ADJUSTING ENTRIES
- next step after trial balance
- use to update or correct all overstated or understated
accounts before preparing financial statements
- prepared every end of the year or operating cycle
- to update balances of assets, liability, revenue and
expense accounts to make their balances ready for the
preparation of financial statements.
DEPRECIATION
- accounting method of allocating the cost of a tangible
asset over its useful life to account for declines in value
over time (ASSET > EXPENSE)
- decrease in value of a fixed assets/ PPE
- operating expense representing the portion of the
recorded cost of fixed assets estimated to be expired/
depreciated/ consumed
- all fixed assets, properties, plants, equipment, are
subject to depreciation except for land
FORMULA: ANNUAL DEPRECIATION
AD = cost – salvage
Estimated useful life
PREPAID EXPENSE
- type of asset on the balance sheet that results from a
business making advance payments for goods or
services to be received in the future (ASSET >
EXPENSE)
- expense already paid but not yet incurred/ used
- advance payment for expenses
- unused, prepaid, on hand
DEFERRED REVENUE/ UNEARNED REVENUE
- known as unearned revenue, refers to advance payments
a company receives for products or services that are to
be delivered or performed in the future (LIABILITY >
REVENUE)
- Income already collected but not yet earned/ rendered
- Advance collection/ payment of the customers
- You have an obligation to give goods/ services that’s
why it is liability
ACCRUED INCOME/ UNBILLED REVENUE
- Revenue that is recognized but is not yet realized. Also
known as unbilled revenue (EXPENSES > PX)
- Income already earned/ rendered but not yet collected
- It is receivable. That’s why it is asset
ACCRUED EXPENSE
- Those incurred for which there is no invoice or other
documentation (LIABILITY > PX)
- Expenses already incurred/ used but not yet paid
- It is payable. That’s why it is liabilities
ADJUSTING ENTIRES ADHERE TO:
- Completeness
- Freedom from error
- Timeliness
- Accrual basis
- Revenue recognition
- Matching principle
STATEMENT OF COMPREHENSIVE INCOME
(SINGLES-STEP)
- Known as the income statement
- Financial statement that give information on the
revenues earned and the expenses incurred by the
business for a certain period of time
- Informs the stakeholders about the performance of the
business or the result of its operations, whether the
business generated profit or incurred loss during the
period
TWO FORMS OF PRESENTING EXPENSES
1. NATURAL FORM
- Based of the nature of expenses
- Also called the single- step form where only two
sections are presented in the SCI- the revenue section
and the operating expenses section.
2. FUNCTIONAL FORM
- Based on its function
- Also called the multiple-step or multi-step form, is
normally applicable to businesses with more complex
operations.
- Expenses are grouped according to function-cost of
sales, selling expenses, administrative expenses and
other non-operating expenses.
REVENUE > EXPENSE =PROFIT / NET INCOME
REVENUE < EXPENSE =LOSS / NET LOSS
REVENUES
- Revenue is the total amount of income generated by
the sale of goods or services related to the company's
primary operations.
- Revenue, also known as gross sales, is often referred
to as the "top line" because it sits at the top of the
income statement. Income, or net income, is a
company's total earnings or profit.
EXPENSES
- An expense is the cost of operations that a company
incurs to generate revenue.
- Expense is the money that something costs you or that
you need to spend in order to do something.
 PREPARATION OF COMPREHENSIVE INCOME
- TITLE, REVENUES, EXPENSES
STATEMENT OF COMPREHENSIVE INCOME
(MULTI-STEP)
- Called multi-step because there are several steps needed
in order to arrive at the company’s net income.
- Emphasize that the two are only formats and will yield
the same amount of net income/loss.
 - Discuss that single-step SCI is more commonly used by  GENERAL AND ADMINISTRATIVE EXPENSES
service companies while multi-step format is more - These expenses are not directly related to the
commonly used by merchandising companies. merchandising function of the company but are
necessary for the business to operate effectively.
1. REVENUE
o SALES- This is the total amount of revenue that the
company was able to generate from selling products
o SALES DISCOUNT- This is where discounts given to
customers who pay early are recorded. Also known as
cash discount. This is different from trade discounts
which are given when customers buy in bulk. Sales
discounts is awarded to customers who pay earlier or
before deadline.
o SALES RETURNS AND ALLOWANCES- This
account is debited in order to record returns of customers
or allowances for such returns. Sales returns occur when
customers return their products for a reason such as but
not limited to defects or change of preference.

