Adjusting Entries

By: Charlene Bernal

 ACCRUAL CONCEPT
PRINCIPLE
 The accrual concept principle states that
income is recognized when earned
regardless of when collected and expenses
are recognized when incurred regardless of
when paid.
 THE MATCHING PRINCIPLE

 The matching principle aims to align

expenses with revenues. Expenses should be
recognized in the period when the revenues
earned.

Revenues expenses
earned are offset incurred in
this month against.... earning the
revenue
 STUDY OBJECTIVE

Identify the major types of adjusting entries.

 ADJUSTING ENTRIES

 Adjusting entries are made to update the

accounts in the accounting system. If
adjusting entries are not prepared, some
income, expense, asset and liability accounts
may not reflect their true values when
reported in the financial statements.
 TYPES OF
ADJUSTING ENTRIES
1 Accrued Income — Income earned but not yet
received.
2 Accrued Expense — Expenses incurred but
not yet paid.
3. Deferred Income — Income received but not
yet earned.
4. Prepaid Expense — Expenses paid but not yet
incurred.
 TYPES OF
ADJUSTING ENTRIES

5. Depreciation
6. Doubtful Accounts or Bad Debts and other
allowances
 STUDY OBJECTIVE

Prepare adjusting entries for accruals.

 ACCRUALS

 Adjusting entries for accruals are

required to record revenues earned and
expenses incurred in the current period.
 The adjusting entry for accruals will
increase both a balance sheet and an
income statement account.
 ILLUSTRATION
ADJUSTING ENTRIES FOR ACCRUALS

Adjusting Entries
Accrued Revenues
Asset Revenue
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)
Accrued Expenses
Expense Liability
Debit Credit
Adjusting Adjusting
Entry (+) Entry (+)
 ACCRUED REVENUES

 Accrued revenues are income earned but

not yet received
 An asset-revenue account relationship
exists with accrued revenues.
 Prior to adjustment, assets and revenues
are understated.
 The adjusting entry requires a debit to an
asset account and a credit to a revenue
account.
 ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED REVENUES
ADJUSTMENT October 31, the agency earned $200
for advertising services that were not
billed to clients before October 31.
JOURNAL ENTRY

POSTING
 EXAMPLE 1

 Company ABC leases its building

space to a tenant. The tenant pays
monthly rental fees of P2,000 covering
a period from the 1st to the 30th or 31st
of the month. On June 30, 2020, ABC
Company did not receive the rental fee
for June yet and no record was made in
the journal.
 EXAMPLE 1

June 30 Rent Receivable 2,000

Rent Income 2,000
To adjust rent income.
 EXAMPLE 2

 ABC Company lent P9,000 at 10%

interest on December 1, 2020. 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.
 EXAMPLE 2

Dec 31 Interest Receivable 75

Interest Income 75
To adjust interest income.
 ACTIVITY

 On December 31, 2020, Dantes

Network Services performed P1,500
worth of services to a client. The
amount has not yet been collected and
was never recorded in the journal of the
company. What is your adjusting entry?
 ACCRUED EXPENSES

 Accrued expenses are expenses incurred

but not paid yet.
 A liability-expense account relationship
exists
 Prior to adjustment, liabilities and expenses
are understated
 The Adjusting Entry results in a debit to an
expense account and a credit to a liability
account
 ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED INTEREST
ADJUSTMENT October 31, the portion of the interest to be accrued
on a 3-month note payable is calculated to be $50.

JOURNAL ENTRY

POSTING
 ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED SALARIES
ADJUSTMENT October 31, accrued salaries
are calculated to be $1,200.

JOURNAL ENTRY

POSTING
 EXAMPLE 1

 VIRON Company enters into a rental

agreement to use the premises of
DON's building. The terms state that
VIRON will pay monthly rentals of
P1,500 at the end of every month. The
lease started on December 1, 2014. On
December 31, the rent for the month
has not yet been paid and no record for
rent expense was made.
 EXAMPLE 1

June 30 Rent Expense 1,500

Rent Payable 1,500
To adjust rent expense.
 EXAMPLE 2

 VIRON Company borrowed P6,000 at

12% interest on August 1, 2014. 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.
 EXAMPLE 2

June 30 Interest Expense 300

Interest Payable 300
To adjust interest expense.
 ACTIVITY

 Del Mundo’s P100,000 note payable,

which he signed on Nov.2, carries an
18% interest rate. How much interest
expense accrued during the final
twenty-eight days of November?
 ACTIVITY

 Interest Expense 1,400

Interest Payable 1,400

Interest= Principal x Interest Rate x Time

= 100,000 x 18% x 28/360
= 1,400
 UNEARNED REVENUE
 Unearned Revenue (also known as
deferred revenue/income) represents
revenue already collected but not yet earned.
 There are two ways of recording unearned
revenue: (1) the liability method, and (2) the
income method.
 1. LIABILITY METHOD
 Under the Liability Method, a liability account
is recorded when the amount is collected.
 The common accounts used are: Unearned
Revenue, Deferred Income, Advances from
Customers.
 The adjusting entry will include: (1)
recognition of income and (2) decrease in the
liability initially recorded.
 EXAMPLE 1
 On January 10, 2020, ABC Company made
P30,000 advanced collection from its
customers. The entry would be:

January 10 Cash 30,000

Unearned Income 30,000
 EXAMPLE 1
 At the end of the month, 20% of the
unearned revenue has been rendered. The
adjusting entry would be:

January 31 Unearned Income 6,000

Service Income 6,000
 EXAMPLE 2
 On December 1, 2020, DRG Company
collected from TRM Corp. a total of P60,000
as rental fee for three months starting
December 1. What is the initial entry?
 EXAMPLE 2
Dec 1 Cash 60,000
Unearned Income 60,000
 EXAMPLE 2
 On December 31, 1/3 of the rent received
has already been earned. What is the
adjusting entry?
 EXAMPLE 2
Dec 1 Unearned Rent Income 60,000
Rent Income 60,000
 2. INCOME METHOD
 Under the Income Method, the accountants
recorded the entire collection as income.
 Example: On January 10, 2020, ABC
Company made P30,000 advanced
collection from its customers. The entry
would be:
Jan 10 Cash 30,000
Service Income 30,000
 EXAMPLE 1
 At the end of the month, the company earned
20% of the entire P30,000. The adjusting
entry would be:

January 31 Service Income 24,000

Unearned Income 24,000
 EXAMPLE 2
 On December 1, 2020, DRG Company
collected from TRM Corp. a total of P60,000
as rental fee for three months starting
December 1. What is the initial entry?
 EXAMPLE 2
Dec 1 Cash 60,000
Rent Income 60,000
 EXAMPLE 2
 On December 31, 1/3 of the rent received
has already been earned. What is the
adjusting entry?
 EXAMPLE 2
Dec 31 Rent Income 40,000
Unearned Rent Income 40,000
 ACTIVITY 1
Julie Jose owns an apartment that he leases to
different tenants. The contract of lease
specifies that tenants will pay in advance. Dina
Maganda started leasing the apartment last
December 16, 2019 for the amount of
PHP30,000 per month. Julie Jose recorded the
transaction last December as debit to Cash
30,000 and credit Deferred Rent Income
30,000. What is the adjusting entry at the end
of the year?
 ACTIVITY 2
Julie Jose owns an apartment that he leases to
different tenants. The contract of lease
specifies that tenants will pay in advance. Dina
Maganda started leasing the apartment last
December 16, 2019 for the amount of
PHP30,000 per month. Julie Jose recorded the
transaction last December as debit to Cash
30,000 and credit Rent Income 30,000. What is
the adjusting entry at the end of the year?
 PREPAYMENTS

 Prepaid expenses (a.k.a.
prepayments) represent payments made for
expenses which are not yet incurred.
 Because prepayments they are not yet
incurred, they are not recorded as
expenses. Rather, they are classified
as current assets.
 PREPAYMENTS
 Prepaid expenses represent payments made
for expenses which are not yet incurred.
 Expenses are recognized when they are
incurred regardless of when paid. Expenses
are considered incurred when they are used,
consumed, utilized or has expired.
 There are two ways of recording
prepayments: (1) the asset method, and (2)
the expense method.
 ASSET METHOD

Under the asset method, a prepaid

expense account (an asset
account) is recorded when the
amount is paid. Prepaid expense
accounts include: Office Supplies,
Prepaid Rent, Prepaid Insurance,
and others.
 EXAMPLE

 Service Supplies was initially recorded

as:
Service Supplies 1,500
Cash 1,500
Suppose at the end of the month, 60% of
the supplies have been used.
 EXAMPLE

 The adjusting entry will include: (1)

recognition of expense and (2) decrease in
the asset initially recorded (since some of it
has already been used). The adjusting
entry would be:

Service Supplies Expense 900

Service Supplies 900
 ACTIVITY 1
1. Lito Jose, a sole proprietor bought an
insurance for the computers used in his
business, P12,000 last October 1, 2019.
The bookkeeper made this entry:
Prepaid Insurance 12,000
Cash 12,000
How much is the insurance expense at the
end of the year?
 ACTIVITY 1
Dec 31 Insurance Expense 3,000
Prepaid Insurance 3,000
 ACTIVITY 2

2. Loida Magtalas bought an insurance for

the inventory of his business, P24,000 last
October 1, 2019. The bookkeeper made
this entry:
Prepaid Insurance 24,000
Cash 24,000
What is the adjusting entry at the end of
the year?
 ACTIVITY 2

Dec 31 Insurance Expense 6,000

Prepaid Insurance 6,000
 EXPENSE METHOD

 Under the expense method, the

accountant initially records the entire
payment as expense. If the expense
method was used, the entry would have
been:
Service Supplies Expense 1,500
Cash 1,500
 EXPENSE METHOD

Suppose at the end of the month, 40% of

the supplies were on hand.

Service Supplies 600

Service Supplies Expense 600
 ACTIVITY 1
1. Lito Jose, a sole proprietor bought an
insurance for the computers used in his
business, P12,000 last October 1, 2019.
The bookkeeper made this entry:
Insurance Expense 12,000
Cash 12,000
How much is the insurance expense at the
end of the year?
 ACTIVITY 1
Dec 31 Prepaid Insurance 9,000
Insurance Expense 9,000
 ACTIVITY 2

2. Loida Magtalas bought an insurance for

the inventory of his business, P24,000 last
October 1, 2019. The bookkeeper made
this entry:
Insurance Expense 24,000
Cash 24,000
What is the adjusting entry at the end of
the year?
 ACTIVITY 2

Dec 31 Prepaid Insurance 18,000

Insurance Expense 18,000
 ILLUSTRATION 3-16
SUMMARY OF ADJUSTING ENTRIES

1 Prepaid
Assets and Assets overstated Dr. Expenses expenses
expenses Expenses understated Cr. Assets
2 Unearned Liabilities and Liabilities overstated Dr. Liabilities
revenues revenues Revenues understated Cr. Revenues
3 Accrued Assets and Assets understated Dr. Assets
revenues revenues Revenues understated Cr. Revenues
4 Accrued Expenses and Expenses understated Dr. Expenses
expenses liabilities Liabilities understated Cr. Liabilities
 DEPRECIATION

 A method of allocating the cost of the fixed

assets over its useful life.
 Straight-line Method
 Annual Depreciation = Cost-Scrap Value
Estimated Life
 DEPRECIATION
 Where: Cost = the purchase price plus any
incidental expenses to put the asset in use
Scrap Value =the estimated amount the
fixed asset can be purchased after its useful
life
Estimated Life = the number of years the fixed
asset can be of valuable use.
 DEPRECIATION

Depreciation is recorded by
debiting Depreciation Expense
and crediting Accumulated
Depreciation. This is recorded at
the end of the period (usually, at
the end of every month or year).
 Example:

