#4.1 : Adjusting Entries

Question 1

What are adjusting entries?

Answer 1

Adjusting Entries are entries made to update the accounts prior to the preparation of Financial Statements so that they reflect correct balances as of the designated time.

Question 2

When are adjusting entries made?

Answer 2

end of the accounting period

Question 3

Why is there a need for adjustments?

Answer 3

Some events cause silent or gradual changes on the elements of financial statements but they are not directly observable and not usually captured by the accountant or bookkeeper during the accounting process.

Question 4

Accountants need to record these accountable events in the accounting books thru adjustment called….

Answer 4

“adjusting entries”

Question 5

Adjusting entries are accounting journal entries that convert a company’s accounting records to the ________ _________ of accounting.

Answer 5

accrual basis

Question 6

Without adjusting entries, financial statements may not fairly show the…

Answer 6

solvency of the entity in the balance sheet and the profitability in the income statement.

Question 7

These are expenses already paid but not yet incurred or used.

Answer 7

Prepayments

Question 8

Asset method vs. Expense method

Answer 8

Asset Method - Adjust amount is used or expired

Expense Method - Adjust amount is unused

Question 9

Asset method initial entry and adjusting entry

Answer 9

Ø Initial entry: DR Prepaid Expense CR Cash

Ø Adjusting entry: DR Expense CR Prepaid Expense

Question 10

Expense method initial entry and adjusting entry

Answer 10

Ø Initial entry: DR Expense CR Cash

Ø Adjusting entry: DR Prepaid Expense CR Expense

Question 11

These are income already received but not yet earned.

Answer 11

Deferrals

Question 12

Liability method vs. Income method

Answer 12

Liability Method - Adjusting amount is the earned portion.

Income Method - Adjusting amount is the unearned portion.

Question 13

Liability method initial entry and adjusting entry

Answer 13

Ø Initial entry: DR Cash CR Unearned Income

Ø Adjusting entry: DR Unearned Income CR Income

Question 14

Income method initial entry and adjusting entry

Answer 14

Ø Initial entry: DR Cash CR Income

Ø Adjusting entry: DR Income CR Unearned Income

Question 15

These directly impact the income statement and balance sheet of a company through the preparation of adjusting journal entries made at the end of each accounting period.

Answer 15

Accruals

Question 16

What is the purpose of accrual accounting?

Answer 16

Accrual accounting seeks to align revenues and expenses with the time period when they were incurred, rather than the time period of the actual cash flow associated with them.

Question 17

These are services rendered or merchandise sold but money is not yet received ; receivables from the customers.

Answer 17

Accrued revenues

Question 18

Accrued revenue adjusting entry (with interest)

Answer 18

DR Interest/Income Receivable CR Interest Income

Question 19

Accrued revenue entry upon payment (with interest)

Answer 19

DR Cash CR Income Receivable, Interest/Income Receivable, Interest Income

Question 20

These are expenses incurred but not yet paid.

Answer 20

Accrued expenses

Question 21

Accrued expenses adjusting entry (with interest)

Answer 21

DR Interest Expense CR Interest/Expense Payable

Question 22

Accrued expenses entry upon payment (with interest)

Answer 22

DR Expense Payable, Interest Payable, Interest Expense CR Cash

Question 23

It is a decline in the value of an asset due to wear and tear, obsolescence, and passage of time.

Answer 23

Depreciation or depreciation expense

Question 24

Three factors are involved in computing depreciation expense:

Answer 24

1. Asset Cost is the amount an entity paid to acquire the depreciable asset.
2. Salvage Value is the estimated amount of the asset at the end of its useful life.
3. Estimated useful life is the number of years an asset can be useful to the entity.

Question 25

It is the simplest procedure in estimating depreciation.

Answer 25

straight-line method

Question 26

The formula for determining the amount of depreciation expense for each period using this method is:

Answer 26

Asset Cost - Salvage Value = Depreciation Cost / Estimated useful life = Annual depreciation

Question 27

Contra asset of depreciation expense

Answer 27

accumulated depreciation

Question 28

What is the carrying value of an asset?

Answer 28

It is the balance of the accumulated depreciation deducted from the cost of the asset.

Question 29

Depreciation expense adjusting entry

Answer 29

DR Depreciation Expense CR Accumulated Depreciation

Question 30

These are losses due to uncollectible accounts.

Answer 30

Uncollectible Accounts/Bad debts/Doubtful accounts

Question 31

Uncollectible Accounts/Bad debts/Doubtful accounts adjusting entry

Answer 31

DR Bad Debts Expense CR Allowance for Bad Debts