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Compile Data For Adjustments 2. Prepare Adjusting Entries Lesson 1 Discussion
Compile Data For Adjustments 2. Prepare Adjusting Entries Lesson 1 Discussion
ADJUSTING ENTRIES
Competencies
1. Compile data for adjustments
2. Prepare adjusting entries
Lesson 1
Discussion
Adjusting Entries
The fifth step in the accounting cycle is the preparation of the adjusting entries. These
are made usually at the end of the accounting period to update the account. In other words,
adjusting entries are only prepared just merely to update the balances of the accounts. In
adjusting entry, the journal entry made at the time of recording is correct. However, at the
end of the accounting period, the balance of the account is no longer correct because of the
happening of some events. The outdated data, therefore, must be adjusted and updated in
order to give proper information to the users of the financial statements.
For example, the business purchased office supplies in the form of 10 reams of bond
paper at P300 per ream, or a total amount of P3,000 on September 1, 2018. The bookkeeper
prepares the following entry:
Undoubtedly, this entry is correct. Once the entry is posted and the trial balance is
prepared, the account Office supplies expense will have a debit balance of P3,000. This
information indicates that the business incurs expenses of P3,000 in the office supplies.
Assuming at the end of the year, December 31, 2018, there are still unused three reams of
bond papers amounting to P900.
In case the account Office supplies expense will not be adjusted, then the account
balance will provide erroneous information, simply because the 10 reams of bond paper were
not totally consumed. Only seven reams had been used with equivalent monetary value of
P2,100. There are still three reams of office supplies, which are considered resources of the
business.
In other words, expenses o office supplies are not P3,000, but only P2,100. This
information cannot be provided unless the account is properly adjusted. There is a need,
therefore, to update the account in order to provide correct information to interested users of
financial statements. This is attained through the preparations of adjusting entries.
Not all accounts, however, need to be adjusted. Only those accounts that had been
affected by business activities happening between the date of recording and the date of
financial statements preparation need to be adjusted.
At this point, there are two types of entries that have been introduced already – the
journal entry and the adjusting entry. The primary difference between the two is that the
journal entry is performed daily, while adjusting entry is made only at the end of the
accounting period.
Financial statements prepared directly from the trial balance do not reflect the real
pictures of past transactions because some account balances are outdated. The information
conveys to various interested users is not the true condition of the business entity. Adjusting
entries, therefore, are prepared to update balances of some accounts and match properly
revenues against expense during the period.
Cut-off period refers to the end of accounting period where all accounting elements are
sorted or segregated. When the business follows the calendar year as the accounting period,
then the cut-off period is December 31. Transactions happening after December 31 shall no
longer be included in that period.
For example, Jenny Service Shop is using the calendar year as its accounting period.
for year 2018, the accounting period starts on January 1, 2018 and ends on December 31,
2018. This implies that only transactions happening within that period shall be included in
the financial statements.
The relevance of cut-off period in relation to adjusting entry is that this is the only
time adjusting entries are prepared. This is the primary reason why adjusting entries are also
called “end of the period adjustments”. At this point, it is worth recalling the different
activities in the recording process, and the corresponding time involved: