A D J U S T I N G

E N T R I E S

B Y : I R I S H A . C A N D E L , C P A
THE NEED FOR ADJUSTMENTS:
• Adjusting entries reflect in the accounts economic activities that have occurred but have not yet
been recorded. It assigns revenues to the period in which they are earned and expenses to the
period in which they are incurred.
• These entries are needed to ensure that the recognition and derecognition principles are followed
thus resulting to financial statements reporting the effects of all transactions at the end of the
period.
• Adjusting entries involve changing account balances at the end of the period from what is the
current balance to what is the correct balance for proper financial reporting.
TWO GENERAL TYPES OF ADJUSTMENTS:
DEFERRALS & ACCRUALS

1. DEFERRALS – It is the postponement of the recognition of “an expense already paid but not
yet incurred”, or “revenue already collected but not yet earned”. This adjustment deals with
an amount already recorded in the balance sheet account. The entry, in effect, decreases the
balance sheet account and increases an income statement account.

Deferrals would be needed in two cases:

A. Allocating assets to expense to reflect expenses incurred during the

accounting period (e.g. prepaid insurance, rent & depreciation)

B. Allocating revenues received in advance to revenue to reflect revenues earned

during the accounting period (e.g. subscriptions)
TWO GENERAL TYPES OF ADJUSTMENTS:
DEFERRALS & ACCRUALS

2. ACCRUALS – It is the recognition of “an expense already incurred but unpaid”, or

“revenue earned but uncollected”. This adjustment deals with an amount unrecorded in any
account. The entry, in effect, increases both a balance sheet and an income statement account.

Accruals would be required in two cases:

A. Accruing expenses to reflect expenses incurred during the accounting period that are
unpaid and unrecorded.

B. Accruing revenues to reflect revenues earned during the accounting period that are
uncollected and unrecorded.
 ADJUSTMENT FOR DEFERRALS
A. Allocating Assets to Expenses – These are expenditures entities made that benefit more than
one period. Generally, these expenditures are debited to an asset account. At the end of each
accounting period, the estimated amount that has expired during the period or that has
benefited the period is transferred from the asset to an expense account.

1. Prepaid Expenses – These are expenses paid in advance. Thus, prepaid expenses
are assets not expenses. At the end of an accounting period, a portion or all of these prepayments
may have expired or consumed. The portion of an asset that has expired becomes an expense.
A D J U S T M E N T A . P R E PA I D R E N T
• On May 1, BukSU paid P8,000 for two months’ rent in advance. This expenditure resulted to an
asset consisting of the right to occupy the office for two months. A portion of the asset expires
and becomes an expense each day. By May 31, one-half of the asset had expired and should be
treated as an expense. The analysis is shown below.
TRANSACTION : Expiration of one month’s rent
ANALYSIS : Asset decreased. Owner’s equity decreased.
RULES : Decrease in assets are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Rent Expense P 4,000
Prepaid Rent P 4,000
A D J U S T M E N T B . P R E PA I D
INSURANCE
• On May 1, BukSU acquired a one-year insurance coverage on the service vehicle and paid
P14,400 premiums.

TRANSACTION : Expiration of one month’s insurance

ANALYSIS : Asset decreased. Owner’s equity decreased.
RULES : Decrease in assets are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Insurance Expense P 1,200
Prepaid Insurance P 1,200
ADJUSTMENT C. SUPPLIES
• On May 8, BukSU purchased supplies, P18,000. During the month, the entity used supplies in
the process of performing services for clients. At the end of the accounting period, physical
inventory of supplies is conducted. The inventory count showed that supplies costing 15,000 are
still on hand. This transaction is analyzed and recorded as follows:
TRANSACTION : Consumption of supplies
ANALYSIS : Asset decreased. Owner’s equity decreased.
RULES : Decrease in assets are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Supplies Expense P 3,000
Supplies P 3,000
D E P R E C I AT I O N O F P R O P E R T Y A N D
EQUIPMENT
• When an entity acquires a long-lived assets such as buildings, service vehicle, etc., it is basically
buying or prepaying for the usefulness of that asset. These assets help generate income for the entity.
Therefore, a portion of these assets should be reported as expense in each accounting period. Proper
accounting requires the allocation of the cost of the asset over its estimated useful life. The
estimated amount allocated to each accounting period is called depreciation expense. There are three
factors involved in computing depreciation expense:

1. Cost – Asset cost is the amount an entity paid to acquire the depreciable asset.

2. Salvage Value – It is the amount that the asset can probably be sold for at the end of its estimated
useful life.

3. Useful Life – It is the estimated number of periods that an entity can make use of the asset.
C O M P U T AT I O N O F D E P R E C I AT I O N
• STRAIGHT LINE METHOD:

Asset Cost xx
Less: Estimated Salvage Value xx
Depreciable Cost xx
Divided by: Estimated Useful Life xx
Depreciation Expense xx
A D J U S T M E N T D & E . D E P R E C I AT I O N O F
SERVICE VEHICLE AND EQUIPMENT
• Supposed that BukSU bought a service vehicle for P420,000 which will last for seven years and with
a salvage value of P84,000. Meanwhile, the office equipment was acquired on May 1 for P60,000
with five years useful life and will be worthless at that time. Analysis of the transaction is shown
below.
TRANSACTION : Recording of depreciation expense
ANALYSIS : Asset decreased. Owner’s equity decreased.
RULES : Decrease in assets are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Depreciation Expense – Service Vehicle P 4,000
Accumulated Depreciation – Serv. Vehicle P 4,000

Depreciation Expense – Office Equipment P 1,000

ADJUSTMENT FOR DEFERRALS
A. Allocating Assets to Expenses

B. Allocating Revenues Received in Advance to Revenues – there are times entity received
cash for services or goods even before service is rendered or goods are delivered. When such
is received, the entity has an obligation to perform services or deliver goods. The liability
referred to is UNEARNED REVENUES.

As the company delivers or render services, it earns a part of the advance payments.
This earned portion must be transferred from the unearned revenue account to revenue
account.
A D J U S T M E N T F. U N E A R N E D
REFERRAL REVENUES
• Assume that a publishing company received P10,000 as advance payment for magazine
subscription. At the end of the month, half of it has been delivered. Analysis of the transaction is
shown below.

TRANSACTION : Recognition of income where cash is received in advance.

ANALYSIS : Liabilities decreased. Owner’s equity increased.
RULES : Decrease in liabilities are recorded by debits. Increase in owner’s equity are
recorded by credits.
ENTRY : Unearned Subscription Revenues P 5,000
Subscription Revenues P 5,000
 ADJUSTMENT FOR ACCRUALS
A. Accrued Expenses – These are expenses already incurred but has not yet been paid. Examples
are salaries, interest, water and electricity.

B. Accrued Revenues – An entity may provide services during the period that are neither paid
for by clients nor billed at the end of the period. The value of these services represents revenue
earned. Any revenue that has been earned but not recorded calls for an adjusting entry.
ADJUSTMENT G. ACCRUED SALARIES
• Assume that BukSU’s office assistant are paid salaries every October 10 and 25 with monthly
salary, P11,000. At month-end, the employee have worked for four days (October 26,27, 30 &
31). The salary for these days is rightfully an expense in October, and a liability should be
recorded that entity owes the employees salaries for those days. Analysis of the transaction is
shown below.
TRANSACTION : Accrual of unrecorded expense
ANALYSIS : Liabilities increased. Owner’s equity decreased.
RULES : Increase in liabilities are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Salaries Expense P 2,000
Salaries Payable P 2,000
ADJUSTMENT H. ACCRUED INTEREST
• On May 2, BukSU borrowed P210,000 from Metrobank. She issued a promissory note that
carried a 20% interest per annum. Both the interest and principal will be payable in one year. The
note accrues interest at 20% annually. Analysis of the transaction is shown below.

TRANSACTION : Accrual of unrecorded expense

ANALYSIS : Liabilities increased. Owner’s equity decreased.
RULES : Increase in liabilities are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Interest Expense P 3,500
Interest Payable P 3,500
ADJUSTMENT I. ACCRUED
C O N S U LT I N G R E V E N U E S
• Supposed that Wedding Co. agreed to arrange a rush but simple civil wedding for a madly-in-
love couple in the afternoon of May 31. the entity intended to charge fees of P5,000 for the
services which is earned but unbilled. This should be recorded as shown below:
TRANSACTION : Accrual of unrecorded revenue
ANALYSIS : Assets increased. Owner’s equity increased.
RULES : Increase in assets are recorded by debits. Increase in owner’s equity are
recorded by credits.
ENTRY : Accounts Receivable P 5,000
Consulting Revenues P 5,000
 ACCRUAL FOR
UNCOLLECTIBLE ACCOUNTS
• In practice, an expense is recognized for the estimated uncollectible accounts in the current
period. This practice produces a better matching of income and expenses. Estimates of
uncollectible accounts may be based on credit sales for the period or the accounts receivable
balance.
• Illustration: Assume that an entity made credit sales of P1,100,000 in 2022 and prior experience
indicates an expected 1% average uncollectible accounts rate based on credit sales. The contra-
account Allowance for Uncollectible Accounts has a normal credit balance. This account need to
be increased by P11,000 (1,100,00 x 1%). The adjustment will be:
Uncollectible Accounts Expense 11,000
Allowance for Uncollectible Accounts 11,000
• When there is positive evidence that a specific account is uncollectible, the appropriate amount is
written off against the contra account. For example, if a P1,500 receivable were considered
uncollectible, that amount would be written off as follows:

Allowance for Uncollectible Accounts 1,500

Accounts Receivable 1,500
Use the following format to post your adjusting entries.