SAN PEDRO COLLEGE

12 C. Guzman Street, 8000 Davao City, Philippines

Master of Arts in Hospital Administration

Third Trimester, SY 2019-2020

SEMINAR IN ACCOUNTING

LESSON 2 – ADJUSTING THE ACCOUNTS

TRIAL BALANCE

Recalling the cycle of the accounting process below as introduced in Lesson 1, the
preliminary trial balance is initially prepared after the recording phase of the accounting
cycle as follows: (1) analyzing the business transactions and events, (2) journalizing of
accountable business transactions and events, and (3) posting of journal entries to the
ledger.

Summarizing phase:
a. Preparing the preliminary trial balance
b. Preparing the adjusting entries
c. Preparing the financial statements
d. Preparing the closing entries
e. Preparing the post-closing trial balance
f. Preparing the reversing entries (optional)

In this lesson, we will focus on the first two steps of the summarizing phase of the
accounting process, namely, (1) preparing the preliminary trial balance, and (2)
preparing the adjusting entries.
TYPES OF TRIAL BALANCES:

Preliminary Trial Balance (unadjusted)

- list of all open accounts in the ledger with their balances as of a given date
- to provide the equality of total debits and total credits
- to eliminate accounting errors

Adjusted Trial Balance

- to verify the equality of total debits and total credits after all adjustments are
made
- provides the primary basis for preparing financial statements

Post-Closing Trial Balance

- to verify the equality of total debits and total credits for all real account
- to ensure that the closing process has been performed correctly

The post-closing trial balance will be discussed in lesson 3.

PRELIMINARY TRIAL BALANCE:

The balances of each account in the ledger must be totaled, and properly placed in their
respective debit and credit positions. The balances of the accounts posted in the
general ledger are then summarized by preparing the preliminary trial balance.

For example, Dr. Pedro completed his first year of operations. He approached Mr.
Goryo, his bookkeeper, to prepare the preliminary trial balance but was unsatisfied with
the results. He decided to prepare the trial balance and retrieved the following records
of all the general ledger accounts from Mr. Goryo:

Cash P200,000
Receivable from patients 300,000
Clinic supplies inventory 200,000
Clinic equipment 500,000
Clinic furniture and fixtures 200,000
Payable to suppliers 300,000
Bank loans payable 400,000
Dr. Pedro, capital 700,000
Professional fees income 800,000
Supplies expense 300,000
Salaries expense 200,000
Light and water expense 100,000
Rent expense 150,000

Required: Prepare the preliminary trial balance.

Solution: Dr. Pedro

Preliminary Trial Balance
As of December 31, __

Debit Credit
Cash P 200,000
Receivable from patients 300,000
Clinic supplies inventory 200,000
Clinic equipment 500,000
Clinic furniture and fixtures 200,000
Payable to suppliers P 300,000
Bank loans payable 200,000
Dr. Pedro, capital 850,000
Professional fees income 800,000
Supplies expense 300,000
Salaries expense 200,000
Light and water expense 100,000
Rent expense 150,000 _________
Total P2,150,000 P2,150,000
 Notes: Make sure that the total of the debits and credits are both equal. To
accomplish this, observe the normal balances of the accounts as shown in
lesson 1. Arrange the accounts in the following order: asset, liability,
capital, income, and expenses.

Errors in trial balance

Some errors or omissions that may cause the trial balance to “in-balance”, as follows:
1. A transaction may not have been recorded in the journal.
2. A journal entry may not have been posted in the ledger in its entirety.
3. Posting a correct amount to a wrong account.
4. Wrong charging of account title in the journal entry and was carried to posting in the
ledger.

Some errors or omissions that may cause the trial balance to “out-of-balance”, as
follows:
1. The total of the debit and credit columns of the trial balance is wrong because of
incorrect addition of figures.
2. An account with open balance in the general ledger was not listed in the trial
balance.
3. The total of the account balance in the general ledger is wrong.
4. Posting the amount of an item to the wrong side of the account or ledger.
5. Omission in posting of either debit or credit entry in the journal.
6. The balance of an account is listed in the trial balance with a wrong amount, such as
transposition of the amount or sliding of the amount or listing a different amount
from the correct one.

ADJUSTING ENTRIES:

The adjusting entries are prepared to split mixed accounts or bring accounts up-to-date
to properly measure the net income or loss during the period. The realization and
matching principles (accrual accounting) affecting two or more accounting periods are
followed in this process. Normally, the adjusting entries affect both a balance sheet
(real) and an income statement (nominal) account.

