AE13- FINANCIAL ACCOUNTING AND REPORTING HANDOUT #8

Chapter 8
Adjusting Entries

Learning Objectives
1. Enumerate the common end-of-period adjustments.
2. Prepare adjusting entries.

Adjusting entries

 Adjusting entries are entries made prior to the preparation of financial statements to update certain
accounts so that they reflect correct balances as of the designated time.

Purpose of adjusting entries

A. To take up unrecorded income and expense of the period.

B. To split mixed accounts into their real and nominal elements.

Real, Nominal and Mixed Accounts

A. Real Accounts (Permanent accounts) – accounts that are not closed at the end of the accounting
period. These accounts include all balance sheet accounts, except the “Owner’s drawings” account.
B. Nominal Accounts (Temporary accounts) – accounts that are closed at the end of the accounting
period. These accounts include all income statement accounts, drawings account, clearing accounts
and suspense accounts.
C. Mixed accounts – accounts that have both real and nominal account components. These accounts
are subject to adjustment.

Methods of Initial Recording of Income

1. Liability method – under this method, cash receipts from items of income are initially credited to a
liability account. At the end of the period, the earned portion is recognized as income while the
unearned portion remains as liability.
2. Income method – under this method cash receipts from items of income are initially credited to an
income account. At the end of the period, the unearned portion is recognized as liability while the
earned portion remains as income.

Methods of Initial Recording of Expenses

1. Asset method – under this method cash disbursements for items of expenses are initially debited
to an asset account. At the end of the period, the incurred portion (‘used up’ or ‘expired’) is
recognized as expense while the unused portion remains as asset.
2. Expense method – under this method, cash disbursements for items of expenses are initially
debited to an expense account. At the end of the period, the unused portion (‘not yet incurred’ or
‘unexpired’) is recognized as asset while the incurred portion remains as expense.

APPLICATION OF CONCEPTS
Instruction: Answer Problems 1-5 below. Write your answers in your journal or notes. Assess yourself
within the day and reflect on your performance. Reflection guide will be sent in a separate google form
link. Such will be accomplished within the day.

ACCOUNTANCY DEPARTMENT Ms. Ritsyl C. Serona, CPA, MM

Instructor
AE13- FINANCIAL ACCOUNTING AND REPORTING HANDOUT #8

ACCOUNTANCY DEPARTMENT Ms. Ritsyl C. Serona, CPA, MM

Instructor
AE13- FINANCIAL ACCOUNTING AND REPORTING HANDOUT #8

END

ACCOUNTANCY DEPARTMENT Ms. Ritsyl C. Serona, CPA, MM

Instructor