FINANCIAL ACCOUNTING
&
REPORTING
(Fundamentals)
Chapter 8: Adjusting Entries (FAR by: Millan)
Chapter 8
Adjusting Entries
Learning Objectives
1. Enumerate the common end-of-period adjustments.
2. Prepare adjusting entries.
Chapter 8: Adjusting Entries (FAR by: Millan)
Adjusting entries
• Adjusting entries are entries made prior to the preparation
of financial statements to update certain accounts so that
they reflect correct balances as of the designated time.
Chapter 8: Adjusting Entries (FAR by: Millan)
Purpose of adjusting entries
a. To take up unrecorded income and expense of the period.
b. To split mixed accounts into their real and nominal
elements.
Chapter 8: Adjusting Entries (FAR by: Millan)
Real, Nominal and Mixed Accounts
a. Real Accounts (Permanent accounts) – accounts that are
not closed at the end of the accounting period. These
accounts include all balance sheet accounts, except the
“Owner’s drawings” account.
b. Nominal Accounts (Temporary accounts) – accounts that
are closed at the end of the accounting period. These
accounts include all income statement accounts,
drawings account, clearing accounts and suspense
accounts.
c. Mixed accounts – accounts that have both real and
nominal account components. These accounts are
subject to adjustment.
Chapter 8: Adjusting Entries (FAR by: Millan)
Chapter 8: Adjusting Entries (FAR by: Millan)
Methods of Initial Recording of Income
1. Liability method – under this method, cash receipts from
items of income are initially credited to a liability
account. At the end of the period, the earned portion is
recognized as income while the unearned portion
remains as liability.
2. Income method – under this method cash receipts from
items of income are initially credited to an income
account. At the end of the period, the unearned portion
is recognized as liability while the earned portion remains
as income.
Chapter 8: Adjusting Entries (FAR by: Millan)
Methods of Initial Recording of
Expenses
1. Asset method – under this method cash disbursements
for items of expenses are initially debited to an asset
account. At the end of the period, the incurred portion
(‘used up’ or ‘expired’) is recognized as expense while the
unused portion remains as asset.
2. Expense method – under this method, cash
disbursements for items of expenses are initially debited
to an expense account. At the end of the period, the
unused portion (‘not yet incurred’ or ‘unexpired’) is
recognized as asset while the incurred portion remains as
expense.
Chapter 8: Adjusting Entries (FAR by: Millan)
APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION
Chapter 8: Adjusting Entries (FAR by: Millan)