Types of adjusting entries

1. Accruals
a. Accrued income – income that is earned but not yet collected

Proforma journal entry:

Debit Credit
Receivable P xx
Income P xx

b. Accrued expense – expense that is already paid but not yet incurred

Proforma journal entry:

Debit Credit
Expense P xx
Payable P xx

2. Deferrals
a. Pre-collection of income – income that is not yet earned but already collected

Debit Credit
Original entry:
Cash P xx
Income Pxx

Proforma journal entry:

Income P xx
Receivable P xx
 b. Prepayment of expense – expense that is not yet incurred but already paid

Debit Credit
Original entry:
Expense P xx
Cash Pxx

Proforma journal entry:

Prepaid expense P xx
Expense P xx

3. Provision for bad debts – represents a portion of the receivables that is estimated to
be uncollectible.

Debit Credit
Proforma journal entry:

Bad debts expense P xx

Allowance for bad debts P xx

4. Depreciation – is that portion of the property and equipment that is consumed or

used during the current period.

Debit Credit
Proforma journal entry:

Depreciation expense P xx
Accumulated depreciation P xx

Based on our previous illustration, for example, Mr. Goryo submitted to Dr. Pedro for
adjustments the following transactions that happened at the end of the first year of
operations (December of current year) of the latter.

a. Billed a patient for services rendered but not yet collected, P200,000.
b. Unpaid light and water bill for December, P10,000.
c. Out of the P800,00 professional fees income, P120,000 was collected in
advance from several patients for services to be rendered on January of the
following year.
d. Advance salaries of the staffs amounting to P30,000 were included in the
salaries expense of P200,000.
e. It is estimated that 10% of the receivables from patients will not be collected
in December.
f. Estimated useful life: clinic equipment – 10 years; clinic furniture and fixtures
– 8 years.

Required: Prepare the adjusting entries on December 31 of the current year.

Solution: Dr. Pedro

Adjusting Entries
As of December 31, __

Debit Credit
a. Receivable from patients P200,000
Professional fees income P200,000

b. Light and water expense 10,000

Light and water payable 10,000

c. Professional fees income 120,000

Receivable from patients 120,000

d. Prepaid salaries 30,000

Salaries expense 30,000
 e. Bad debts expense 38,000*
Allowance for bad debts 38,000

f. Depreciation expense 75,000**

Accumulated depreciation 75,000

* (300,000 + 200,000 – 120,000 = 380,000 x 10%)

** (500,000 / 10 years = 50,000) + (200,000 / 8 years = 25,000)

ADJUSTED TRIAL BALANCE:

The preparation of the adjusted trial balance commences after the adjusting entries
have been made (and each account affected has been updated) to prove again the
equality of the total debits and credits of the trial balance before the financial
statements are prepared.

To continue our illustrative example, prepare now the adjusted trial balance.

Solution: Dr. Pedro

Adjusted Trial Balance
As of December 31, __

Debit Credit
Cash P 200,000
Receivable from patients 380,000*
Allowance for bad debts P 38,000
Clinic supplies inventory 200,000
Prepaid salaries 30,000
Clinic equipment 500,000
Accumulated depreciation
- clinic equipment 50,000
Clinic furniture and fixtures 200,000
Accumulated depreciation
- clinic furniture & fixtures 25,000
Payable to suppliers 300,000
Light and water payable 10,000
Bank loans payable 200,000
Dr. Pedro, capital 850,000
Professional fees income 880,000**
Depreciation expense 75,000
Bad debts expense 38,000
Supplies expense 300,000
Salaries expense 170,000***
Light and water expense 110,000****
Rent expense 150,000 _________
Total P2,353,000 P2,353,000

* (300,000 + 200,000 – 120,000)

** (800,000 + 200,000 – 120,000)
*** (200,000 – 30,000)
**** (100,000 + 10,000)

Notes: Again, make sure that the total of the debits and credits are both equal.
To accomplish this, observe the normal balances of the accounts as
shown in lesson 1. Arrange the accounts in the following order: asset,
liability, capital, income, and expenses.
QUIZ – ADJUSTING THE ACCOUNTS

Multiple Choice:

1. Which of the following statements regarding a trial balance is incorrect?

a. A trial balance is a test of the equality of the debit and credit balances in the ledger.
b. A trial balance is a list of all of the open accounts in the ledger with their balances as of
a given date.
c. A trial balance proves that no errors of any kind have been made in the accounts during
the accounting period.
d. A trial balance helps to localize errors within an identifiable time period.

