ADJUSTING ENTRIES

I WILL NOT ANYMORE TALK ABOUT WHAT IS THE JOURNAL ENTRY FOR A CERTAIN  TRANSACTIONS   ( or the journalization process).

THIS TOPIC WILL CONCENTRATE ON THE ADJUSTING ENTRY PROCESS OF AN ENTRY MADE THAT NEED TO BE ADJUSTED TO CONFORM OR MATCHED SOME RELATIVE ACCOUNTS.

AND ALSO TO DISCUSS  THOSE TRANSACTIONS THAT WAS NOT MADE PART OF THE NORMAL JOURNALIZATION PROCESS BUT SHOULD BE RECOGNIZED IN THE BOOKS OF ACCOUNTS OR ON THE FINANCIAL STATEMENT.

LET ME MAKE AN OVERVIEW OF THE ACCOUNTING PROCESS:

FIRST PROCESS:         GATHER  DOCUMENTS AS SOURCE OF ENTRY, LIKE SALES INVOICE, OFFICIAL RECEIPTS,   CHECK NOS.,  INVOICES OF SUPPLIER OR SERVICE PROVIDERS.

SECOND PROCESS:    JOURNALIZATION PROCESS

                        1.  POST THE SALES INVOICES NOS.  AMOUNT  TO THE "  sales book" JOURNAL, WITH DEBIT AND CREDIT.COLUMN FOR THE APPROPRIATE ACCOUNTS
                         2.  POST OFFICIAL RECEIPT NOS.  AMOUNT TO THE cash receipt book "with  DEBIT AND CREDIT  COLUMN FOR THE APPROPRIATE ACCOUNTS.
                        3.   GATHER THOSE INVOICE OF PURCHASES OF ANYTHING, SUPPLIERS DOCUMENT  OF THEIR SERVICES ETC.  THEN MAKE A VOUCHER DOCUMENT  , PUT A NUMBER ON THAT VOUCHER THE POST TO THE voucher register book " WITH DEBIT AND CREDIT COLUMNS WITH APPROPRIATE ACCOUNTS.
                        4.   POST THE CHECK NOS. AND ITS AMOUNT TO THE  check book or journal or register with debit and credit column for the appropriate accounts.
                        5.  make a voucher for those transaction not applicable to the above , say,  subscription of capital stock, depreciation and others and post to the GENERAL JOURNAL HAVING DEBIT CREDIT COLUMN, which will be discussed later

                 AFTER COMPLETING THE SECOND PROCESS,  ADD ALL  DEBITS AND CREDITS OF EVERY SPECIAL JOURNALS., AND PUT THE TOTAL AT THE BOTTOM EXCEPT   GENERAL JOURNAL..

THIRD PROCESS"   POSTING PROCESS

               1.  THE EVERY TOTAL OF EACH ACCOUNT  NAME  IN ALL THAT SPECIAL JOURNALS SHALL BE POSTED TO THE GENERAL LEDGER OF THAT ACCOUNT.

                      FOR ALL BALANCE SHEET OR REAL ACCOUNTS, EXTRACT THE ENDING BALANCE  AND PUT THAT ON THE ENDING BALANCE COLUMN OF THE GENERAL LEDGER OF THAT ACCOUNT.

 FOR THE ENTRIES IN THE GENERAL JOURNAL , POST EVERY JOURNAL ENTRY TO THE APPROPRIATE GENERAL LEDGER ACCOUNT.
                      COMPUTE THE NET TOTAL OF EACH AND EVERY NOMINAL ACCOUNTS  AND PUT IT ON THE BALANCE COLUMN OF THAT GENERAL LEDGER.

FOURTH PROCESS     :   SUMMARIZING PROCESS  , THE MAKING OF TRIAL BALANCE  

HOWEVER,  THERE IS A SYSTEM WHERE THERE IS NO MORE SPECIAL JOURNALS ( sales book, cash receipt book , disbrusement book etc)  BUT  ALL TRANSACTIONS ARE COVERED BY A VOUCHERS, AND THIS VOUCHERS ARE CLASSIFIED OR NAMED ACCORDING TO THEIR USE AS FF:

           1.  FOR CASH RECEIPT    ,   CALLED       COLLECTION VOUCHER
   2.  FOR DISBURSEMENT              CALLED        DISBURSEMENT VOUCHER
  3.   FOR PETTY CASH                    CALLED       PETTY CASH VOUCHER
 4.  ALL OTHER TRANSACTION    CALLED        JOURNAL VOUCHERS

