Step 6 – Adjusting Entries

At the end of the accounting period, some accounts in the general ledger would require updating. The journal
entries that bring the accounts up to date are called adjusting entries. One purpose of adjusting entries is
for income and expenses to be reported in the correct period.

#1 Depreciation
Depreciation is a method of allocating the cost of an asset to an expense over the accounting periods that
make up the asset’s useful life.

The formula is Annual Depreciation: (Acquisition Cost – Salvage or Residual Value) / Useful Life.

Example: Sept.1 2019 -The cost of the equipment is PHP25, 000. It was estimated to have a useful life of five
years. It is estimated that after five years, the office equipment can be sold at a scrap value of PHP1,000. The
company uses the straight line method of depreciation.

Computation:

Journal Entry:
Date Account Title and Explanation Ref Debit Credit

#2 Deferred Expenses or Prepaid Expenses

These are items that have been initially recorded as assets but are expected to become expenses over time or
through the operations of the business.

Example:
Company Transaction

1st Journal Entry

Date Account Title and Explanation Ref Debit Credit

Company Transaction
Adjusting Journal Entry
Date Account Title and Explanation Ref Debit Credit

#3 Deferred Income or Unearned Income

These are items that have been initially recorded as liabilities but are expected to become income over time or
through the operations of the business. When payment from customers is received in advance, the unearned
revenue liability arises.

Example: On September 1, 2019 Alekiel Company entered into a contract with

to deliver merchandise for two months starting on September 30, 2019 up to October 30, 2019. On the same
date, Alekiel Comapany paid the total contract amount of PHP40,000 in full.

1st Journal Entry

Date Account Title and Explanation Ref Debit Credit

Deferred - to delay recognizing certain revenues or expenses

Accrued - have been earned or incurred, but not yet recorded—that is, actually happened or been realized.
Company Transaction
Adjusting Journal Entry:

Date Account Title and Explanation Ref Debit Credit

#4 Accrued Expenses or Accrued Liabilities

These are items of expenses that have been incurred but have not been recorded and paid.

Example: On September 30, 2019 your company received the Meralco Bill for the month of September worth
Php 12,500. The due date would be on October 15, 2019.

Journal Entry
Date Account Title and Explanation Ref Debit Credit

#5 Accrued Income or Accrued Assets

These are income items that have been earned but have not been recorded and paid by the customer.
In short, these are receivables of the business.

Example: On September 30, 2019 Alekiel Company bought merchandise on

worth Php50,000. Payment won’t be receive until October 15,2019.

Note: income has to be recorded for the accounting period it’s earned in, regardless of whether
payment is received then. This is a fundamental principle of accrual accounting.

Journal Entry
Date Account Title and Explanation Ref Debit Credit

Deferred - to delay recognizing certain revenues or expenses

Accrued - have been earned or incurred, but not yet recorded—that is, actually happened or been realized.