216 | ng eg a7 Chapter 7 Posting to the Ledger Learning Objectives 1. Post transactions in the le 2. Prepare the ijusted tial Balance Musteation 1: Posting Irusiness had the following transactions during the second week Date ~Franactions Jon. 8 Servis worth POD were rendered for sah Introduction Jon. 9 | Services worth SO.00 were rendered on ac Weave already dscused the frst two steps in the cycle in the previous chapter. In this chapter, we. will casing steps) an Steps inthe accounting cycle: Jer. 10 | Cash. amounting 10 75,000. was disbursed for | mpplion expense. Jon. 11 | Accounts receivable of 40,000 was collected, i eenaoel ets Be eens ae recoded in our lows te a pera tes r en Smee aoa a Leena ienees = me lee ae au sigs pene oe beep ce SS eee a oonrena =. sna ay 10 | Supplies eqperae 5000 Se Site ose oe ta oa ee en ee ee Be cli so the ledger. More specifically, posting, is done by transferring: = cede cet cd eee a reel eee he aes | so oS "The purpose of posting is to clasity the effects transactions on specific asset, lability equity income and exp ‘accounts in order to provide more meaningful information, ‘We may thik of this way ~ data proceed inthe ju is “raw" information. We need to classify (le, post) Information in the ledger s0 as to provide a more “refing information. Atsough the transactions have already been recorded, the journal ‘provide readily available information on, for example, the following 1 How much ate the total sevice fees earned during the week? Vow much are the total expenses incurred during the week?28 on ing tte eter _ How much are the total cash collections during the week? How much are the total nsh disbursements daring the 1W the cash balance a the begimeing ofthe week was how mach is the cash Balance athe end ofthe week? > How much accounts resivnble are outstanding at the ‘The Jan.9 transaction is posted a follows: JOURNAL, 219 the week? a count tities Debit | Accra eotivabe em ‘Service fees ‘We need this information if we are to prepare mi accounting reports. To answer the questions, We need to the effects of the transactions on specific aset, Hibility, income and expense accounts, This procede is called poe 41) The Jan. 8 transaction is posted a follows: FROM: JOURNAL Date Aacout titles Debit | ca 5000) Servic font “The Jan. 10 transaction is posted 3s follows: JOURNAL fe Hicount titles Debit Credit 10 [ Suppl expense “5.000 ‘Cosh ard ee deme err 5,000 ‘GENERAL LEDGER tug tl! mean begga The Ph amit pen ave © Posting simply involves transfersing the debit and amounts of a journal entry to the affected accounts edger 2 Accounts inthe ledger resemble a “T-account.” 10 3000 eg ta, “40.000 m8 30,000 Im 20Bo 4) The Jon, 11 transaction is poste as follows JOURNAL, Seri fe ee Date count titles Debit - es Tan tt | Conk 0.000 ene: "Accounts receivable an a fen te Jonro 000] 0,000 end nt. 5,000 (GENERAL LEDGER ‘Accounts recefoable Dr | ce Im. 30000 Jom now readily answer the previous questions. How much isthe total sevice fees forthe week? Ars 80,00 (eed nn he ener eer ae) es an How much ae the total expenses incurted during the week? aS Asice: 5,000 (ee ding ae te gone eg te) How much isthe total cash elections during the week? ‘Anse: 72,000 (GENERAL LEDGER ‘The total cash collections for the week isthe sum of the ‘ASSETS, debits to the “Cask” account during Uhe period, as shown Cash Accounts recivable below: Be oe Dr Cash toy na “50000 jan 9 “S000 ms 30,000, tes nat “40,000 5000 jan 10 sie 30,000 11 30,000, nk tl. 10000 5/000, om 10| jon tt 40,000, nt nt. “105,000 tl” 105,000 “Recall that the ending balance of an account is the dif ‘between the total debits and total credits in that account. Th ending balance of cash s computed as follows: (40,000 + 30,0 440000 - 5000 = 105,000. Similar procedure is pert compute forthe ending balances ofthe ather accounts How muh the total cash disbursements during the week? “The total cash disbursements forthe week i the sum of he credits to the “Cash” acount during the period a8 shown belowmm . cha nto the Leger ay 23 mis, St eR reg ma “40,000 Tou nh “Salaries expense” (expense) and "Cash ms 30,000 aborts atest: {asset Elects om Expenseis nereased Cash is decreased pout Piet eA OES nk tot “105,000 Expenseis ceased through debit Asat is decrensed through credit > tf the cash balance atthe beginning ofthe week was how much i the cash balance at the