EACH TYPE HAS ITS OWN DIFFERENT COLOR

(        OF COURSE NOWADAYS ,  THE SYSTEM OF JOURNALIZATION IS COURSED THRU THE COMPUTER, THAT MEANS  , THE OFFICIAL RECEIPT FOR COLLECTION , THE CHECKS ISSUED, AND OTHER DOCUMENTS CAN BE DIRECTLY ENTERED WITH THE CORRESPONDING ENTRIES  TO THE COMPUTER AND THE COMPUTER CAN PRINT YOU OUT THE VOUCHERS ITSELF.   THE COMPUTER CAN NOW POST TO THE GENERAL LEDGER, SUBSIDIARY LEDGERS, PRINT THE TRIAL BALANCE,  MAKE THE PROFIT AND LOSS, BALANCE SHEET.    )

 
   WITH CORRESPONDING DEBITS AND CREDITS,  THESE VOUCHERS SHALL BE DIRECTLY POSTED TO THE GENERAL LEDGER FOR EVERY ACCOUNTS AFFECTED. IF THERE IS A SUBSIDIARY ACCOUNTS FOR THAT ACCOUNTS , SIMILARLY IT IS INCLUDED ON THAT JOURNAL VOUCHERS .
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THE MAKING OF A TRIAL BALANCE.

 This trial balance is where in its FIRST COLUMN  appear or listed all the  accounting account name base on the chart of accounts of the company.  THE first set of accounts to be written on this first column are the  assets, next is the liabilities, next is the capital accounts , next is the profit and loss account.

the second column is the DEBIT AMOUNT ,  THE THIRD COLUMN IS THE CREDIT AMOUNT.

THE PUTTING OF THE AMOUNTS FOR THAT DEBIT AND CREDIT of the trial balance
           1. USING THE GENERAL LEDGER,  POST THE LEDGER BALANCE OF THAT ACCOUNT TO THE correspond account on the TRIAL BALANCE,  IF IT IS DEBIT , PUT IT TO DEBIT, AND CREDIT, PUT TO CREDIT.
          2.  ADD THE DEBIT COLUMN AND CREDIT COLUMN OF TRIAL  BALANCE , IT MUST BE EQUAL OR BALANCE.
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THE ADJUSTING ENTRIES PROCESS

WHAT IS THIS ADJUSTING JOURNAL ENTRIES , WHY IS IT , IT WAS NOT TAKEN UP IN THE JOURNALIZATION PROCESS.WHY IS THERE A NEED TO ADJUST.

THERE ARE FINANCIAL TRANSACTIONS THAT STILL NEEDS THE FINAL BALANCE AMOUNTS  OF THE TRIAL BALANCE BEFORE IT CAN BE  JOURNALIZE, SUCH AS

   

 1.       EXAMPLE ,  THE DEPRECIATION OF THE FIXED ASSETS FOR THAT PARTICULAR PERIOD , MONTH OR YEAR , HAS NO REGULAR DOCUMENT SO THAT A REGULAR ENTRY CAN BE MADE.. ALTHOUGH THERE IS A DEPRECIATION SCHEDULE BOOK, BUT IT IS IMPRACTICAL TO COMPUTE IT DURING THE REGULAR PROCESS.

     why is there a need to record this depreciation expense.  ;you see  the fixed assets that was purchased will definitely by passing of time and by it use WEAR OUT . Take note that this fixed asset is being used in the operation of business so it is contributing to the operation  of the business.  take note  also that when the fixed assets was purchased  , it was not charged to expense account but to an assets account, but since this asset will wear out , the necessary depreciation has to be recorded in the books .
      IN MAKING THE DEPRECIATION EXPENSE , IT IS CREDITED TO  A CERTAIN CONTRA ACCOUNT  AND THIS IS  "  ACCUMULATED DEPRECIATION "  , in this way the original book value of the fixed assets will still appear on the balance sheet.  Since accumulated depreciation is used instead of crediting a fixed assets, therefore this accumulated  is  a REAL ACCOUNT OR BALANCE SHEET ACCOUNTS.

       EXAMPLE:   FIXED ASSETS COSTING  200,000 is estimated to have useful life of 10 years.
       depn  a year is    200,000 divide 10 years  = 20,000

               depreciation exp.     ......                       ... 20,000
                    accum depn  (say building)                            20,000
           
      IN CASE THE ASSET IS PURCHASED DURING THE YEAR , OTHER THAN JAN IN CASE A CALENDAR YEAR IS USED, YOU HAVE TO PRO RATE THE DEPN IN ACCORDANCE WITH THE NUMBER OF MONTHS DURING THE YEAR IT WAS USED.  SAY  JULY PURCHASE THEN 1/2  DEPN EXP.  SO ON SO FORTH.

     NORMALLY THERE IS  FIXED ASSETS AND DEPRECIATION SCHEDULE WHERE THE MONTHLY OR THE YEARLY DEPRECIATION IS ALREADY PRE COMPUTED SO THAT ALL YOU HAVE TO DO IS TO GET THE TOTAL OF DEPRECIATION IN IT AND  RECORD IN THE ADJUSTING ENTRY.    . IT IS A LAPSING SCHEDULE .        
     there are many ways on how to allocate the depreciation expense for a fixed assets but what is regular or normal system of depreciation is the straight line method , where an estimated useful life in number of years  is being attributed it  or   a certain percent per year is given as his rate of depreciation.

          2.           THE  PROVISION FOR BAD DEBTS OF RECEIVABLES IS NOT JOURNALIZE ON THE REGULAR PROCESS., THOUGH THERE MAY BE A FIXED RATE  FOR THIS  BUT AGAIN THAT RATE IS BASED ON THE OUTCOME OF THE TRIAL BALANCE.

          WHEN A COMPANY IS SELLING PRODUCTS OR SERVICES ON CREDIT, THERE IS TENDENCY THAT SOME OF THE RECEIVABLE MAY NOT ANYMORE BE COLLECTED , AND SINCE A SALES OR AN INCOME HAS ALREADY BEEN RECORDED , IT WOULD BE PROPER THAT AN ALLOWANCE FOR POSSIBLE BAD DEBTS HAS TO BE RECOGNIZED IN THE BOOKS SO THAT A PROPER MATCHING OF INCOME AGAINST EXPENSE IS ATTAINED .

        EXAMPLE:   IT IS ESTIMATED THAT NORMALLY THE RATE OF  BAD ACCOUNTS IS ABOUT 4% OF WHAT WAS SOLD, THEREFORE IF YOU SELL WORTH 100,000 , THE ALLOWANCE FOR BAD DEBTS WOULD BE 4,000.00 .

                      PROVISION FOR BAD DEBTS                 4,000
                                 RESERVE FOR BAD DEBTS                       4,000


       JUST LIKE ACCU. DEPN,  IT IS NOT DIRECTLY CREDITED TO ACCOUNTS RECEIVABLE.
        BECAUSE THIS IS NOT THE EXACT AMOUNT OF THE BAD DEBTS.

 NOW WHEN THE TIME COMES AND THE ACTUAL  UNCOLLECTIBLE IS DETERMINED THAT IS THE TIME WHEN THE CREDIT TO ACCTS. RECEIVABLE IS MADE.

                    RESERVE FOR BAD DEBTS                2,000
                           ACCTS. RECEIVABLE                               2,000

   IT IS DEBITED TO RESERVE ACCOUNTS BECAUSE THERE WAS ALREADY A DEBIT TO EXPENSE ACCOUNT  PREVIOUSLY  , THE PROVISION FOR BAD DEBTS.
             3        THE  COST OR THE PURCHASE COST OF THE PRODUCT SOLD HAS NOT BEEN JOURNALIZE YET ..  IT WOULD BE IMPRACTICAL THAT EVERY TIME  A SALE IS MADE A COST OF SALES ACCOUNT SHALL BE DEBITED, HENCE , THIS IS JOURNALIZE IN A TOTAL END OF THE PERIOD.ESPECIALLY WHEN , AN INVENTORY TAKING OF MERCHANDISE  IS  STILL NEEDED BEFORE AN ENTRY CAN  BE MADE  HENCE NOT PART OF THE REGULAR ENTRY..    read xplanation below.
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               4      THERE ARE RECORDED EXPENSES MADE IN THE REGULAR JOURNALIZATION BUT  IT NEEDS ADJUSTMENT BECAUSE THAT EXPENSE APPLIES TO MORE THAN THE PERIOD WHERE THE TRIAL BALANCE WOULD COVER. SAY THAT EXPENSE WHEN RECORDED WAS INTENDED FOR 5 YEAR USE, BUT THE TRIAL BALANCE IS FOR 1 YEAR ONLY..
                       a.   PREPAID EXPENSE=  THESE ARE EXPENSES WHICH ARE PAID IN ADVANCE  WHICH AMOUNT IS IN EXCESS OF THE REGULAR PERIOD.
                    EXAMPLE:

                          RENT EXPENSE   PAID  30,000 ON  MARCH  THIS YEAR  BUT THIS IS GOOD FOR 2 YEARS. YOU ARE PREPARING THE ADJUSTMENT FOR THIS YEAR.  CONSIDERING THAT THE YOU HAVE USED UP ONLY 10 MONTH RENT ,  AN ADJUSTMENT  IS NEEDED SO THAT THE ACTUAL EXPENSE RECORDED IS GOOD FOR 1O MONTHS ONLY.

                          BUT BEFORE YOU COULD MAKE A CORRECT ACCOUNT TO BE USED , YOU MUST DETERMINED WHAT WAS THE ACCOUNT USED WHEN THAT RENT WAS JOURNALIZE.    
                IF IT IS DEBITED TO AN ASSET ACCOUNT SAY PREPAID RENT , THEN THE CREDIT ACCOUNT TO BE USED IN ADJUSTMENT IS CREDIT PREPAID RENT:  WHEN YOU READ A PREPAID ACCOUNT, THAT  MEANS IT IS NOT YET AN EXPENSE, IT IS IN ASSET OR BALANCE SHEET STATUS

                           RENT EXPENSE          12,500
                                PREPAID EXPENSE              12,500
               to record the  actual rent expense .  30,000 divide 24months = 1250 x 10 months
               if you deduct the 12,500 credited to the prepaid account , the balance of the prepaid originally debited is now  17,500   (  30,000 less 12,500)
              IF THE DEBIT ACCOUNT USED WHEN THIS 30,000 RENT WAS PAID IS RENT EXPENSE OR AN EXPENSE ACCOUNT THEN THE ADJUSTING ENTRY IS  CREDITING EXPENSE ACCOUNT.

                        Prepaid rent         17.500
                                 rent exp                  17,500

                  TO  adjust the rent expense account to reflect the 10 mos. rent expense. IT IS DEBITED TO PREPAID TO RECOGNIZE PORTION OF THE RENT  17,500  AS STILL AN ASSET .

              after posting this entry, the rent expense which is originally debited to 30,000 will now have a balance of 12,500 representing 10 month. and the PREPAID RENT would now be 17,500 goodfor 14 months which applies to next accouniting period  and therefore must be in an ASSETS state.

               so the purpose of this adjusting entries is to recognized the applicable rent expense for this period and recognized the ASSET ACCOUNT , PREPAID  for the payment applicable to the next accounting period.

          OR A CERTAIN RENT WHERE THE LAST  RENTAL IS NOT ANYMORE BEING PAID BECAUSE IT WILL APPLIED TO THE ADVANCE DEPOSIT MADE.

             b.   DEFERRED REVENUES.  on the other hand , if your business is leasing or renting ,  your customer will pay you in advance .  Example ,  the customers pays you ,  30,000 rental of your building good for 3 years, let us say in Oct this year.  That means your income for this year should only be equivalent to 3month ( oct to dec) or 2,500 .  the account you have to used in making the adjustment depends on whether  the account used in crediting the payment is REVENUE ACCOUNT , say  rental income OR  LIABILITY ACCOUNT say  DEPOSIT RECEIVED OR UNEARNED RENT INCOME

IF THE ACCOUNT USED IS LIABILITY ACCOUNT  WHEN THE COLLECTION WAS MADE THEN THE ENTTRY IS:

                           UNEARNED RENT INCOME        2500
                                     RENT INCOME                                 2500
                   To debit the unearned rent so that it can be reduced equivalent to 33months,  and recognized the actual rent income this year equivalent for 3 months.
 when you see UNEARNED ACCOUNT THAT MEANS IT IS NOT YET INCOME , SO IT SHOULD BE RECORDED AS AN  LIABILITY ACCOUNT AND   NO    AN     INCOME YET. 

                    the balance of the unearned rent after this entry is only 27,500 representing  33 months.    
                                
   IF THE ACCOUNT USED IS INCOME OR REVENUE ACCOUNT OR RENT INCOME THEN THIS ENTRY

                             RENT INCOME               27,500
                                      UNEARNED RENT INCOME    27,500
                TO debit the rent income so that it can be reduced to 3 month only , and recognized the 33 month of rent still not yet earned .

  
                  2.  INSURANCE  expense is treated like rent expense as explained above.
                 3.    ADVERTISING  EXPENSES WHICH IS NORMALLY PAID IN ADVANCE same as rent expense method.
                 4.   AN INTEREST EXPENSE ON LOANS OBTAIN  WHERE THE INTEREST WA DEDUCTED IN ADVANCE  . ,treated  the same as rent expense APPROACH.

 5.  THE ACCRUED EXPENSES  =  during the accounting period , there are expenses which may have been incurred but were not recorded  in that accounting period.

  EXAMPLE. 1.      the cut of period of payroll is on the 20th  for salaries for the month, at the end of the month , there are 10 days working days that was not paid yet until the 20 th of next month.  THIS 10 DAYS WORKED MUST BE RECORDED  as ff:

                         SALARIES                  3,000
                                ACCRUED SALARIES PAYABLE    3,000
                 TO  record the salaries from 2oth to 30th which not yet recognized.


 EXAMPLE 2.  THE PROMISSORY NOTE CALLS FOR THE PAYMENT OF PRINCIPAL TOGETHER WITH THE INTEREST , BUT UNFORTUNATELY THE PAYMENT OF PRINCIPALS FALLS ON THE 5TH OF THE MONTH. THEREFORE FROM 5TH TO END OF MONTH , AN INTEREST EXPENSE IS ACCRUING , SO AN ADJUSTMENT HAS TO BE MADE. SAY THE INTEREST FOR ONE MONTH IS  5,000.00.OR ABOUT 167 A DAY. OR ABOUT 4,167 FOR 25 DAYS. THE 25 DAYS EQUIVALENT MUST BE RECOGNIZED
                     
                      INTEREST EXP                        4167
                           ACCRUED INTEREST PAYABLE     4167
                 to   recognize the  interest accruing  which will be only recorded on the 5th fo the following month.

