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
Adjusting entries
Purpose of adjusting entries
To take up unrecorded income and expense of the period.
To split mixed accounts into their real and nominal elements.
(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
Real 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.
Nominal Accounts
accounts that have both real and nominal account components. These accounts are subject to adjustment.
Mixed accounts
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.
Liability 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.
Income 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.
Asset 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.
Expense method