end of the week? ‘Aster: 105,000 (wong hte he ra erate) Salaries expense Cash 30,000 > How much accounts receivable is outstanding at the the week? ‘Anse: 10,000 (oie gee gr abe) 13: Posting Cash Mlustration 2: Overview ofthe recording process Before we move on, rocall the following steps in ooo transactions ‘tap #1: | Transaction analyse > Mdentify dhe accounts (account ies) affected transaction and the effects of the rarsaction these account (inorease or decreas) ‘Step #2 | Fourmalizing > "The tramsoction i recorce in debitcreit form { ournal entry) inte journal [Step | Posting The debits) and credits of the journal entry transfer tothe affected accounts in the led 39000 Mast Mer 31 3,000 e's have a recount of what we have learned s0 far: in the accounting eget IMevifying and analyzing = ourmalizing a Posting a Unadjusted tial balance Now showing 10. Coming so @2 ‘To summarize what we have discussed up to this po ‘us examine how the transaction below is recorded. whadaentimeanegttes |, cord rial balance isa ist of general ledger accounts and ther balances. Prepared t0 check the equality of total debits and total ts in the ledge, The preparation of the tral balance creates a ing point fr the preparation of the financial statements ‘Transaction: (On March 31, 2041, the business pays employee salaries ‘current mont amounting to P30,00,24 Using 2 wrong account sith the same normal lance as the ‘Types of Trial balance 2 Unadjusted trial balance ~ this is prepared before ad lentes are thade. Adjusting, entries and cons financial statements, cannot be prepared unless the total tnd credits in the unadjusted trial balance are equal. 1b. Adjusted trial balance ~ this prepared ater adjusting: bbut before the financial statements are prepared. ‘& Postclosing trial balance ~ this is prepared after the process. Wrong, computation with same erroncous amount posted to Doth the debit and credit sides purpose of preparing a tral balance is to determine whether Pott dicbts and total ere inthe ledger are equal Bi totst debits and total credits are mot equal, an error sely Mowever, total debits and total credits are equal it dows not ocean mean that hore aren eres Although optional,» triat balance shall neve — nen prepared becatse it helps in revealing some errors lation : Unadjusted Trial Balance Preparation Jory 1, 20e1, Mr Tiger Astg Sarted a laundry business Tiga Laba' Laundry Shop” The following were the tions during the frst week of operations: Transactions Provided 500,000 cash as initial investment to the hsiness Acquired a washing machine for P200,000 cash Acavired a dryer machine for ®100,000 cash, Purchased supplies foe P20.00) cash Rendered laundry services worth 15,000 cn cash basis Rendered laundry services worth P10,000 on account Pid 2500 to an employee representing her wook's salary. Errors revealed by atrial balance ‘Theil balance can reveal errors that caused the total debi total credits to be unequal Examples: 1 Joumalizing oF posting one-half of an entry, Ley a without a credit or vice versa 2. Recording one part ofan entry fora diferent amount ther par. 3, Tranaplacement error on one side ofan entry. 44. Transposition eror on one side ofan entry. > Transpacement error (Slide error) is committed ‘umber of digits ih an amount i incorrectly in ‘ecreased, for example, 8 PI,G00 amount fs recorded a¢ ‘or PU0,000, jurnal entries fr the above transactions areas follows: oe eee Fa ur sie | Pesce trary ipsysocs ie as a P15 625 or 15,265. Eripment= Washing machina] 20n00a| tu et ret yin ee 2a ‘The trial balance cannot reveal errors that do not cause Equipment yer 100,000, fe Pee beds i Gain rls Ue ey ra cress Sete | 2. Joumalizing or posting an entry twicePrepaid supplies 20000 ‘Cash Sarde oe Gosh T5000 Service fees “Accounis receivable 70000 | Service fees | | Sivies expense [2500 eae carrey “Another way of seting up the "Owners capita” and “ ravings” accounts is by using the name ofthe business lieu of the word “Owners” eg, “Aatig, Capital and % Drawings” _INCOME, EXPENSES, Service fees Salaries expense 1500075 | 7 2.500 10006 25,000 Bal, 2500 adjusted trial balance is prepared a fll: igs Laba Laundry Shop ‘Unadjusted Trial Balance January 7,201 “Thojournal enti are posted tothe ledge ees Ses ASSETS, Recon pei cr oa Acacia wy 192.500 SS a ‘Accounts rceivable 10000 Seo Prepaid supplies 20,000 z ; Equipment = Washing 200,000 ean: Equipment -Dryer 100,000 ee te ‘stig, Capital 00.000 eee Service fees 25,000 Solaris expense pl ei peal al. 20,000 je ‘he unadjusted trial balance te simply a lst of the ending ipment - Washin balances of accounts in the general ledger. 