Accounting And Taxation (not For Dummies)

• Adjusting Entry - A journal entry made at the end of an accounting period to record revenues and expenses in the correct period. - Accrual - Recognition of revenue earned or expenses incurred that have not yet been recorded or cash received/paid. - Deferral - Postponing recognition of revenue or expenses because cash was received or paid in advance. - Prepaid Expense - An expense paid in advance and recorded as an asset until it is incurred. - Unearned Revenue - Cash received before services are performed, recorded as a liability until earned. - Depreciation - Allocation of the cost of a tangible fixed asset over its useful life as an expense. - Bad Debt Expense - Estimated expense for receivables expected to be uncollectible. - Adjusted Trial Balance - A list of all accounts and balances after adjusting entries are recorded, used for preparing financial statements.

Active Recall

• Adjusting Entry ________________________________________________ ______________________________________________ - Accrual ______________________________________________ ______________________________________________ - Deferral ______________________________________________ ______________________________________________ - Prepaid Expense ______________________________________________ ______________________________________________ - Unearned Revenue ______________________________________________ ______________________________________________ - Depreciation ______________________________________________ ______________________________________________ - Bad Debt Expense ______________________________________________ ______________________________________________ - Adjusted Trial Balance ______________________________________________ ________________________________________________

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Worked Examples

Example 1: Accrued Expense Adjustment 1. Company incurred electricity expenses of $1,200 in December but receives the bill in January. 2. At December 31, record adjusting entry to recognize the expense: - Debit Electricity Expense $1,200 - Credit Accrued Liabilities $1,200 3. This ensures the expense is recognized in December when incurred.

Now you try: A company earned $800 in consulting fees in December but will receive payment next month. Prepare the adjusting entry. ________________________________________________ ______________________________________________ ________________________________________________

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Example 2: Prepaid Expense Adjustment 1. On November 1, company prepaid $6,000 for a 6-month insurance policy. 2. At December 31, two months of insurance have expired: $6,000 × 2/6 = $2,000 expense. 3. Adjusting entry: - Debit Insurance Expense $2,000 - Credit Prepaid Insurance $2,000

Now you try: A business paid $3,600 for a 12-month rent on July 1. Prepare the adjusting entry at September 30. ________________________________________________ ______________________________________________ ________________________________________________

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Example 3: Depreciation Adjustment 1. Asset cost $50,000, useful life 10 years, no residual value. 2. Annual depreciation = $50,000 ÷ 10 = $5,000. 3. At year-end, record: - Debit Depreciation Expense $5,000 - Credit Accumulated Depreciation $5,000

Now you try: An asset costing $24,000 with a 4-year life and no residual value is purchased on January 1. Prepare the depreciation entry at year-end. ________________________________________________ ______________________________________________ ________________________________________________

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Practice Questions

1. (Easy) Define an adjusting entry and explain why it is necessary. ________________________________________________ ________________________________________________

2. (Medium) A company received $12,000 on December 1 for services to be performed evenly over 6 months, starting December 1. Prepare the adjusting entry at December 31. ________________________________________________ ______________________________________________ ________________________________________________

3. (Medium) Explain the difference between accrual and deferral adjustments with examples. ________________________________________________ ______________________________________________ ________________________________________________

4. (Hard) A company estimates 5% of its $100,000 accounts receivable will be uncollectible. Prepare the adjusting entry for bad debts and explain its effect on financial statements. ________________________________________________ ______________________________________________ ______________________________________________ ________________________________________________

5. (Hard) Discuss how incorrect adjusting entries can impact the accuracy of the Income Statement and Statement of Financial Position. Provide two examples. ________________________________________________ ______________________________________________ ______________________________________________ ________________________________________________

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Answer Key

1. Adjusting entry is a journal entry to recognize revenue or expenses in the correct period to comply with accrual accounting. Necessary to match income and expenses. 2. Debit Unearned Revenue $2,000; Credit Revenue $2,000 (recognizing 1 month’s earned revenue). 3. Accruals recognize revenues/expenses earned/incurred but not yet recorded; deferrals postpone recognition until cash is received/paid. Examples: accrued salary

End of chapter one. 4 more chapters in the full book.