Adjusting Entries – journal entries prepared at the end of accounting period of one year

following the preparation of Trial Balance for the following reasons:

1. To bring records or balances of accounts updated

2. To match revenues against expenses during the period.

Matching Principle – a Generally Accepted Accounting Principle (GAAP) which requires that
revenues and any related expenses be recognized together in the same reporting period.

Note: An adjusting entry must always have a balance sheet account and an income
statement account

Items requiring adjusting entries:

I. ACCRUALS- Accrual adjusting entries recognizes transactions already expired or

earned but remained unrecorded as of cut-off date. (Note: no original entries made)

a. Accrued income – income already earned but not received (Receivable)

ENTRY:
Receivable Account (Accrued revenue) P XXX
Revenue or Income Account P XXX
b. Accrued
expense – expense already incurred but not paid (Payable)

ENTRY:
Expense Account P XXX
Liability Account (Accrued expense) P XXX

Illustration 1:

A building owned by Metro Davao Hotel was partly rented by PNB for P50,000 per month
payable every 5th day of the following month. The rental for the month of Dec 31, 20A will be
paid on Jan 5, 20B.
Required: Adjusting entries to record a.) accrued income and b.) accrued expense.

a. Accrued income
Metro Davao Hotel (Lessor/Owner):
12/31 - Rent receivable or Accrued rent income P50,000
Rental income P50,000
To record rent income
 b. Accrued expense

PNB: (Lessee)
12/31 - Rent expense P50,000
Rental payable or accrued rent expense P50,000
To record rent expense

Illustration 2:

Assume that the business entity received a promissory note from a customer on October 1. The
note is for ₱100,000 with interest of 12% due after one year.
Required: Adjusting entry to record accrued income.

12/31 – Interest receivable P3,000

Interest income P3,000
To record interest from Oct 1 to Dec 31

Solution: Principal x Rate x Time (P x R x

T)
P100,000 x 12% x 3/12 = P3,000

EXERCISES:

ACCRUED INCOME

Prepare adjusting entries on the following independent cases:

1. On December 31, 2021, Gray Electronic Repair Services rendered, P3,000 worth of
services to a client. However, the amount has not yet been collected. It was agreed that
the customer will pay the amount on January 15, 2022. The transaction was not
recorded in the books of the company as of 2021.
2. Company ABC leases its building space to a tenant. The tenant agreed to pay monthly
rental fees of P2,000 covering a period from the 1st to the 30th or 31st of every month.
On December 31, 2021, ABC Company did not receive the rental fee for December yet
and no record was made in the journal.
3. ABC Company lent P9,000 at 10% interest on December 1, 2021. The amount will be
collected after 1 year. At the end of December, no entry was entered in the journal to
take up the interest income.
ACCRUED EXPENSES

1. For the month of December 2021, Gray Electronic Repair Services used a total of P1,800
worth of electricity and water. The company received the bills on January 10, 2022.
a. When should the expense be recorded, December 2021 or January 2022?
b. What is the adjusting entry for this transaction?
2. VIRON Company entered into a rental agreement to use the premises of DON's building.
The agreement states that VIRON will pay monthly rentals of P1,500. The lease started
on December 1, 2021. On December 31 of the same year, the rent for the month has
not yet been paid and no record for rent expense was made. What is the adjusting entry
for this transaction?
3. JEST Company borrowed P60,000 at 12% interest on August 1, 2021. The amount will be
paid after 1 year. At the end of December, the end of the accounting period, no entry
was entered in the journal to take up the interest. What is the adjusting entry for this
transaction?