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Adjusting Entries
Adjusting Entries
Adjusting Entries
of the accounting period. Adjusting entries ensure that the revenue recognition and matching principles are followed. Adjusting entries make it possible to report correct amounts on the Statement of Financial Position and on the Income Statement
these are revenues earned but not collected and not yet recorded at the of end of accounting period. Accrued revenues may have accumulated (accrue) with the passing of time, as in the case of interest income and rent income. Or, they maybe a result of services that have been performed but are neither billed nor collected. The purpose of the adjusting journal entry for accrued income is FIRST, to recognize the collectible/receivable so that it will be reflected in the Statement of Financial Position and SECOND, to recognize the Income earned so that it will be reflected in the Income Statement
As of December 31, 2012, Joseph Santos Janitorial Services has unrecorded and uncollected revenues from customers has reached P100,000
ADJUSTING JOURNAL ENTRY: Dec 31 Accounts Receivable 100,000 Service Income 100,000 To record unrecorded and uncollected revenue
As of December 31, 2012, rental payment for the past three (3) from a tenant of an office space in the business building has not yet been received or collected. Monthly rent is P5,000.
Notes Receivable outstanding as of December 31, 2012 is a P100,000, 90 day, 12% note dated Nov. 16 , 2012.
** What we have here is an accrued interest income at end of December 31. An interest income that is already earned but not yet collected and not yet recorded. ** Why UNCOLLECTED and UNRECORDED?? Because the maturity date of this promissory note (notes receivable ) on FEBRUARY 14, 2013. ** We cannot demand yet for its payment because it is not yet matured, but we can already recognize the interest income that has been earned from the time it was received (Nov 15, 2012) until end of the December 2012. ** It is important that we recognize this interest income for 2011 because it belongs 2012. Remember the Revenue Recognition Principle , it says we recognize revenue at the TIME IS WAS EARNED ** the computation is very simple--- i=prt interest income = P 100,000 x 12% x 45/360 = P 1,500 ** 45 days = Nov 16-Dec 31 - the period that has passed/expired on this particular promissory. Interest income has already accrued/or accumulated. ** this 45 days of interest income belongs to 2012, while the remaining 45 days interest income belongs to 2013.
*** Why Interest Receivable??? because they are receivable or soon to be collected. *** Why Interest Income ??? because, they are already earned (Nov 16Dec 31)
Expenses incurred but not yet paid and unrecorded as of end of accounting period. The adjusting journal entry for accrued expenses serves two purposes, FIRST is to record the obligation that exist as of end of accounting period, SECOND, to recognize the expenses of the current period.
Unpaid and unrecorded utilities as of December 31, 2012 are as follows: MERALCO P 6,000, PLDT P 10,000 and MWSS P 5,000
Notes Payable as of December 31, 2012 is a 60 day 12% for P150,000 dated Dec. 1, 2012
** What we have here is an accrued interest expense at end of December 31. This is an interest expense that is already incurred but not yet paid and not yet recorded.
** Why UNPAID and UNRECORDED?? Because the maturity date of this promissory note (notes payable ) on JANUARY 30, 2013.
** They are not yet due for payment because it is not yet matured, but we can already recognize the interest expense incurred on this notes payable from the time it was issued (Dec 1, 2012) until end of the December 2012. ** It is important that we recognize this interest expense for 2012 because it belongs 2012. Remember the Expense Recognition Principle?? it says we recognize expense at the TIME IS WAS INCURRED ** the computation is very simple--- i=prt interest expense = P 150,000 x 12% x 30/360 = P 1,500 ** 30 days = Dec 1 - 31 - the period that has passed/expired on this particular promissory. Interest Expense has already accrued. ** this 30 days interest belongs to 2012, while the remaining 30 days interest expense belongs to 2013
Companies record payment of expenses that will benefit more than one accounting period as assets, and they are called PREPAID EXPENSES
Prepaid expenses are costs that expire either in the passage of time ( like rent and insurance), or through use ( like supplies)
The expiration of these costs does not require daily journal entries. The companies postpone the recognition of these cost until they prepare the Financial Statement.