2. EXPENSES
o INVENTORY (BEG)- This is the amount of inventory
at the beginning of the accounting period. This is also
the amount of ending inventory from the previous
period.
o PURCHASES- Amount of goods bought during the
current accounting period.
o PURCHASES DISCOUNTS- Account used to record
early payments by the company to the suppliers of
merchandise. This is how buyers see a sales discount
given to them by supplier.
o PURCHASES RETURNS AND ALLOWANCES-
Account used to record merchandise returned by the
company to their suppliers. This is how buyers see a
sales return recorded by their supplier.
o FREIGHT IN- This account is used to record
transportation costs of merchandise purchased by the
company. Called Freight In because this is recorded
when goods are transported into the company.
o TOTAL GOODS AVAILABLE FOR SALE- Add
beginning inventory and net purchases to get Goods
available for Sale
o INVENTORY (END)- Amount of inventory presented
in the Statement of Financial Position. Total cost of
inventory unsold at the end of the accounting cycle.
o COST OF SALES- total good available for sale less
ending inventory
o GROSS PROFIT- net sales less cost of sales

 SELLING EXPENSES
- These expenses are those that are directly related to the
main purpose of a merchandising business: the sale
and delivery of merchandise. This does not include
cost of goods sold and contra revenue accounts.
FINANCIAL STATEMENTS PREPARATION

ACCOUNTING CYCLE- set of steps that are

repeated in the same order every period. The
culmination of these steps is the preparation of
financial statements

1. Identification and measurement of

transactions and events
2. Journalizing (journal entries)
3. Posting to ledger/ T-accounts
4. Unadjusted trial balance ELEMENTS OF INCOME STATEMENTS
5. Adjustments (adjusting entries) 1. INCOME/REVENUE- business has earned over a
6. Preparation of adjusted trial balance period
7. Preparation of worksheet (optional) 2. EXPENSE- cost incurred by the company over a
8. Preparation of financial statements/ reports period
9. Closing entries NET PROFIT OR LOSS- will be computed by
10. Post-closing trial balance (optional) deducting expenses from income/revenue
11. Reversing entries (optional) - If income/revenue is greater than expenses = Net
Income/profit
FINANCIAL STATEMENTS/ REPORTS - If expenses are greater than income/revenue = Net loss
- Basically a summary of all transactions that are
carefully recorded and transformed into TYPES OF INCOME STATEMENT
meaningful information. A SINGLE-STEP income statement uses a single
- Also shows the company’s permanent and equation to compute the net income of the business
temporary accounts and it is more simplified report compared to a multi-
- Represent a formal record of the financial step income statement
It represents the revenue, expenses and profit or loss
activities of an entity
generated by the business during a particular period,
- Written reports that quantify the financial but it is uses a single equation to calculate profits
strength, performance and liquidity of a company Net income= (revenue + grains) – (expenses + losses)
- Reflect the financial effects of business
transactions and events on the entity A MULTI-STEP income statement follows a 3-step
- Primary-end products of accounting process to calculate the net income and it segregates
operating incomes and expenses from the non-
TYPES OF FINANCIAL STATEMENTS/ operating incomes
REPORTS It separates revenues and expenses from activities that
1. Income statements are directly related to the business operations from the
- Shows the financial results of operations of the activities that are not directly tied to the operations
company
- Includes INCOME and EXPENSES
2. Statement of changes in equity
- Shows the movement/ changes of capital of the
owner
- Includes CAPITAL, DRAWINGS and NET
INCOME/LOSS
3. Balance sheet or Statement of financial
position
- Shows the financial condition of the company
- Includes ASSETS, CONTRA-ASSETS,
LIABILITIES, EQUITY
4. Cash flow statement
- Shows the INFLOWS and OUTFLOWS of cash
5. Notes to finacial statements
- To be discussed in higher accounting

CHAPTER 1: INCOME STATEMENTS

- Known as the Profit/Loss statements, statements of
comprehensive income or statement of income
- A summary of the revenue and expenses of a business
entity for a specific period, such as a month or a year
- Shows the financial performance and results of
operations of the business
CHAPTER 2: STATEMENTS OF CHANGES IN
EQUITY
- known as the capital statement or statement of retained
earnings
- this reports the changes or movements in the owner’s
equity over a period of time
- the movement in owner’s equity is derived from the
following components
o investment (+) and withdrawals (-) during the
period
o net profit (+) or loss (-) during the period as
reported in the income statements
o Other:
o Share capital issued or repaid during the period
o Dividend payments
o Grains or losses recognized directly in equity
(revaluation surpluses)
o Effects of a change in accounting policies or
correction of accounting error