2 eee ‘at. 200,000“© The hending ofthe trial balance consists ofthe followings Name of the business (ney ‘Tiga Labo Laundry a + Account titles are listed in the unadjusted trial balance § ‘answers the question “Wha?” Title of the report (ie, ‘Unadjusted Trial Baa answers the question “What?” Date of the report (i, January 7, 2051) ~ ans question “When?” following onder: “© Recall again the normal belances of accounts Liabilities; Equity: Income; ane Expenses ‘Assets and Expenses Liabilities, Equity and Income the Ledge ration 2: Unadjusted Trial Balance Preparation December 31, 20x: juntspayable——SSSSSCS~*« nts ecaivable 100,000 jvalated depreciation = Building «0,000 mulated depreciation - Equipment 200,000 ising expense 35,000 ance or bad debts 20,000 10,000 2,000,000 280,000 reciation expense 100,000 1,800,000 1,000,000, DEBIT Hlaneous expense. 2,000 — CREDIT 2,000,000 40000 20,000 «20,000 ice foes 3}000,000 # plics expense 30,000, 4 es and Neences 0,000 4 oportation end travel expense 70,000 ies expense 23,000, is payable 20,000 irement: Prepare the unadjusted trial balance, sia Travel and Tours” have the following sccour balances“Turlsta Travel and Tours ‘Unadjusted Teal Balance December 3, 20<1 Devit cash 250,000 ‘Accounts receivable 100,000 Allowance for bad debts Prepaid sapplies 20,000 Land s,o0e.c00 Building 2,00,000 Accumiated depreciation - Bldg. Equipment 1,800,000 Accumulated deprecation - Equip. ‘Accounts payable Salaries payable lies payable Owner's capital Owner's drawings 49000 Service fees Salarles expense «50.000 Utlites expense 23.00 Seppe Spee 30000 Dad debt expense 10000 Depreciation expense 00,000 Advertsing expense 35,000 ‘Taxes and licenses 20,000 Transportation and travel expense 70,000 Miscellaneous expense 2,000 Totals 200,000 Mise stp in the accounting eyo are: I, dentifying and analyzing: 2. journaling: B.Posting: 4, Unadsted tial balance: 8. Adjaning entries? (Adjusted tral Balance (Worksheet), 7, Financial statements, J Closing entries; 9, Post-cosing tril balance; and eversing sires Posting isthe process of transfrring the amount of debits and Adis i 3 recorded journal entry to the ledger acount he ending taionce of an account i the diference between the tal debits and otal credits in that account (Atrial balance is a list of genera lager accounts and their alone. 1's propared to deck the equality of oa debits and lotal fyis in the ledger. The 3 types of teal balances are: (1) adjust tra balance, 2) Adjusted trial balance, and (3) Pos losing ria bance240 ing Emr 2a uals of Income and Expenses sccounting, the term “accrual” (or ‘o accu’) means to Income thats already earned but not yet collected; or ‘expense that is already incurred but not yet paid Chapter 8 Adjusting Entries ‘earning Objectives ; 1. Enumerate the common end-of-period adjustments 2 7 ee, Introduction et ushave a recount of what we have leaned 50: Accruals ve rte to both income and receivable (or both se and payable) ‘Oisrce the application of the following concepts in the eng itustrations | Al ssn ers vate at toe lane set acount | ‘Steps inthe accounting cycle: fe one income Statement account or semen of camped | 1 Wentfing and walyzing me ne 2 Journaling @ All adjusting entries affect the profit or loss forthe period (or | 3 Posting 2 rah pri. 4 Unadjusted tia bolonce aa oe 5. Adjusting enteies Now! ration: Adjusting entries ~ Accruals of income & expense 6.1010. Later 9 Co. is preparing fs financial statements for the period ended ber 31, 20x. Adjustments ae needed forthe following: ‘Adjusting entries “Aujusing entries are enties made price to the preparat financial statements to update certain accounts so that they ‘correct balances as ofthe designated time £1: Accrual of income ~ Interest income Co. received a 12%, P100,000, one-year, note receivable on 1,201. ABC uses a calendar year period. The principal and 4 on the note are due on Apri 1, 2052. Purpose of adjusting entries 1. To take up unrecorded income and expense of the period: spt i frat 2 Tosplit mixed accounts into their real and nominal ek Concepts: trol dd norte 8. Notes receivable give iw to dteres income bh Interest income is earned due fo passage of tine. nal yes end conclasion ‘Our subsequent discussions on adjusting ent subdivided into the follwing: {Given information: 1. Accruals of income and expenses ABC anes a clendar year period. Therefore, the cirent Recognition of deprecation expense and bad debs ‘sccounting period ends on December 31,201 Interest on the note is collectible on April 1, 2052 (ie, in the next accounting period).Slop #1: Transaction analysis > Accours| “Interest receivable” (asset) and “Tate lected income” (income) > Analysis: ‘As of December 31, 0x1 (end of accounting peri), nt income would have heen eared becnise there is alread passage of time (rom April 1 to December 31, 201), alt feterest will nly be collected in the next accounting pe Ge, April 1, 2042, > Conclusion terest income shall be accrued for the 9 months cov April fo December 3,201 ‘The fnterest income is acrutd as follows: [aunt irae Forma Where: ‘interest principal (Prt Interest equals principal times rate times time) ‘Principal (P) isthe P100,000 face amount of the note, Rate (7) is the 12% interes rate, + Time (2) is the expired time of 9 months (ie, April 1 December 31, 2041) oper the total of 12 months in ye (reer Fy © Interest = (100,000 «12% x9/12) = 9.000 ng Eri 243 Tits on | eros receivable ls incensed. Interest accounts income is inereased. Debit / Credits | Asset is increased through debit. Income ls increased through credit (2: Adjusting journal entry (AJE) adjusting enty forthe accrued interest Income iss follows Interest receivable ‘000 Interest income 9,000 a atr nes nce ure b ‘The adjusting entry is dated as a the end of the reporting period (ie, December 31,201) interest receivable” i debited because the interests yet to be collected in the future (ie, on Apri, 202). In 20x1, interest income is recognized only for the expired period (tine passed) of April 1 9 December 31, 20x. Interest ‘covering the remaining 3 months of January 1 to March 31, 0x2 will be recognized in the next accounting period. This is an application ofthe time period concp. tnt ners our ps helt te rit rind teeor a] Cash 20 Interest receivable > 9,000 | imerest income 3000 He cash collection pertains tothe L-yeor total interest covering ‘months of Apri 1,201 to March 3, 2032. This is computed as lows: = Pr (100,000 x 12% x 12/12) = 12,00. “The credit to interest receivable pertains to the acerued interest December 31, 201 (se ATE above)‘The credit to interest income pertains to the 3month int Income earned in the months of Jan. 1 to Mar. 31, 202. computed as follows: = Prt (10,000 x 12% x 3/12) = 3,000. 0.00% 12% 9/12) ,000 ‘cage in 20 ‘pet 20 tor 1,200 ‘ooo 1243 3273)— "2.000 Jan-tto Mar 3, 200 (abo 2% x 372)= 3.000 recgized nn ‘The preparation of adjusting entries isan application the concepts of Fime period and acrual basi of accounting ee The application of dhe accrual basis causes tim dliflerences between the date income is recognized and the d ‘is collected. Adjusting entries are needed to ensue that ince recognize in the proper period when it was eared (time pei (Case #2: Accrual of income — Rent income ABC Co. rents out is building to a tenant for @ monthly rent 50,000 As of December 31, 2D, the tenant has not yet ald th rent foe the month of December, Concept, give information, and concusion > Concept Income is recognized when earned rather dhan when collec accrual basis of accounting. Given information: The tenant has already used the building in December but has. ot yet paid the ent, Conclusion Rent income for the month of December shall be accrued on | December 31, 204 1: Transaction analysis _ Accounts “Tent receivable” (saat) and fected income” (income) tests om Rent receivable is iereased Rent income accounts, is increased. Baa ‘Asse is inereased rough debit. Income incensed through credit ‘Slop 12: Adjusting journal entry (ATE) Be ajsting etry iss flo: = ent roewable Sa °. ‘Rent income: 0,000 When the sent i colleed in the wet accounting period it vill be recorded a follows i= [Cah S000 20 | Rent receivable 50,000 To ron the allt of he De Observe that rent income is recognized in 20x1 when it was eared rather than in 202 when twas collectedPa Case &: Accrual of expernse— Interest expense ‘ABC Co. issued a 12%, P100,000, one-year, note pays Interest expense” (expense) and “Interest October 1, 20x], The principal and interest are dc on ced payable” (labilty) 2022. Concpts: a. Notes payable pve rise to interest expense 1. Interest expense Is incurred due to pasage oft. Adjusting journal entry AJE) justin entry forthe necraed interest expense fas follows: Interest expense 3,000 Interest payable 3.000 etsetna > Giown information ‘8. Interest on the anole s payable on October 1, 2042 the next accounting period). 