     6.  THE ACCRUED REVENUE.  MORE PARTICULARLY ON  INTEREST ON NOTES RECEIVALBE AND OTHER INTEREST BEARING NOTES.. THIS IS JUST THE REVERSE OF THE ACCRUED INTEREST EXPENSE.

                       ACCRUED INTEREST RECEIVABLE      4167
                                 INTEREST INCOME                                  4167

 THIS MAYBE DIFFERENT IS,   SAY YOU ARE IN LENDING BUSINESS AND YOU ARE DEDUCTING IN ADVANCE THE INTEREST OF YOUR NOTES RECEIVABLE.  THE METHOD IS JUST LIKE THE UNEARNED RENT ABOVE, BUT IN THIS CASE  THE ACCOUNT IS  UNEARNED INTEREST INCOME.  OR INTEREST INCOME.

7.   OFFICE SUPPLIES EXPENSE AND OTHER SIMILAR MATERIALS
       Considering that office supplies expense are bought normally in bulk, there is a tendency that it may not be consumed during the period, therefore there is a remaining unused office supplies at the end of the accounting period.  THIS UNUSED SUPPLIES MUST BE recorded in the balance sheet as an ASSETS  and the used portion shall be reflected in the profit and loss as office supplies expense.
     EXAMPLE.   the cost of office supplies purchased was  10,000, and was debited to office supplies expense account, but at the end of the accounting period , there left 2,000.00 unused office supplies. This 2,000.00 must be recorded as an asset account in OFFICE SUPPLIES INVENTORY ACCOUNT. and the  8,000.00 be recorded  as OFFICE SUPPLIES EXP.   HENCE THIS ENTRY

                OFFICE SUPPLIES INV           2,000.00
                        SUPPLIES EXPENSE                       2,000.00

Posting this entry to the ledger would reduced the original debit to supplies exp of 10,000.00 to 8,000.00 balance and the unused  inventory will be 2,000.00
IF IT WAS ORIGINALLY DEBITED TO OFFICE SUPPLIES INV. then this is the adjusting entry
                  SUPPLIES EXP              8,000.00
                        SUPPLIES INV                        8,000  

       Posting this entry to ledger account, supplies inventory  which has 10,000.00 balance would become 2,000.00 only  and the supplies expense would have 8,000.00 which is the true usage of the supplies.

7.   There are instances when a company may have a pending legal case against them and that case may have been decided by the court in favor of the other party.  If it would involve some financial consideration in settling that case, the company should provide the necessary journal entry to recognize the expenses that would be incurred , therefore an adjusting entry is necessary as ff:

                        provision for legal damages             200.00
                                 accrued legal  damages                            200.00

8.  A possibility of having fire on any business establishment, properties  may happen.  If that is the case , and that there is an insurance coverage. A claim receivable should be recorded in the books and the corresponding credit is made on the applicable TANGIBLE ASSETS  ,  fixed assets, must be made and any difference between the INSURANCE COVERAGE AND THE ACTUAL VALUE OF THE FIXED ASSETS SHOULD EITHER BE LOSS OR INCOME.

 A Building costing  300.00 was burned , it has an accumulated depn of 50.00.  The insurance coverage is good for 100.00.

           CLAIMS RECEIVABLE      100.00
           ACCU. DEPN                       50.00
           LOSS DUE TO FIRE           150.00
                        FIXED ASSETS                 300.00
                           
   9.  there is a possiblity that in making an entry, a wrong classification of account may have been used.   A correcting or classifying entry is needed
           example:   An advances of cash was given to an employee to purchase something but instead of debiting ADVANCES TO EMPLOYEES ACCOUNT ( AN ASSET ACCOUNT) it was debited to SALARIES EXPENSE.  SO THE DEBIT TO EXPENSE SHOULD BE CORRECTED BY CREDITING IT.

 TAKE NOTE THAT IN ACCOUNTING FOR YOU TO CORRECT AN ACCOUNT THAT WAS DEBITED , YOU HAVE TO CREDIT IT , TO CORRECT IT.

                    ADVANCES TO EMPLOYEE                            200.00
                              SALARIES                                                          200.00

10.  A wrong use of account in recording a transaction may arise,  either , it should be debited to ASSET ACCOUNT  BUT  it was debited to EXPENSE ACCOUNT or vice versa.

      example.  A review of the LEDGER OF FIXED ASSETS reveals that there is a debit to this account but it is an expenditure to  repair that fixed assets. A correcting entry should be made

                  REPAIR AND MAINTENANCE                                 400.00
                             BUILDING OR ANY FIXED ASSETS  APPLICABLE    400.00
               
   7.  THE  COST OF SALES .  = TAKE NOTE THAT WHEN A SALES IS MADE , THAT PRODUCT CARRIES WITH IT  ITS COST OR THE PURCHASE COST OF THAT PRODUCT,,. OF COURSE THAT COST MUST BE RECORDED TO BE ABLE TO OBTAIN THE GROSS PROFIT OF THAT SALES AMOUNT.


  I WILL DISCUSS THIS COST OF SALES AHEAD OF THE OTHERS, BECAUSE THIS IS A LITTLE BIT  COMPLICATED TO SOME STUDENTS.


BASICALLY THERE ARE THREE METHODS  TO BE ABLE TO REFLECT THIS COST OF SALES IN THE PROFIT AND LOSS.

ACTUALLY THE INTENT OF ANY OF THE THREE METHOD IS TO BE ABLE TO COMPUTE FOR THE COST OF THE PRODUCT SOLD OR THE COST OF SALES .

ALLOW ME FIRST TO SHOW YOU THE VARIOUS METHODS AND JOURNAL ENTRIES FOR TO ARRIVE AT COST OF SALES.

IST METHOD.  this the PERIODIC INVENTORY METHOD , WHERE THE AMOUNT OF ENDING INVENTORY IS SET UP BASED ON THE ACTUAL PHYSICAL COUNT OF THE REMAINING INVENTORY.

  1.     THE CREDITING  OF THE BEG INVENTORY  AND DEBITING IT TO COST OF SALES ACCOUNT, IT IS AS IF ALL OF THE BEG INVENTORY WERE SOLD.

2.     THE CREDITING OF THE PURCHASES ACCOUNT  AND DEBITED IT TO COST OF SALES, AS IF ALL OF THEM WERE ALSO SOLD.  THAT MEANS IN THIS METHOD WHEN THE PURCHASES WAS MADE  IT WAS DEBITED TO PURCHASES ACCOUNT.

THE DEBITING OF THE REMAINING INVENTORY AT THE END AND CREDITING COST OF SALES .  THE COST OF SALES WAS CREDITED FOR THIS ENDING INVENTORY JUST TO OFFSET THE OVER DEBIT OF COST OF SALES IN NO. 1, 2  SIMPLY BECAUSE NOT ALL OF THEM WERE SOLD, SO CREDIT TO COST OF SALES IS NECESSARY ,  AS A MATTER OF FACT , THERE IS AN INVENTORY UNSOLD AT THE END.

               COST OF SALES               100
                     BEG INVENTORY                     100

               COST OF SALES               200
                      PURCHASES                          200

              INVENTORY END             50
                      COST  OF SALES                   50

       YOU WILL NOTICED THAT THE BEG INVENTORY AND THE PURCHASES WERE INITIALLY ASSUMED TO HAVE BEEN SOLD BECAUSE IT WAS DEBITED TO COST OF SALES BUT IT TURNS OUT THAT  THERE WAS A REMAINING INVENTORY UNSOLD, THEREFORE TO CORRECT OR TO REDUCE THE OVER DEBIT TO COST OF SALES , THE COST OF THIS ENDING INVENTORY WAS  CREDITED TO COST OF SALES AND TO SET UP THEN NEW INVENTORY AMOUNT, BECAUSE THE BEG INVENTORY ACCOUNT WAS CLOSED AS SHOWN ABOVE.


       OF COURSE , THE ENDING INVENTORY IS EITHER COUNTED ONE BY ONE AND ASSIGNED THE APPROPRIATE COST THEN COMPUTE THE AMOUNT. THIS IS NOW THE ENDING INVENTORY  .  THIS IS  THE  NOW THE BASIS OF SETTING UP OF INVENTORY AT THE END .

IN THIS METHOD ,  IN THE GENERAL LEDGER , THERE IS AN ACCOUNT NAME CALLED COST OF SALES . THEREFORE IN THE MAKING OF THE PROFIT AND LOSS STATEMENT , YOU CAN SIMPLY PICK UP THE BALANCE OF THIS ACCOUNT  WHICH IS 250  AND DEDUCT THIS TO SALES AMOUNT TO ARRIVE AT GROSS PROFIT.

HOWEVER,  YOU ARE NOT PREVENTED FROM PRESENTING IN TEH PROFIT AND LOSS STATEMENT ITSELF TO SHOW HOW DID YOU ARRIVE AT THIS COST OF SALES AS FF:


                 SALES                                                                500
                     BEG INVENTORY                          100
                     PURCHASES                                   200
                       AVAILABLE FOR SALES             300
                     LESS : ENDING INVENTORY         50
                     = COST OF SALES                                        250
                        GROSS PROFIT                                          250
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THE SECOND METHOD


1.   DEBITING INCOME AND EXPENSE SUMMARY ACCOUNT  AND CREDITING BEG. INVENTORY ACCOUNT TO CLOSE THE BEG INVENTORY ACCOUNT.  THIS IS SOMEWHAT SIMILAR TO METHOD ONE, THE ONLY DIFFERENCE IS THE USE OF INCOME AND EXPENSE SUMMARY ACCOUNT.  TO TRUTH IS YOU CAN USE ANOTHER ACCOUNT NAME SAY  "  decrease in inventory"  or increase / decrease in inventory"

2.   THE DEBITING OF THE REMAINING INVENTORY UNSOLD AT THE END  AND CREDITING IT TO THE INCOME AND EXPENSE SUMMARY.   THIS IS SIMPLY SETTING UP OF THE ENDING INVENTORY  AND ALSO SIMILAR TO METHOD NO. 1.  THOUGH AS SAID YOU CAN ALSO USED , " increase in invetory or " increase decrease in inventory" 

3.   TAKE NOTE THAT THE PURCHASES ACCOUNT WHICH IS OF COURSE DEBITED WHEN THE PURCHASES OF GOODS WAS MADE  WAS NOT CLOSED TO INCOME AND EXPENSE SUMMARY ACCOUNT, UNLIKE IT METHOD 1 WHERE THIS PURCHASES ACCOUNT WAS CLOSED TO COST OF SALES ACCOUNT.

                  INCOME AND EXP SUMMARY            100
                            BEG INV                                                 100

                 END INV                                                    50
                      INCOME EXP. SUMMARY                          50

NOW IT WOULD APPEAR THAT THERE IS NO COST OF SALES ACCOUNT IN THE GENERAL LEDGER  THAT YOU CAN USE TO PUT THAT ON THE PROFIT AND LOSS STATEMENT.

WHAT IS NOW ON THE LEDGER IS THE ACCOUNT INCOME AND EXPENSE SUMMARY . AND THE   PURCHASES ACCOUNT WHICH IS CONSIDERED AS A NOMINAL ACCOUNTS.

NOW IF YOU ARE GOING TO PREPARE YOU PROFIT AND LOSS STATEMENT IT WOULD APPEAR LIKE THIS

                           SALES                                                   500
                           LESS COST OF SALES:

                           INCOME EXP SUMMARY   .      50
                           PURCHASES                               200                       
                            COST OF SALES                       250    250
                         GROSS PROFIT                                       250

  BUT PRESENTING THE COST OF SALES THIS WAY IS TO SOME NON ACCOUNTANTS SEEMS DIFFICULT TO COMPREHEND SO THAT , YOU CAN PRESENT THIS COST OF SALES COMPUTATION SIMILAR TO THE METHOD 1.

MIND YOU AS A MATTER OF FACT  THEY ARE ALL THE SAME, THIS  INCOME EXPENSE SUMMARY IS USED ONLY IN PLACE OF COST OF SALES EXPLAINED IN NO. 1.

AND THE PURCHASE IN THIS METHOD 2  WAS NOT CLOSED TO INCOME EXPENSE SUMMARY , BUT HAD IT BEEN CLOSED TO INCOME EXP SUMMARY,  THE NET AMOUNT OF THIS INCOME AND EXPENSE SUMMARY IS ALSO COST OF SALES OF 250.
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METHOD 3.  THIS NOW THE  PERPETUAL INVENTORY METHOD, WHERE THERE IS NO ACTUAL PHYSICAL COUNT OF THE ENDING INVENTORY BUT RATHER A THEORETICAL COMPUTATION OF THE ENDING INVENTORY IS MADE..

 THIS TIME , THERE IS NO DIFFERENTIATION OF BEG AND ENDING INVENTORY ACCOUNT, ALL OF IT IS TERMED  "INVENTORY:"

 1.  IN THIS SYSTEM WHEN THE PURCHASES WAS MADE IT DEBITED TO INVENTORY ACCOUNT AND NOT PURCHASES, IN THE INTENTION OF MAKING THE ENDING INVENTORY PERPETUALLY COMPUTED.

2.  SINCE THERE IS A BEG INVENTORY AND THIS BEG WILL NOT BE CLOSED TO COST OF SALES AS IN ABOVE EXAMPLE ,  AND THE PURCHASE ALSO IS DIRECTLY DEBITED TO INVENTORY , THERE NOTHING TO CLOSE TO COST OF SALES AS LIKE IN THE ABOVE. SO LOOKING AT THE LEDGER THE INVENTORY ACCOUNT IN THE LEDGER SHOWS THE BEGINNING AMOUNT  , PLUS THE PURCHASES EQUALS THE GOODS AVAILABLE FOR SALE.

3.  SINCE THERE ARE SALES MADE , THIS AVAILABLE INVENTORY WILL BE REDUCED . 
4.  IT WOULD BE NECESSARY FOR YOU TO BE ABLE TO COMPUTE THE ENDING INVENTORY, A SCHEDULE OF FINISHED GOODS INVENTORY SHOULD MADE LIKE THE FF:

           ITEM       beg inv.         purchases        sales              others                  ending inv.
                      qty cost amt    qty cost amt     qty cost amt    qty cost amt      qty cost amount


  total                          100                200                   250                                             50

take note that the inventory end is perpetually computed  and not based on actual physical inventory.  the sales amount is not the SALES AT SELLING PRICE BUT A SALES BASED ON COST.

  the adjusting entry to be made now is:

        
               COST OF SALES                            250
                            INVENTORY                                250
     TO RECORD THE COST OF SALES AND TO REDUCE THE AVAILABLE INVENTORY FOR SALE TO ARRIVE AT THE ENDING BALANCE.

  JUST SIMILAR TO THE METHOD 1,  THERE IS  A LEDGER ACCOUNTS FOR COST OF SALES  WHERE YOU CAN PUT ON THE PROFIT AND LOSS STATEMENT.  AGAIN THERE YOU ARE NOT PREVENTED FROM PRESENTING  A SCHEDULE ON HOW DID YOU ARRIVE AT THE COST OF SALES AND PLACED THAT ON THE PROFIT AND LOSS STATEMENT NOT BECAUSE SOME ACCOUNT THERE YOU WILL PLACED IS A NOMINAL ACCOUNTS , BECAUSE INVENTORIES ARE REAL ACCOUNTS, BUT THIS IS ONLY MADE FOR PURPOSES OF CLARITY.

TAKE NOTE THAT IN THIS METHOD,  ANY LOSSES OR PILFERAGE OR COSTING VARIATIONS WILL NOT BE RECOGNIZED UNLIKE IN THE PERIODIC METHOD WHERE ACTUAL COUNT OF INVENTORY IS MADE AND WAS MADE TO BE THE ENDING INVENTORY HENCE THE LOSSES DUE TO MANY FACTORS IS AUTOMATICALLY CHARGED TO COST OF SALES .

  THE COST OF SALES IS SIMILARLY PRESENTED THIS WAY:

                 BEG INV....................
                 PLUS PURCHASE
                LESS ENDING INV..............
                     COST OF SALES..........
LASTLY THIS METHOD  WOULD PROBABLY REFLECT THE  COST OF SALES AS THEORETICAL AMOUNT  BECAUSE THE INVENTORY AMOUNT IS REFLECTED AS A THEORETICAL AMOUNT.

IN THE EVENT THAT LATER THE PILFERAGE OR LOSSES ON INVENTORY WAS DISCOVERED,  AND THE BOOK IS STILL OPEN THEN EITHER MAKE A NEW ENTRY OR MAKE ADJUSTMENT TO ADJUST THE ORIGINAL ENTRY.

               SAY CHANGE THE ORIGINAL ENTRY BECAUSE  THERE ARE  LOSSES OF  10
 ORIG ENTRY:
                       COST OF SALES             250
                                INVENTORY                 250
               
                IF CHANGE THE ORIG. , THIS IS THE ENTRY
                            COST OF SALES           25O
                            INVENTORY LOSS         10
                                       COST OF SALES.................260

               IF ADJUST THE ORIGINAL ENTRY''
                              INV. LOSS         10
                                       INVENTORY      10

         IT WOULD BE APPROPRIATE  TO CHARGE THE LOSS TO INV. LOSS ACCOUNT  INSTEAD TO COST OF SALES ,  SO THAT MANAGEMENT WOULD KNOW THAT THERE ARE SOME LOSSES ALONG THE WAY.
IF ON THE OTHER HAND , THE COMPANY WANTS IT BE CHARGED TO COST OF SALES, THEN THE ENTRY SHOULD HAVE BEEN:
                  COST OF SALES     260
                           INVENTORY            260
INSTEAD OF

                     COST OF SALES   250
                           INVENTORY              250     AS SHOWN ABOVE/
  

IF AFTER A COUPLE OF YEARS A BIG AMOUNT OF LOSSES WAS FOUND OUT,  THOSE LOSSES PERTAINING TO THE LAST YEARS SHOULD BE CHARGED TO RETAINED EARNINGS AND NOT TO THE CURRENT YEAR PROFIT AND LOSS.

PROBLEM EXERCISES  I:

required : prepare adjusting entries.
1.  the prepaid insurance account in the trial balance has a debit of 3,600.00 for a 2 year fire insurance starting July 1 , the company is in a calendar period.
2. On sept  1 a    RENT INCOME has a balance of 3,750.00 , for a 5 month rent .
3. on nov 1  3000.00 was paid for a rent for 6 month , it was debited to rent expense.
4.  office supplies exp  appeared on trial balance 1,350.00 but at the end of the year there remaining 500.00 pesos.

PROBLEM EXERCISE 11

required : make a journal entry.
1.  there was a receivable of 300.00 but the debtor was declared bankrupt .  the company is maintaining an allowance for doubtful account in its ledger. you are advised to write off or remove that receivable balance.
2.