ADJUSTING

ADJUSTMENT

• The amount that is added or subtracted from the

an account balance to bring the balance up to
date.

ADJUSTING ENTRIES
• Are journal entries made at the end of accounting
period to update the general ledger accounts.
ADJUSTMENT

The following are the adjustments to made at the

end of the accounting period:
- Merchandise inventory
- Impairment Loss on Receivables (Bad Debts)
- Depreciation
RULES

When recording adjusting entries, remember two

very important rules:
•First,
Cash is never involved in adjusting
entries. Cash is always recorded when it is actually
received or paid.
•Second,adjusting entries always involve either a
revenue account or an expense account.
ACCRUALS

• Revenue is recorded when it is earned (collected

or not) and Expenses are recorded when they
are actually incurred (paid or not)
• ACCRUED INCOME
• ACCRUED EXPENSES
TYPES OF ADJUSTMENT
• PREPAID EXPENSE
• UNEARNED REVENUE
• ACCRUED EXPENSE
• ACCRUED REVENUE
• DEPRECIATION EXPENSE
• BAD DEBTS EXPENSE
Case 1: Accrual of Interest
Income
• ABC Co. received a 12%, P100,000, one-year, note receivable
on April 1, 20X1. ABC uses a calendar year period. The principal
and interest on the note are due of April 1, 20X2.
i=Prt
I = 100,000 (.12) (9/12)
I = 9,000
Interest receivable on December 31, 20X1 is 9,000
Case 1: Accrual of Interest
Income
On December 31, 20X1 the entry would be:
Interest Receivable 9,000
Interest Income 9,000
Upon receipt of the interest income on April 1, 20X2
Cash 12,000
Interest Receivable 12,000
Interest Income 12,000
Case 2: Accrual of Rent
Income
ABC Co. rents out its building to a tenant for a monthly rent of
50,000. As of December 31, 20X1, the tenant has not yet paid
the rent for the month of December.
The adjustment to record on December 31, 20X1 is:
Rent Receivable 50,000
Rent Income 50,000
Upon receipt of payment
Cash 50,000
Rent Receivable 50,000
Case 3: Accrual of Interest
Expense
• ABC Co. issued a 12%, 100,000, one-year, note payable on
October 1, 20X1. The principal and interest are due on October
1, 20X2
i=Prt
I = 100,000 (.12) (3/12)
I = 3,000
Interest expense on the note payable on December 31, 20X1 is
3,000
Case 3: Accrual of Interest
Expense
On December 31, 20X1 the entry would be:
Interest Expense 3,000
Interest Payable 3,000
Upon receipt of the interest income on October 1, 20X2
Interest Payable 3,000
Interest Expense 9,000
Cash 12,000
Case 4: Accrual of Utilities
Expense
The cost of electricity used for the month of December 20X1
is 4,000. The electricity bill was received and paid on January
20X2
The adjustment to record on December 31, 20X1 is:
Utilities Expense 50,000
Utilities Payable 50,000
Upon payment
Utilities Payable 50,000
Cash 50,000
Case 5: Depreciation

On January 1, 20X1, a business acquired equipment for

20,000. The business expects to use the equipment over the
next 4 years.
The entry upon acquisition on January 1 would be:
Equipment 20,000
Cash 20,000
Depreciation is the allocation of the cost of a depreciable
asset over the periods the assets is used
Case 5: Depreciation

On December 31, 20X1, the equipment has already been used

for a year out of its total useful life of 4 years.

The annual depreciation expense is computed as follows:

(Cost – Salvage Value) / Useful Life
Year 1 – 5,000 Depreciation Expense 5,000
Accumulated Depreciation 5,000
Year 2 – 5,000
Year 3 – 5,000 The carrying amount of the equipment as of
December 31, 20X1 is 15,000
Year 4 – 5,000
Case 6: Bad Debts /
Doubtful Accounts
A business has total accounts receivable of 2,000 on
December 31, 20X1 before any adjustments. Of the total
amount, it was estimated that 500 is doubtful of collection.
The entry would be:
Bad Debts Expense 500
Allowance for Bad Debts 500
After recording the adjusting entry, the carrying amount of the
accounts receivable is 1,500
 Dr. Stone Clinic
Unadjusted Trial Balance
December 31, 2018
Debit Credit
Cash P 30,000 P
Accounts Receivables 10,000
Office Supplies 12,000
Medical Equipments 40,000
Accounts Payable 30,000
Dr. Stone, Capital 62,000
Dr. Stone, Drawing 10,000
Service Income 35,000
Salary Expense 4,000
Interest Expense 6,000
Supplies Expense 6,000
Unearned income 3,000
Prepaid Rent 12,000  
TOTALS 130,000 130,000
ADJUSTMENTS
 The one year prepaid rent was effective Dec. 1, 2018
 Advertising for the month of December was still unpaid,
5,000
 Fees of 4,000 was collected in advance and the services to
be rendered for the next year
 Unused office supplies amount to 5,000
 Medical equipment have a useful life of 5 years and started
the computation of depreciation on December 2018.
 Uncollectible accounts is estimated to be 2% of A/R