ABC Company acquired a

delivery van for P40,000 at the
beginning of 2020. Assume
that the van can be used for 5
years. Compute for annual
depreciation.
 Example:

Annual Dep = Cost-Scrap Value

Estimated Life
= 40,000 – 0
5yrs
= 8,000
 Example:

Dec 31 Depreciation Expense-

Delivery Van 8,000
Accumulated
Depreciation- Delivery Van 8,000
 ACTIVITY 1
1. Pedro Reyes purchased a delivery vehicle
on January 1, 2016 amounting to
PHP250,000. It is estimated that the vehicle
will be useful for 10years. The vehicle can
be sold for PHP10,000 at the end of its
useful life. If the accounting period being
reported by Pedro is one (1) year from
January – December 2016, how much is the
depreciation expense?
 ACTIVITY 2

2. Pedro Reyes purchased a delivery vehicle

on April 1, 2016 amounting to PHP250,000.
It is estimated that the vehicle will be useful
for 10years. The vehicle can be sold for
PHP10,000 at the end of its useful life. If the
accounting period being reported by Pedro is
one (1) year from January-December 2016,
how much is the depreciation expense?
 ACTIVITY 3

3. Pedro Reyes purchased a delivery

vehicle on January 1, 2016 amounting to
PHP250,000. It is estimated that the vehicle
will be useful for 10 years. The vehicle can
be sold for PHP10,000 at the end of its
useful life. If the accounting period being
reported by Pedro is one (1) month (January
2016), how much is the depreciation
expense for the month?
 BAD DEBTS
 Companies provide services or sell
goods for cash or on credit.
 However, businesses that allow credit are
faced with the risk that their receivables
may not be collected.
 Accounts receivable should be presented
in the balance sheet at net realizable
value, i.e. the most probable amount that
the company will be able to collect.
 BAD DEBTS

Accounts Receivable (Gross

P 100,000
Amount)

Less: Allowance for Bad Debts 3,000

Accounts Receivable - Net

P 97,000
Realizable Value
 ALLOWANCE FOR BAD
DEBTS
 Allowance for Bad Debts (also often
called Allowance for Doubtful Accounts)
represents the estimated portion of the
Accounts Receivable that the company
will not be able to collect.
 ALLOWANCE FOR BAD
DEBTS

Dec 31 Bad Debts Expense xxx  

Allowance for Bad
      xxx
Debts
 BAD DEBTS

 Bad Debts Expense a.k.a. Doubtful

Accounts Expense: An expense account;
hence, it is presented in the income
statement. It represents the estimated
uncollectible amount for credit
sales/revenues made during the period.
 ALLOWANCE FOR BAD
DEBTS
 Allowance for Bad Debts a.k.a. Allowance
for Doubtful Accounts: A balance sheet
account that represents the total estimated
amount that the company will not be able to
collect from its total Accounts Receivable.
 EXAMPLE

 Dantes Network Services estimates that

P100.00 of its credit revenue for the period
will not be collected. The entry at the end of
the period would be:
Dec 31 Bad Debts Expense 100
Allowance for Bad 100
Debts
 EXAMPLE

 Dantes Network Services estimates that

P100.00 of its credit revenue for the period
will not be collected. The entry at the end of
the period would be:
Dec 31 Bad Debts Expense 100
Allowance for Bad 100
Debts
 EXAMPLE

 If the company's Accounts Receivable

amounts to P3,400 and its Allowance for
Bad Debts is P100, then the Accounts
Receivable shall be presented in the balance
sheet at P3,300 – the net realizable value.
Accounts Receivable (Gross Amount) P 3,400
Less: Allowance for Bad Debts 100
Accounts Receivable - Net Realizable
P 3,300
Value
 Effects of the Adjusting Entries

Make end-of-
Journalize year
Post entries to Prepare trial
transactions. adjustments.
the ledger balance.
accounts.

Prepare adjusted
trial balance.