Adjusting Entries and

Worksheet Preparation
MODULE GOALS/LEARNING OBJECTIVES:
At the end of the session, the learners will be able to:
1. Explain the purpose of adjusting entries.
2. Explain and apply the accrual principle to adjusting entries.
3. Analyze and prepare adjusting entries for accrued revenue and
deferred revenue, accrued expense and prepaid expense, bad debt
and depreciation.
4. Prepare a working paper to catch all adjustments to be made.
5. Record and post the adjusting entries and prepare an adjusted trial
balance.
 Adjusted
Trial Adjusting
Entries Trial
Balance Balance
Adjusting Entries are entries prepared at the end of an accounting period to
update or adjust the balances of the accounts.

Why do we prepare adjusting entries?

- Because of timing issues. It cannot be helped sometimes revenues and
expenses transcend more than one accounting period.

How does adjusting entries affect the financial statement?

- All adjusting entries affect at least one income statement account (revenue
or expense) and one balance sheet account (asset or liability). Adjusting
entries ensure the application of the accrual basis of accounting and the
matching principle.
Types of Adjusting Entries

• Accrued Expenses
• Accrued Revenue
• Prepaid Expenses or Deferred Expenses
• Unearned Revenues or Deferred Revenues
• Depreciation of Property, Plant and Equipment
• Uncollectible Accounts or Bad Debts
• Accrued Expenses (liability account) – are expenses already incurred
but not yet paid. These are also called accrued liabilities or accrued
payable. Examples are Taxes Payable, Interest Payable, Utilities
Payable, Salaries Payable and Rent Payable.
• Accrued Revenue (asset account) – is revenue already earned by the
business but not yet received or collected at the end of the
accounting period.
• Prepaid Expenses – are expenses paid in advance. These are treated
as asset since the benefits will be received in the future. These are
expected to be expensed through the passage of time or through use
of consumption.
• The two methods of recording adjusting entries for prepaid expenses
are the Asset Method and Expense Method.

• Asset Method – Under this method, the account debited upon

payment is an asset account. Upon adjustment, an expense account is
debited with a corresponding credit to an asset account.
• Expense Method – the account debited upon payment is an expense
account. Upon adjustment, an asset account is debited and an
expense account is credited.
• Unearned Revenues or Deferred Revenues (liability account) – are
revenues collected or received in advance by the business. These
revenues are not yet earned but already collected or received by the
business.
• The two methods of recording adjusting entries for prepaid expenses
are the Liability Method and Revenue Method.

• Liability Method – Under this method, the account credited upon

receipt of cash is a liability account. Upon adjustment, such liability
account is debited and a revenue account is credited.

• Revenue Method – the account credited at the date of collection is a

revenue or income account. Upon adjustment, a revenue account is
debited and a liability account is credited.
• Depreciation – process of allocating the depreciable cost of a fixed
asset over its estimated useful life.

Factors to Consider in Computing Depreciation:

• Asset Cost
• Estimated Residual Value
• Estimated Useful Life
• Using straight-line method, annual Depreciation Expense (DE) is
computed as follows:

DE = (Asset Cost – Residual Value)

Estimated Useful Life
• Uncollectible Accounts Expense or Bad Debts Expense – related to
the Company’s receivable which might not be collected. Companies
prepare adjusting entry to recognize the anticipated loss that the
business might incur arising from these uncollectible accounts.
SOURCE:
• 21st Century Accounting Process; 2015 edition, by Zenaida Vera Cruz-
Manuel
Thank you ☺