ACCOUNTING CYCLE PREPAID EXPENSE – represents advance payment for

(for a service provider) service to be received

*Accounting Cycle – is a series of steps used to collect and - Expense to be incurred in the future
process raw economic data into relevant financial
information before financial statements can be prepared. ASSET METHOD: PREFERABLE METHOD

*Calendar Accounting Period – twelve-month period - Recorded as an asset, but at the expiration is
ending on December 31 transferred to expense account
- Preferrable method since it follows conceptual
*Fiscal Accounting Period – twelve-month period that ends flow of cost.
on any month other than December 31
EXPENSE METHOD:
Example: 12 months starting July 1,2022 and
ending June 30,2023 - Alternative method to record advance payment
- To immediately debit to expense account
10th step = REVERSING ENTRIES
DEPRECIATION EXPENSE - current year depreciation
 Done at the start of the succeeding period.
ACCUMULATED DEPRECIATION – sum of the periodic
depreciation

ADJUSTING ENTRIES BAD DEBTS -

 Entries prepared at the end of the accounting period

to update some accounts and ensure their accuracy
before preparing the financial statement.

Reasons why some accounts need to be changed or

updated:

1. Accrued Income – income already earned but

not yet collected.
2. Accrued Expense – expenses already expired but
not yet paid
3. Unearned Income – advance collection recorded
as a liability, but a portion of which has already
been earned.
4. Prepaid Expense – advance payment recorded as
an asset but a portion of which has already been
used up.
5. Bad Debts – client accounts that may not be
collected anymore or are doubtful of collection
6. Depreciation Expense – declining utility value of
asset cost that should be expensed.

ACCRUAL PRINCIPLE

 Also known as Revenue Recognition Principle &

Expense Recognition Principle.

ACCRUED INCOME – called Referral Fee Receivable which

is a current asset representing account to be collected

ACCRUED EXPENSE – called Referral Fee Payable which is a

current liability representing account to be paid

ACCRUED REVENUE – creates a receivable account

ACCRUES EXPENSE – creates a payable account