'b. The current accounting period ends on December 3, > Analyse [As of December 31, 20e1 (end of accounting period), expense is incurred” because there is aleeady 2 passage (October 1 to Decernber 3, 20x), although interest be paid inthe next accounting period (ie, October 1, erest payable” is credited because the interests yet to be il in the fate (Le, Oct. 1, 202), 20x1, ntorest expense Is recognized only for the expired ld (ine passed) ~ from October 1 to December 31, 20% Conlution: «Interest expense shall be accrued for the 3 months (October 1 to December 31, 20, “The inorest expense is wccrueld as follows: rest payable 3.000 Formal: Interest expense ® 9,000 SE ‘Cosh 12,000 ‘bit to interest payable pertains to the accrued interest on. her 31, 20 (ce adjusting entry above), debit to interest expense pertains tothe 9 months interest Incurred in the months of Jan-1 to Oct. 1, 20:2 This és ted a flloves: {= Prt (100,000 12% x 9/12) = 900, ‘+ Principal (P) = P100,000 face amount 2 Rate (= 12% + Time (0 = expired time of 3 months (Le, October December 31, 20x1) over 12 months ina year © Interest = (100,000 x 12% x3/12)= 3,000,“0 The cash payment pertains to the total 1-year interest cove the months of Oct. 1, 20x to Sept. 30, 2042. Tis is comput follows: §= Prt (100,000 x 2% x 12/12) = 12,00. £2: Adjusting journal entry (AJE) adjusting entry is as follows: Uilities expense Utes payable 4.000 waco np tin ‘ooneno 128 a3) = 20st Tantra Jn the mest accounting period, the peyment of the “100,00 x 12% 12/12} = P00 Jon 10 Sept 3 202: (moo) 128972) = torn he pron of he De 22 tect ti 5: Accrual of expense ~ Salaries expense ployees eamed total salaries of P100,000 én December 20x1. owever the salaries were paid only in January 202 Case sie Accrual of expense Utilities expense ‘The cost of electricity used for the month of December 20 14,00. The electricity bill was received and paid in January #1: Transact analysis Cave sen information nd ccs ‘Accounts “Salaries expense” (expense) and "Salaries Concept: ected payable” (ability) Expense is recognized when incurred (used’) rather when paid accrual basis of accounting. > Giver information: The electricity bil although patd in January 20%2, pe the cot of electricity used tn December 201 > Conclusion slits expenae shall be accrued in December 20s Tieton Salaries expense is increased. Salaries accounts payables increased. a Debit / Credit Expenses increased through debit. _| Lisbiity is increased through ered 2: Adjusting journal entry adjusting entry to record the accrued salaries is follows: aries expense 100,000 Sip Taco nes eae aoe ‘Aesounts “Uilities expense” (expense) and are eee lected: Uiilties payable” (ability) Effects on ilies expense is increased. Unites — payables increased. Debit Credit | Expense is increased through debit. Liabilty is increased through credit250 hay tng Et 251 Recognition of Depreciation expense December 31,204, the equipment has already been used for 1 out of its total useful ile of & years. Thus one-fourth of the ‘The Concept of Systematic and rational allocation 1 shouldbe ecogized as expense Under the concept of systematic and rational allocation that provide economic benefits over several accountng pet but cannot be ditelly associated with the earning of revenues recognized as expenses over the periods where the eco benefits are consumed ‘One application of this concept is the recognition deprecation expense, The expenditure to acquire equipment Initially recorded as asset However, because this € cannot be directly associated with sles (as opposed to the fnwentores sold), the expenditure is recognized as expense the periods the equipment is used. sal depreciation expense i computed as follows: ‘Mlustration: Adjusting entries - Depreciation ‘Depreciation = Niccation of cost over a oe the useful life ofa depreciable ase. Year 1 depreciation expense: P5,000 Case #1: Depreciation expense (On January 1, 20x1, 8 business acquired equipment for ‘The business expoct to use the equipment over the next 4 yea ‘The entry on January 1, 20x1 to record the acquisition is follows: Year 2 depreciation = Cont of equipment | si with 4-year useful expense: P5000 aon | red iment hte is atl eet recognized as Year deprecation “The cost of the equipment dnflally recorded as an ose 20000. expense: 5.000, (rather than an expense) because i provides future eco ‘benoit, Le, the equipment wil be used over the next 4 years, ’As the equipment is used, a portion of the cost recognized as expense ona piecemeal esis or “ile by ite’ portion is called depreciation. Tn accounting, depreciation means the allocation of cost ofa depreciable asst over the periods the aset is used.Step #1: Transaction ana Accounts “Depredation expense” (expense) affected “xccumulated deprecation” (co ne Eres 253 —— Tad dabis expense ls creased, Allowance nis for bad debts inrense it Credle | Expenses increased though debi set) Contra-aset is increased through credit. 5 Rife on Depreciation expense i neeased sccounts, Accumulated depreciation i i 2: Adjustng journal entry Debit / Credit” Expense is increased through debit Justing entry sas follows: Contrast i increased thro Bed debts expense 300 Allowance for bad debts so ‘Step #2: Adjusting journal entry AJE) arsed te had deepens fr the “The adjusting entey i a follows: pend ‘ee ] Depreciation expense 5000 31, | "Accumulated depreciation oe | ero te ection exes or Sepia ‘The carrying amount ofthe equipment as of 20x1 is determined as follows: Equipment 20,000 Accumulated depreation —_ 000), Equipment net P1500 Recognition of Bad debts expense ustraion: Adjusting entries ~ Bad debts expense [A business has total accounts receivable of 2,000 on 31, 2041 before any adjustments. Of the total amount, ‘estimated that P500 is doubtful of collection (se af ne mears sanguin a mets) Stop 1: Transaction anayis Accounts ad debts expense” expense) and alec “Allowance for bad debt" (contr Alter recording the adjusting entry, Uhe carrying amount receivable is brought equal to the estimated collectible of P50. Accounts receivable P2000 Allowance fr bad debts 50) Accounts receivable net P3500, Concept of immediate recognition ‘the concept of immediate recognition, cos that produces ure economic benefits oF an asset that ceases to provide economic benefits recognized immediately as an expense ‘One application ofthis concept fs the recognition of bad. tespenss, In the case above, the PSO0 account receivable is ately charged as bad debt expense because it ceased to le future economic benefits, Le, itbecame uncollectibe Aso this point, we have already completed discussing the expense recognition principles. A summary is show below: Description 7 Gents that are dieily sssociated with the earning fof revenue are recognized 3 cespenses in the same periodin which the related ro is recognized (See let's move on to the third type of adjusting entries which is Chapter?) Jpliting ofthe components of 3 “mie! acount.” = Application: The . Nominal and Mixed Accounts fnventory is Sar poate aie steise ce Stange oe ences pos) pe es ee ee ee 2% Systematic —& rational |= Costs that are no allocation associated with the fof revere are ree ‘expenses over the per ‘economic benafitg consumed. = Application: The equipment is recognized 25 asst cherged ms expental Depreciation) over periods. the equip minal Accounts (Temporary accounts) ~ are accounts that are a the end of the accounting period. Nominal accounts ude all income statement accounts, drawings acount, ng accounts and suspense accounts A cleaving accont is an account used temporary to store amounts that will eventually be transferred to another fccount. An example is the “Income stomary™ account Which stores amounts of income and expenses during the period. The balance of the “Income summary” account represents the profit or loss durig the period. The “ncome summary" is eloved to the “Owners capital” account before the financial statements are prepare. A susponse account is an secant wed temporarily to store ‘lserepancies in the accounts pending their analysis and permanent clasiication. An example isthe "Cish storage ‘or overage” account which is temporarily “ase to record ‘ash shortages oF overages pending their investigation. Depending on the result of the investigation, the “Cash shortage o oeage” account is closed oa receivable or loss ‘count (for shortages) ora payable oF gain account (Hor ‘overage. 