Business

Transactions
&
The Accounting
Cycle
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS
The WORKING PAPER is a financial tool that facilitates
the preparation of financial statements.

Types of Adjustments
1. Accruals (Accrued income/ Accrued expenses)
2. Prepayments (Asset Method / Expense Method)
3. Unearned Income (Liability Method/ Income
Method
4. Doubtful Accounts
5. Depreciation
6. Ending inventories (for merchandising and
manufacturing concerns)
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued income – items already earned but remain
uncollected as at end of the accounting period

Ex. (1) Uncollected fees on services already

rendered; (2) Uncollected accounts from customers
on goods already delivered; (3) Uncollected rent on
premises or assets already occupied or used by the
lessee
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

ACCRUALS
Accrued income

Pro-forma journal entry:

Dr. Receivable (Asset) xx
Cr. Income xx

Explanation:
1. A receivable account is debited since the item remain
uncollected as at end of the accounting period.
2. An income account is credited since the item has already
been earned (service has been rendered/ goods have been
delivered)
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued income

Transaction 1 – As at end of the accounting period,

BILANG Accounting Services, owned by Mrs. Bi Lang,
CPA, has an uncollected account from a client
amounting to P 100,000 for services rendered during the
period. No entry was taken up at the time the service
was rendered.

Adjusting journal entry:

Accounts receivable P 100,000
Professional fees P100,000
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued income

Transaction 2 – Gawa-Lunes-Sira-Martes Repair Shop,

owned by Mr. Bu Ting- Ting, billed Ms. Sheera Hin for
services previously rendered amounting to P 50,000. No
entry was made at the time the service was rendered.

Adjusting journal entry:

Accounts receivable P 50,000
Service income P50,000
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued income

Transaction 3 – As at end of the period, Bentah

Company has an outstanding uncollected account on
goods sold to Ms. Sasa Lee amounting to P 50,000. No
entry was made at the time of sale.

Adjusting journal entry:

Accounts receivable P 50,000
Sales P50,000
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued income

Transaction 4 – As at end of the period, NAGPAPA-

OPPA Company has an outstanding uncollected rent
of P 20,000 from UMO-OPPA Company which already
occupied the premises during the period.

Adjusting journal entry:

Rent receivable P 20,000
Rent income P 20,000
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued expense – items already incurred (used)
but remain unpaid as at end of the accounting
period

Ex. (1) Unpaid fees on services already incurred by

the business; (2) Unpaid salaries of employees (3)
Unpaid rent on premises or assets already occupied
or used by the lessee
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

ACCRUALS
Accrued expense

Pro-forma journal entry:

Dr. Expense xx
Cr. Payable (Liability) xx

Explanation:
1. An expense account is debited since the item has already
been incurred during the accounting period.
2. A payable account is credited since the item remains
unpaid as at the end of the accounting period.
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued expense

Transaction 1 – The business has unpaid salaries

amounting to P 75,000 as at end of the period for
service already provided by the employees during the
accounting period.

Adjusting journal entry:

Salaries expense P 75,000
Salaries payable P 75,000
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued expense

Transaction 2 – The business has unpaid rent

amounting to P 15,000 as at end of the period for the
building space it occupied during the period.

Adjusting journal entry:

Rent expense P 15,000
Rent payable P 15,000
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued expense

Transaction 3 – The business has unpaid electricity

costs amounting to P 10,000 as at end of the period
for the electric consumption during the period.

Adjusting journal entry:

Utilities expense P 10,000
Utilities payable P 10,000
The Accounting Cycle
5. PREPARATION OF THE WORKING PAPER WITH
ADJUSTMENTS

ACCRUALS
Accrued expense

Transaction 4 – The business has unpaid interest of P

5,000 as at end of the period on the outstanding note
payable which it issued to its creditors during the
period.

Adjusting journal entry:

Interest expense P 5,000
Interest payable P 5,000