BOOKKEEPING 2

WEEK 3
 Lesson 03
ADJUSTING ENTRIES
(Accruals of Income and Expense)
 OBJECTIVES
At the end of this lesson, you are expected to:

a. define adjusting entries;

b. understands the purpose of adjusting entries, and
c. prepares adjusting entries.
 Let us consider:
Imagine that your company closed a $5,000 client project in April and completed the
work during the month. The client has been billed but you haven’t received payment yet.
That same project cost you $1000 in materials, which you had to pay for on the spot.
(also known as end of period adjustments)
• are journal entries that are made at
the end of an accounting period to
adjust the accounts to accurately
reflect the revenues and expenses of
the current period.
• is to assign an appropriate portion of revenue and expenses
to the appropriate accounting period.
• By making adjusting entries, a portion of revenue is assigned
to the accounting period in which it is earned and a portion
of expenses is assigned to the accounting period in which it
is incurred.
• It ensures that only the relevant revenue and expenses are
reported in the income statement of a particular
accounting period and the financial statements have been
prepared correctly in accordance with the accrual
concept of accounting.
Accruals of Income
and Expense.

Adjusting Entries
 Let us consider:
ABC Co. is preparing its financial statements for the period ended December 31, 20x1,
Adjustments are needed for the following:

Case 1: ABC Co. received a 12%, P100,000 one year, note receivable of
April 1, 20x1, ABC uses a calendar year period. The principal and interest
on the note are due on April 1 20x1.

Case 2: ABC Co. rents out its building to a tenant for a monthly rent of
P50,000. As of December 31, 20x1, the tenant has not yet paid the rent
for the month of December.

Case 3: ABC Co. issued a 12% P100,000- one year, note payable on
October 1, 20x1/ The principal and interest are due on October 1, 20x2.
 Case 1
Case 1: ABC Co. received a 12%, P100,000 one year,
note receivable of April 1, 20x1, ABC uses a calendar
year period. The principal and interest on the note are
due on April 1 20x1.
Case 1: Accrual of Income – Interest Income

Concepts:
• Notes receivable give rise to interest income.
• Interest income is earned due to the passage of time.

Given Information:
• ABC uses a calendar year period. Therefore, the current
accounting period ends on December 31,20x1.
• Interest on the note is collectible on April 1, 20x2 (i.e., in the next
accounting period).
Case 1: Accrual of Income – Interest Income

Analysis:
• As of December 31, 20x1, (end of the accounting period),
interest income would have been earned because there is
already a passage of time (from April 1, to December 31, 20x1),
although interest will only be collected in the next accounting
period. (i.e., April 1, 20x2)
Conclusion:
• Interest income shall be accrued for the 9months covering April
1, to December 31, 20x1.
Case 1: Accrual of Income – Interest Income
The interest income is accrued as follows:
Formula: I = P r t (where: I = interest P= Principal r = rate t = time)
● Principal (P) is the P100,000 𝑰 = 𝑷𝒓𝒕
face amount of the note:
= 100,000 (0.12)(9 12)
● Rate (r) is the 12% interest
rate. 𝑰 = 𝑷 𝟗, 𝟎𝟎𝟎
● Time (t) is the expired time
of 9 months over a total of 12
months in a year.
Case 1: Accrual of ncome – Interest Income
The adjusting entry for the accrued interest income is as follows:

Note: Interest covering the remaining 3 months of January 1 to March

31,20x2 will be recognized in the next accounting period. This is the
time period concept.
Case 1: Accrual of Income – Interest Income

In the next accounting period, the collection of the interest

recorded as follows:

April Cash 12,000

1, Interest Receivable 9,000
20x2 Interest Income 3,000
To record the collection of
interest
 WEEK 3 - DONE

COPY OF YOUR
LESSON AND
ACTIVITY WILL
BE POSTED IN
YOUR
ARALINKS.