2. An adjusting entry in which a revenue is recognized before the related cash receipt occurs is
called:
a. deferral
b. nominal
c. accrual
d. special item

3. The purpose of adjusting entries is to:

a. prepare revenue and expense accounts for recording the transactions of the next period
b. apply the realization principle and the matching principle to transactions affecting two or
more accounting periods
c. adjust daily the balances in asset, liability, revenue and expense accounts for the effects
of business transactions
d. adjust the capital account for the revenue, expense and withdrawal transactions which
occurred during the year

4. Adjusting entries involve:

a. only real accounts
b. only capital accounts
c. only nominal accounts
d. at least one real and one nominal account

5. Why are adjusting entries necessary?

a. transactions take place over more than one accounting period
b. to made debits equal credits
c. to close nominal accounts at year-end
d. to correct erroneous balances in accounts

6. Which of the following is an example of an adjusting entry?

a. recording the purchase of supplies on account
b. recording the depreciation expense on a truck
c. recording the billing of customers for services rendered
d. recording the payment of wages to employees

7. An adjusting entry to accrue wages earned but not yet paid is an example of:
a. aligning recorded costs with appropriate accounting records
b. aligning recorded revenue with appropriate accounting records
c. reflecting unrecorded expenses incurred during an accounting period
d. reflecting unrecorded revenue earned during an accounting period

8. Which is an incorrect adjusting entry?

a. debit doubtful accounts and credit allowance for doubtful accounts
b. debit accumulated depreciation and credit depreciation
c. debit salaries and credit accrued salaries payable
d. debit inventory-end and credit income summary

9. Which of the following errors would cause unequal totals in the trial balance?
a. The company records a payment of P20,000 in advance of delivery of goods as a debit
of P2,000 to purchases and a credit of P2,000 to cash.
b. The company fails to accrue salaries of P50,000 for the month of December.
c. Both a and b.
d. None of the above.
10. Which of the following is not true of a general ledger trial balance?
a. It proves that the total debits equal to total credits, if it balances.
b. It facilitates the preparation of financial statements
c. It proves that no errors have been made in recording transactions, if it balances.
d. It will not detect an error where the account debited and credited are reversed in
recording a particular transaction.
CASE PROBLEMS – ADJUSTING THE ACCOUNTS

Case 1:

The following are selected account balances of Jessy Company:

Debit ( Credit)
Prepaid insurance P 15,000
Building 50,000
Accum.dep’n-bldg. ( 10,000)
Accounts receivable 80,000
Allowance for bad debts ( 10,000)
Unearned interest income ( 5,000)
Notes Receivable 10,000
Notes Payable ( 15,000)
Jessy, Capital (100,000)
Jessy, Drawing 10,000

1. If at the end of the period, the expired portion of the prepaid insurance is P5,000, what
is the adjusting entry?
DEBIT CREDIT
a. Expired Insurance P 5,000 Cash P 5,000
b. Insurance Expense 5,000 Prepaid Insurance 5,000
c. Prepaid Insurance 10,000 Insurance Expense 10,000
d. Insurance Expense 10,000 Prepaid Insurance 10,000

2. Referring to Jessy Company, if the accounts receivable is determined to be 80%

realizable, the entry for bad debts is:
DEBIT CREDIT
a. Allowance for Bad Debts P 6,000 Accounts Receivable P 6,000
b. Bad Debts 6,000 Allowance for Bad Debts 6,000
c. Bad Debts 16,000 Allowance for Bad Debts 16,000
d. Bad Debts 10,000 Allowance for Bad Debts 10,000

3. Referring to Jessy Company, if at the end of the period, 40% of the precollected income
is realized, what is the entry?
DEBIT CREDIT
a. Interest Income P 3,000 Unearned Interest Income P 3,000
b. Unearned Interest Income 3,000 Interest Income 3,000
c. Unearned Interest Income 2,000 Interest Income 2,000
d. Interest Income 2,000 Unearned Interest Income 2,000

Case 2:

Your bookkeeper already prepared the preliminary trial balance for your business
transactions covering the annual period of 2019, as follows:

Preliminary Trial Balance

As of December 31, 2019

Debit Credit
Cash P 100,000
Receivable from patients 180,000
Clinic supplies inventory 130,000
Clinic equipment 490,000
Clinic furniture and fixtures 230,000
Payable to suppliers P 120,000
Bank loans payable 300,000
Dr. Pedro, capital 700,000
Professional fees income 480,000
Supplies expense 120,000
Salaries expense 110,000
Light and water expense 100,000
Rent expense 140,000 _________
Total P1,600,000 P1,600,000
 a. Billed a patient for services rendered but not yet collected, P80,000.
b. Unpaid light and water bill for December, P15,000.
c. Out of the P480,00 professional fees income, P70,000 was collected in
advance from several patients for services to be rendered on January of the
following year.
d. Advance salaries of the staffs amounting to P20,000 were included in the
salaries expense of P110,000.
e. It is estimated that 10% of the receivables from patients will not be collected
in December.
f. Estimated useful life: clinic equipment – 10 years; clinic furniture and fixtures
– 10 years.

Required: Prepare the adjusting entries as of December 31, 2019.

Prepare the adjusted trial balance as of December 31, 2019.