Accounting Info

Accounting Info

Review and additional information

Review on keywords

use small letters

Asset Method vs Expense Method

tying up the initial and adjusting entries

Prepaid expenses

represent payments made for expenses which have not yet been incurred. These are "advanced payments" by a company for supplies, rent, utilities and others that are still to be consumed. Hence, they are included in the company's assets. They are classified as current assets since they are readily available for use.

Expenses 

are recognized when they are incurred regardless of when paid. Expenses are considered incurred when they are used, consumed, utilized or has expired.

Prepaid expenses

may need to be adjusted at the end of the accounting period. The adjusting entry for prepaid expense depends upon the journal entry made when it was initially recorded.

There are two ways of recording prepayments: 

• the asset method

• the expense method

Asset Method

Under the asset method, a prepaid expense account (an asset) is recorded when the amount is paid. Prepaid expense accounts include: Office Supplies, Prepaid Rent, Prepaid Insurance, and others.

Asset Method

Using the Asset Method to record the transaction: Bought service supplies for cash. See picture in right. Take note that the amount has not yet been incurred, thus it is proper to record it as an asset.

Asset Method

If at the end of the month, 60% of the supplies have been used. This means $900 worth of supplies have been used and $600 remain unused. The $900 must then be recognized as expense since it has already been used.

If Asset Method was initially used, then...

in preparing the adjusting entry, our goal is to transfer the used part from the asset initially recorded into expense – for us to arrive at the proper balances shown in the illustration above.

Asset Method

• The adjusting entry will include: (1) recognition of expense and (2) decrease in the asset initially recorded (since some of it has already been used). 

• The "Service Supplies Expense" is an expense account while "Service Supplies" is an asset.

• After making the entry, the balance of the unused Service Supplies is now at $600 ($1,500 debit and $900 credit). Service Supplies Expense now has a balance of $900.

Expense Method

Using the Expense Method to record the transaction: Bought service supplies for cash. See picture in right. The entire payment was recorded as expense.

Expense Method

• If 60% was used, then the adjusting entry at the end of the month would be: (see picture on the right)

• Service Supplies is debited for $600 (the unused portion).

• Service Supplies Expense is credited thus decreasing its balance.

• Service Supplies Expense is now at $900 ($1,500 debit and $600 credit).

Notice that..

• the resulting balances of the accounts under the two methods are the same.

• Cash paid: $1,500

• Service Supplies Expense: $900

• Service Supplies: $600

Explanation

Of the total six-month insurance amounting to $6,000 ($1,000 per month), the insurance for 4 months has already expired. In the entry above, we are actually transferring $4,000 from the asset to the expense account (i.e., from Prepaid Insurance to Insurance Expense).

Explanation

In this case, we must decrease Insurance Expense by $2,000 because that part has not yet been incurred (not used/not expired). Insurance Expense shall then have a balance of $4,000. The amount removed from the expense shall be transferred to Prepaid Insurance. 

Conclusion

What we are actually doing here is making sure that the incurred (used/expired) portion is included in expense and the unused part into asset. The adjusting entry will always depend upon the method used when the initial entry was made.

Accumulated Depreciation

Advance lesson in preparation for next week

Accumulated Depreciation

This is a valuation account which represents the decrease in value of a fixed asset due to continued use, wear & tear, passage of time, and obsolescence. (contra assets)

Accumulated Depreciation

Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life.

Salvage Value 

is the estimated resale value of an asset at the end of its useful life.

Total Depreciation = Cost - Salvage Value

remember this formula

Remember these formula:

• Annual Depreciation = Total Depreciation / Useful Lifespan

• Monthly Depreciation = Annual Depreciation / 12

Given:

• ₱20,000 (initial value of laptop at the time of purchase)

• Salvage Value ₱5,000

• 5 years (useful lifespan)

Compute for the following:

• Annual Depreciation

• Monthly Depreciation

• 
  

Annual Depreciation

• Formula: Annual Depreciation = Total Depreciation / Useful Lifespan

• Where: Total Depreciation = Cost - Salvage Value (₱20,000 - ₱5,000)

• Computation: Annual Depreciation = ₱15,000 / 5 years

• Annual Depreciation = ₱3,000

Monthly Depreciation

• Formula: Monthly Depreciation = Annual Depreciation / 12

• Where: Annual Depreciation is ₱3,000

• Computation: Monthly Depreciation = ₱3,000 / 12 months

• Monthly Depreciation = ₱250