting entries are made at the end
of the accounting period.
4. Adjusting entries make it possible to report on
the statement of financial position the
appropriate assets, liabilities and owner’s equity
at the reporting date and to report on the
income statement the profit (or loss) for the
period.
5. Accrued Expense – expense already incurred but
NOT yet paid.
◦ Adjusting Entry:
Expense XXX
Liability (Accrued Expense) XXX
Accrued Income – revenue already earned but
NOT yet collected.
◦ Adjusting Entry:
Asset (Accrued Income) XXX
Income XXX
7. Unearned Income – revenue already collected but
NOT yet earned.
Initial Recognition: Cash XXX Cash XXX
Liability XXX Income XXX
Adjusting Entry: Liability XXX Income XXX
Income XXX Liability XXX
LIABILITY METHOD INCOME METHOD
8. Depreciation
the systematic allocation of the cost of fixed
asset over its estimated useful life
Three factors to consider:
◦ Cost of the asset
◦ Residual value, or the estimated amount the asset can
be sold for at the end of its useful life
◦ Estimated useful life
9. Straight Line Method
◦ The simplest and most used method in estimating
depreciation
◦ Results in equal periodic charges for depreciation
The formula for computing depreciation is:
Cost- Residual Value
EstimatedUseful Life (inyears)
=Annual Depreciation
10. Journal Entry:
Depreciation Expense XXX
Accumulated Depreciation XXX
The use of the contra account “Accumulated
Depreciation” allows the disclosure of the
original cost of the asset.
To determine the book value of the asset, the
contra account is deducted from the asset.
11. Doubtful Accounts/Bad Debts
an expense that arises by selling on credit
accounts on credit which an entity is unlikely to
be able to collect
Two methods to account for uncollectible
accounts:
◦ Direct write-off method
◦ Allowance method
12. This method provides for the direct transfer of
the uncollectible amount from the asset account
to an expense account.
Journal Entry:
Doubtful Accounts Expense xxx
Accounts Receivable xxx
13. The Allowance Method, on the other hand,
provides an estimate of the amount that will
eventually prove uncollectible even before some
accounts are determined to be definitely
uncollectible.
Journal Entry:
Doubtful Accounts Expense xxx
Allowance for Doubtful Accounts xxx
14. Two methods of estimating bad debts:
◦ Percentage of Sales Method or Income Statement
Approach
◦ Percentage of Accounts Receivable or Balance Sheet
Approach
Single rate applied to outstanding accounts receivable
Aging of accounts receivable where multiple rates are
applied to accounts broken down according to age
15. BEAR TRADING, a company which operates on a
calendar year, estimates its doubtful accounts
to be at 10% of its outstanding accounts
receivable at period end. Accounts Receivable
Balance at December 31, 2012 is P180,000.
16. Assume that Allowance for Doubtful Accounts
has zero balance before adjustment.
Assume that Allowance for Doubtful Accounts
has a credit balance of P10,000 before
adjustment.
Assume that Allowance for Doubtful Accounts
has a debit balance of P5,000 before
adjustment.
17. Under the allowance method, when specific
accounts are written off against the Allowance
for Bad Debts account.
Journal Entry:
Allowance for Bad Debts xxx
Accounts Receivable xxx
While the write-off removes the uncollectible
account receivable from the ledgers, it does not
affect the net realizable value of Accounts
Receivable.
18. To help restore credit standing, a customer
sometimes chooses to voluntarily pay all or part
of the amount owed.
Journal Entry:
Cash xxx
Miscellaneous Income xxx
19. To determine the cost of inventory on hand, it
is necessary to take a physical inventory. A
physical inventory should be taken at or near
the balance sheet date. Taking a physical
inventory involves:
◦ Counting the units on hand for each item on
inventory
◦ Applying unit costs to the total units on hand for each
item of inventory
◦ Segregating the costs of each item of inventory to
determine the total cost of goods on hand