There are two method of recording Prepaid Expenses, and the adjusting entry at the end of the accounting would depend on the method of recording used by the company
On May 1, 2011, Joseph Santos Janitorial Services paid one year rent (12 months) amounting to P120,000.
Under Asset method, On May 1, at the time it was paid, the recording is
120,000
120,000
** it is an asset method because the prepayment was regarded as an ASSET at the time it was paid (look at the account debited)
On Dec 31, If asset method was used in the recording of prepayment, the required adjusting journal entry is ..
ADJUSTING JOURNAL ENTRY: Dec 31 Rent Expense 80,000 Prepaid Rent 80,000 To recognize the EXPIRED portion of Prepaid Rent ( P120,000 x 8/12 = P80,000 )
** the EXPIRED portion is the 8 months that has passed from the time it was paid. The 8 months expired are May, June, July, August, Sept, Oct, Nov, Dec. To recognize the expired portion of the Prepaid Expense , adjusting journal entry should be prepared by CREDITING the Prepaid Rent account and DEBITING Rent Expense account.
Under Expense method, on May1 at the time payment, the recording is.. May 1 Rent Expense 120,000
** it is an Expense method because the prepayment was recorded as an EXPENSE outright at the time it was paid (look at the account debited)
120,000
On Dec 31, If expense method was used in the recording of prepayment, the required adjusting journal entry is ..
ADJUSTING JOURNAL ENTRY: Dec 31 Prepaid Rent 40,000 Rent Expense 40,000 To recognize the UNEXPIRED portion of Rent Expense ( P120,000 x 4/12 = P40,000 )
** the UNEXPIRED portion is the 4 months remaining of the one year contract. This 4 months period are the months of Jan April. To effect this, we should prepare an adjusting journal entry by CREDITING the Rent Expense account and set up the unexpired portion by DEBITING Prepaid Rent account
Companies record cash received before revenue is earned by increasing a liability account called UNEARNED INCOME. Examples of these are: (a) advance rent received by a landlord from a tenant (b) advance subscription received by a publishing company from a subscribers (c) advance payment received by a services company from its clients
There are two methods of recording UNEARNED INCOME, and the adjusting entry at the end of accounting period will depend on the method used by the company upon receipt of payment.
. The objective at the end of accounting period is to set up/or recognize the EARNED PORTION of these liabilities through adjusting journal entry.
This is alright as long as an adjusting journal entry is prepared at the end of accounting period. The objective of which is to recognize the UNEARNED portion of the Income.
On August 1, 2011, Joseph Santos received P240,000 from Mary De Jesus for a one year cleaning services contract.
Under Liability method: On Aug 1, at the receipt of payment, the recording is Aug 1 Cash 240,000 Unearned Service Income 240,000 Received cash for one year contract
** it is a liability method, because the advance collection was regarded as a liability at the time it was received (
look at the credit account title)
On Dec 31, if Liability method was used in recording the receipt of payment, the required adjusting journal entry is.. ADJUSTING JOURNAL ENTRY: Dec 31 Unearned Service Income 100,000 Service Income 100,000 To recognize the EARNED portion of the Unearned Income ( P 240,000 X 5/12 = P 100,000 )
** the EARNED portion is the 5 months that has passed from the time the payment was received. The 5
months are Aug, Set, Oct, Nov, Dec. 5 months of the one year contract has already been earned. To effect this, we should prepare an adjusting journal entry by DEBITING the liability account (Unearned Service Income) and set up the Income account (Service Income) by CREDITING it.
Under Income Method: On Aug 1, at the receipt of payment, the recording is.. Aug 1 Cash 240,000 Service Income 240,000 Received cash for one year contract
** it is an Income method, because the advance collection was regarded as a INCOME outright at the time
On Dec 31, if Income method was used in the recording the receipt of payment, the required adjusting journal entry is: ADJUSTING JOURNAL ENTRY: Dec 31 Service Income 140,000 Unearned Service Income 140,000 To recognize the UNEARNED portion of the Service Income (240,000 x
** the UNEARNED portion is the 7 months remaining of the contract, from January to July.
The services for this period has not yet been rendered, therefore still unearned at the end of December 31, 2011. So we reverse the Income (Service Income) account to decrease its balance by debiting it, and set up the Liability portion (Unearned Service Income) by crediting it.