3 Tmmediaterecognition | - Costs that donot | future economic | assets that cease £0 future economic recognized immedi expenses. + Application: An receivable that doubtful of coll immediately expense Ge, Badton Ene 237 3 Miva accounts ~ accounts that have both real and faccount components. These accounts are subject adjustment Mined accounts include maadjusted prep. (prepaid assets) and deferrals unsamed income’) that otter and unepied amponens “The expied portion isthe nominal account component the wnexpirel portion i the rel account component. > At the end of the period, adjusting entries are separate these components because the nomi ofthe period, the seamed portion is recognized as lai while the eared portion remains as income ing to various tenants. On Api 1, |, the business rocaives one-year rent én advance of PI20,000 one ofits tenants Rent er month s P1000 receipt of the advance rent is recorded as follows: Component is presented in the income statonent “ability method | Tncone method ‘real acount components presented in the blac hee ut enka 120,000 Csi 120.000 essai Dscarned rent "120000 Rent income 120,000 Before achustments: ee peal | Et ease components) (Observe that under the ilty metho, the rent received in ince is cred (9 a lity account, while under the nce lo, the rent received in advance is creited tam income acount ltomepaate the ceenet ‘green Belore any necestary yearend adjustments on December trom 0x1, both the “unearned ret” (lability method) and the “rent me” (income method) “accounts are considered “mized Qunts” This is beciuse both accounts conain carmed and maton of kia Reversing ot Neame ae cepa eee, red portions. The “owned” portion relates 9 the income ‘To understand how adjusting entries for "mixed accounts doe tee Gee gees mont (nominal account), while the “unearned” portion eeates (0 reece lence sheet (reat account). These portions are analyzed 28 Income Advanced collections of income are inital recorded using ‘he (1) ily method or (2) inom method. 1 Liability method ~ under this method, advanced collet income are initially credited toa lability account. At of the period, the eared portion is recognized as ‘while the unearned portion remain as liability 2 Income method ~ under this method, advanced collectio income are initially credited to an income account. At ard portion (used up’) ~ pertains to the fist 9 months of the 1-year eent in advance covering the months of Apri 10 December 31, 20x1. This portion s computed as follows: (20.000 rent per month x9 months) = 90.000 ; or [120,000 x9 os. /12 mon.) = 9,000.‘The eared portion is recognized as income for period (he, 20x). Under the Hability method, adjusting entry is needed to recognize the eared portion (income) of a mixed account. Under the income method, adjusting entry is needed to recognize the unearned portion (lability) of 2 mixed account bb Uncared portion (‘unused’) ~ pertains to the rem: months covering January 1 to March 31, 202. This por ‘computed as follows (10,000 rent per month x:3 months) ~ 30.00; or Both the lability and income methods are accoptable (020,000 x3 mon /12 mos) = 3,000. a joedless of the method sid, the adjusted amounts of rent yme and unearned rent to be. presented in the financial lements are the same. These are analyzed in the Taccounts ‘The neared portion {= recognized a6 lability December 31, 20x. I wil oy be recognized as income i next accounting period (i, 2032). LIABILITY METHOD 120,000" a1 ei ‘peat te fling ae 90,000 AE 30,000 Fd bal, 90,000 End bat. Before adstmente | ‘Pn nib 49 9) INCOMEMETHOD aD 28 earned rent Rent income 120000 $711 30000__AJE _30,000 30,000 End bal 905000 End bat. Pana gana 3. payments of expenses are initially recorded using either the (2) method or (2) expense metho Asset method ~ under this method, prepayments of expenses fate initially debited to an asset account. At the end of the Aalusting entries are needed to separate the rea! and nominal acount components ofa mixed account ‘The adjusting entries (AJE) on December 31, 20x) are fellows: eo | Yeriod, the incurred portion (used up’ ot “expted!) 1s eet Sasa shod. Tecognized as expense, while the timed portion remain st Uneared ent 90000 | Rent income 30.000 ase Batieepas TOT Saad? | imearaed a oa Fxpense method — under this method, prepayments of Sra te eared portion | te rapice the ane coperses are initially debited to am expense acvount. At the the ers pede eer as ol fof the peri, the wnused portion (nak yet incured” oF‘unexpired’ is recognized as asset, while the incurred po remains as expense lustation: Asset method vs. Expense method. ‘A business prepays one-year insurance for P120,000 on Octob 2x. ‘The prepayment of insurance it recorded 35 follows “Asset method Expense method LLL Feet 7 Prepaid insurance 120,000 | Insurance expense 120,000 Cash 20000 | Cash 129 next accounting period (ue, torsade payment of Torche prepare of efor adjustments ie wer iar ‘Obscrve that under the aise method, the prepaymen Mined acount insurance is debited to an set account, while under thee iio method, dhe prepayments debited oan expense acount. One yr pcp Before any necessary year-end adjustments ot Dea 31, 2041, both the “prepaid insurance” (aset method) and | insurance expense” (expense methed) accounts are consi “mixed accounts” This is beease both accounts contain and not yt incurred portions. The “incurred” portion relates to Income staement (nominal acount), while the nat yet in portion relates to the blanc see! (el account). These port nalyzed os follows Adjusting entries are needed to separate the ral aecount [Not yet incurred portion (suse ot ‘unexpired’ pertains to the remaining ® months of January 1 to Sept. 20, 20x2. This portion is computed as allows (220,000 x9 mes,/12 mos) = 90,0, ‘The not yet incurred portion is recognized as asset as of December 31, 201 Iwill nly be recognized as expense inthe 202), prt the li (et yt incre portion eon tna s9 2) Ton tsp 28 ‘Asset method Expense method 8. Incurred portion (se up” ot ‘espn’ ~ pertains to the fi Th Bik ‘months of the year prepaid insurance covering the rance expense 30,0) Prepaid insurance 0,000 ‘of Oct. 1 to December 31, 20e1. This portion is comput Prepaid inwrance 30,000 follows: ae ep portion (120,00 x 3 mos/12 mon) = 30,000. ‘The incurred portion is recognized as expense for Under the asset method, period (ie, 20x), Insurance expense 90,000 opt the anepied portion of the yer surance adjusting, entry ie. needed to ‘recognize the expired portion (expense) ofa mixed account.260 © Under the expense method, adjusting entry is racognize the unexpired portion (aset) of mixed. Both the asset and expense methods are acc Regardless of the method used, the adjusted amounts oft expense and prepaid insurance to be presented in the fi statements ar0 the same, This analyzed in the T-accounts ASSET METHOD Prepaid insurance Insurance expense omer 120,000 000 ATE End ba End bat. — 90,000 30,000 EXPENSE METHOD Prepaid insurance Insurance expense 20,000, 1oitist, ATE End bat, 0,000, 90,000 End bal. ~ 30,000 © The recording of items of income that were coll advance and items of expense that were paid in adv referred 10a deferals: To defer means to postpone recognition. Ths The unearned portion of an item of income that collected in advanced is recognized os lability. This bbe recognized as income only when earned. The unexpired portion ofan item of expense that ws in advanced is recognized as asset. Ths will be es {as expense only when incurred, 263 ‘Accruals and deferra. are opposites. “To wangnize income thats already earned but not yet ollected To postpone the income recognition ofan adoance collection. The advance ‘Collection is treated a8 liability until earned. ‘To recognize expense thats ready incurted bu not yet oid. > To postpone the expense recognition ofa prepayment. The [prepayment is treated as {seet until incurred. wapter@ Summary: ‘Adjusting entries are entries made prior t the preparation of Financial statements to update certain accounts 0 that they feflect cormct balances a of the designated time. Adjusting “nines normally involve the following: (1) Accruals of income land expenses; 2) Recognition of depreciation expense and bad debts fesponse: and) Defrals of income and expenses (pitting of med accounts The the expense recognition principles are (1) Matching: (2) ‘Systematic & rational allocation: and (3) Immediate recgniton. Accounts are also classified into the following: (1) Real ‘secon (2) Nominal accounts; and (3) Mixed acount, [Advanced collections of income are recorded using either the ) Laity method or 2) Income method. Prepayments of expenses are recorded using either the (1) ‘Asot method oF 2) Expense metho.