Adjusting Entries - Adjusting entries are made to update the accounts in accrual basis.

Adjusting entries are usually made on the last day of an accounting period (year, quarter,
month) so that the financial statements reflect the revenues that have been earned and
the expenses that were incurred during the accounting period.

6 Types of adjusting entries:

1. Accrued Expense
2. Accrued Income
3. Prepaid Expense
4. Unearned Revenue
5. Depreciation
6. Doubtful Accounts

Accrued Expense - these are the expenses that are already incurred but not yet paid by the
company.

Example1:

A manufacturing company ordered P25, 000 worth of raw materials from their supplier on
December 29. Their order will be delivered after 7 days. The manufacturing company should
make an adjusting entry.

To record: Accrued expenses - 25,000

The adjusting entry will be:

Accrued Income – this is the income that is already earned but not yet received.

Example1:

A customer ordered a cake from a bakeshop on Dec. 27. They will take the cake on January 1.
Now, assuming that the bakeshop had already made the cake on Dec. 31, they should make an
adjusting entry.
Prepaid expenses –prepaid expenses are future expenses that have been paid in advance. You
can think of prepaid expenses as costs that have been paid but have not yet been used up or
have not yet expired.

Example1:

Electronic Repair Services), we made this entry to record the purchase of service supplies:

The original entry was:

The adjusting entry to update such account should be:

Unearned Income – this is the income already received by the company but not yet earned, or,
in other words, this is the advanced receipt coming from customers.

Example1:

A company received a 6-month advance rental, amounting to P120, 000 on Aug. 1.

The original entry was:

The adjusting entry will be:

Depreciation – is the systematic allocation of the cost of an asset. The straight line method is
normally used in computing the depreciation an asset.

Formula:

Example1:

A company purchased a car amounting to P500,000 on January 1, 2013. its salvage value is
P200,000 at the end of 5 years. The depreciation will then be computed as follows:

And the entry to take up depreciation is:

Doubtful accounts – this is the portion of the estimated collectible accounts. The estimate can
be based on a percentage of income, sales, or a percentage of accounts receivable.
Example1:

The total income or sales made by the company during the year is P100,000 and an estimated
2% of its income or sales are uncollectible. And so the entry will be:

Correction of Errors- When an error is discovered in the accounting records, it should be

corrected immediately to prevent the processing of wrong data which results to unreliable
financial statements. This is done through a correcting entry. A correcting entry is a journal
entry whose purpose is to rectify the effect of an incorrect entry previously made.

Example1.

On December 5, 2014, Gray Electronic Repair Services paid $370 registration and
licensing fees for the business.

The correct entry is:

The entry made is:

The correcting entry will be:

The correcting entry will be: