CHAPTER 11

ADJUSTING the ACCOUNTS, and PREPARATION of WORKSHEET and

FINANCIAL STATEMENTS

LEARNING OBJECTIVES:

The student should be able to:

1. Define adjusting entries
2. Appreciate the importance of adjusting entries.
3. Identify the accounts that need to be adjusted at the end of the accounting period.
4. Identify the method used by the company in recording the prepayments of expenses

LY
and advance collection of revenue.
5. Prepare worksheet.

ON
6. Prepare adjusting entries, closing entries and reversing entries.

The adjustment process (adjusting the accounts) of a service type of business was

E
already discussed in chapter 5. The same procedures and principles are applied in both

US
service and trading or merchandising type of business. The only difference is that, in a
trading or merchandising business firm there are inventories.
T
After the preparation of the trial balance, although it shows the same balances as to
EN

debit and credit, there is no guarantee of its correctness. There are accounts that need to be
adjusted. At the time of recording the business transaction it really reflects the correct
UD

account balances but at the end of the accounting period some of the accounts need to be
adjusted. The trial balance only proves the equality of debit and credit.
ST

Accounts that need to be adjusted:

U

1. Inventory
CP

a. set up the ending inventory

b. close the beginning inventory to income summary
R

2. Prepaid Expenses
a. Prepaid Insurance
FO

b. Prepaid Interest
c. Prepaid Advertising
d. Prepaid Rent
e. Unused Supplies
3. Deferred Revenues / Unearned Revenue
a. Unearned Interest Income
b. Unearned Commission
c. Unearned Rent
d. Unearned Fees
4. Bad Debts Expenses – based on past experienced of the company

284
 5. Depreciation Expenses
a. building
b. furniture and fixtures
c. equipment
d. machineries
e. vehicles
f. plant
g. other fixed assets (except land)
6. Accrued Income
a. interest
b. rent
c. fees

LY
d. commission
7. Accrued Expenses

ON
a. Salaries and wages
b. Telephone
c. Water and Electricity

E
d. Rent

US
e. Gasoline
f. Transportation
g. Interest
T
h. miscellaneous
EN

TIME OF PREPARATION OF ADJUSTING ENTRIES

UD

Adjusting entries must be prepared prior to the preparation of financial statements. If

ST

the financial statements are prepared monthly, then monthly adjusting entries are required. In
cases that financial statements are prepared annually, adjusting entries will be prepared at the
end of the accounting period.
U
CP

There are two classes of adjusting entries

R

1. Consist of those entries that relate to data previously recorded in the accounts
FO

a. Advance payment of expenses or prepayments recorded as asset or expenses

under the asset or expense method.
b. Advance collection of income or revenue as a revenue or a liability under the
revenue and liability method.
c. Inventory purchased and sold under the periodic and perpetual inventory
system.

285
 To illustrate: Assume the following transactions given:

2018
March 1 Paid one year insurance policy for P12,000 covering the period
from March 1, 2018 to February 28, 2019.

April 1 Bought supplies for P10,000

June 1 Granted loan to employees P50,000 at 12%. Interest for one

year was already deducted from the loan.

November 1 Paid rent for six months P18,000, for November 1, 2018 to

LY
April 30, 2019.

ON
Additional Data:
1. Supplies on hand P4,000 as of December 31, 2018.

E
Instruction:

US
1. Journalize the transactions under the asset and expense method.
2. Give journal entries required at the end of the year.
T
SOLUTION:
EN

Journal entries to record selected transactions for the year, 2018.

Date Description Debit Credit Description Debit Credit
UD

ASSET METHOD EXPENSE METHOD

ST

2018
Mar 1 Prepaid Insurance 12,000 Insurance Expense 12,000
U

Cash 12,000 Cash 12,000

Paid insurance Paid insurance
CP

Apr 1 Supplies 10,000 Supplies Expense 10,000

R

Cash 10,000 Cash 10,000

FO

Bought supplies. Bought supplies.

Nov 1 Prepaid Rent 18,000 Rent Expense 18,000

Cash 18,000 Cash 18,000
Paid rent. Paid rent.

REVENUE METHOD LIABILITY METHOD

Jun 1 Loan Receivable 50,000 Loan Receivable 50,000
Cash 44,000 Cash 44,000
Interest Income 6,000 Unearned Interest 6,000

286
 ADJUSTING ENTRIES
Dec 31 Insurance expense 10,000 Prepaid insurance 2,000
Prepaid insurance 10,000 Insurance expense 2,000
12,000/12 x 10 months

31 Rent expense 6,000 Prepaid Rent 12,000

Prepaid Rent 6,000 Rent Expense 12,000
18,000/6 x 2 months

31 Supplies expense 6,000 Supplies 4,000

Supplies 6,000 Supplies Expense 4,000

LY
31 Interest Income 2,500 Unearned Interest 3,500
Unearned Interest 2,500 Interest Income 3,500

ON
6,000/12 x 7 months

E
US
ADJUSTING INVENTORY ACCOUNT

At the end of the accounting period the Inventory account needs to be adjusted. As
T
already discussed, there are two systems in accounting the Inventory, namely the Periodic
EN

Inventory System and the Perpetual Inventory System.

UD

Under the perpetual inventory system, all purchases during the period are debited to
the Inventory account. Sale of inventory is credited to the same account. Thus, at any given
time, the balance of the Inventory account can be determined even without physical count.
ST

Under the periodic inventory system, all purchases of inventory –are debited to
U

Purchases account. The ending Inventory can be determined by actual or physical count of
CP

inventories on hand.
The Inventory in the unadjusted trial balance represents the beginning Inventory.
R

Assume that the beginning Inventory of GOLD Co. amounted to P52,800 and the
FO

ending Inventory amounted to P48,300. At the end of the accounting period, the required
adjusting entries under the Periodic Inventory System will be as follows:

1. Adjust or close the beginning Inventory account to Income Summary account.

Income Summary 52,800

Inventory 52,800
To close beginning balance of inventory to income summary account

287
2. Ending Inventory (set up the physical count of Inventory)

Inventory 48,300
Income Summary 48,300
To set up ending balance of Inventory

2. Consist of entries relating to activity on which nothing has been previously recorded
in the accounts or there are recorded accounts related to this account as the basis of
computation only.
a. Accrued Expenses – expenses already incurred but not yet paid as of the end
of the accounting period.

LY
Example: Unpaid salaries as of end of the accounting period P6,000.

b. Accrued Income – revenue already earned but not yet collected and recorded

ON
as of the end of the accounting period.
Example: Interest earned as of December 31- P1,000.

E
US
c. Amortization of cost of fixed assets other than land.
Example: Equipment costing P50,000 with an estimated useful life of five
years. Depreciation method used is straight line method.
T
EN

d. Provision for the allowance for bad debts or uncollectible accounts.

Example: based on company’s experience bad debts were 1% of credit sales.
UD

Credit sales for the year amounted to P500,000.

ST

OTHER ADJUSTING ENTRIES

Dec
31 Salaries Expense 6,000
U

Salaries Payable 6,000

CP

31 Interest Receivable 1,000

R

Interest Income 1,000

FO

31 Depreciation Expense 10,000

Accum. Depr’n 10,000
50,000/5 years

31 Bad Debts Expense 5,000

Allow for Bad Debts 5,000
500,000 x 1%

288
PREPARATION OF WORKSHEET

As discussed in service concern type of business the preparation of worksheet is the

same except for the additional account called Inventory. If the adjustments are few, the
Adjusted Trial Balance column may be omitted.

GOLD CO,
Trial Balance
December 31, 2018
DEBIT CREDIT
Cash 29,410

LY
Accounts Receivable 42,400
Inventory 52,800

ON
Prepaid Insurance 17,400
Store Supplies 2,600
Office Supplies 1,840

E
Land 4,500

US
Building 20,260
Accumulated Depr’n.-Building 5,650
Office Equipment 8.,600
T
Accumulated Depr’n-Office Equipt. 2,800
EN

Accounts Payable 25,683

Salaries Payable 5,000
UD

Gold, Capital 118,352

Gold, Drawing 20,000
ST

Income Summary
Sales 246,350
Sales Returns and Allowances 2,750
U

Sales Discounts 4,275

CP

Purchases 126,400
Purchase Returns Allowances 5,640
R

Purchase Discounts 2,136

Freight In 8,236
FO

Salaries Expense – Selling 32,640

Freight Out 5,740
Advertising Expense 10,000
Salaries Expense – Admin 21,760 _______
411,611 411,611
====== =======

289
Additional data:
a. Inventory on hand Dec. 31, 2018, P48,300
b. Expired insurance P5,800.
c. Store supplies used P1,540
d. Office supplies used P1,204.
e. Depreciation expense-bldg.-P2,600;Equipment 2,200.

To illustrate: Using the Trial Balance and additional data of GOLD CO:
a. Complete the eight column worksheet
b. Prepare Income Statement, Statement of Changes in Owner’s Equity, and
Statement of Financial Position.

LY
c. Prepare adjusting entries.
d. Prepare closing entries.

ON
e. Prepare post closing trial balance
f. Prepare reversing entries (if any) at the beginning of next accounting period.

E
US
T
EN
UD
ST
U
CP
R
FO

290
 GOLD COMPANY
WORKSHEET
For the Year Ended December 31, 2018 (in Pesos)
ACCOUNT TITLE Trial Balance Adjustments Income Statement Statement of Financial
Position
Debit Credit Debit Credit Debit Credit Debit Credit
Cash 29,410 29,410
Accounts Receivable 42,400 42,400
Inventory 52,800 b) 48,300 a) 52,800 48,300
Prepaid Insurance 17,400 c) 5,800 11,600
Store Supplies 2,600 d) 1,540 1,060
FO
Office Supplies 1,840
R e) 1,204 636
Land 4,500 4,500
Building 20,260 20,260
Accum. Depreciation-Bldg. 5,640 f) 2,600 8,250
CP
Office Equipment 8,600 U 8,600
Accum Depr’n-Office Equipt. 2,800 g) 2,200 5,000
Accounts Payable 25,683 25,683
Salaries Payable 5,000 5,000
ST
Gold, Capital 118,352 118,352
Gold, Drawing 20,000 20,000
Income Summary a)52,800 b)48,300 52,800 48,300
UD
Sales 246,350 246,350
Sales Returns and Allowances 2,750 2,750
EN
Sales Discounts 4,275 T 4,275
Purchases 126,400 126,400
Purchase Returns & Allow. 5,640 5,640
Purchase Discounts 2,136 2,136
US
Freight In 8,236 E 8,236
Salaries Expense-Selling 32,640 32,640
Freight Out 5,740 5,740
Advertising Expense 10,000 10,000
ON
Salaries Expense – Admin 21,760 21,760
Insurance Expense c) 5,800 5,800
Store Supplies d) 1,540 1,540
LY
Office Supplies e) 1,204 1,204
Depreciation Expense – Bldg f) 2,600 2,600
Depr’n. Expense-Office Equipt. g) 2,200 2,200
Total 411,611 411,611 114,444 114,444 277,945 302,426 186,766 162,285
Profit for the period ======= ====== ======= ======= 24,481 24,481
302,426 302,426 186,766 186,766
======= ======= ====== ======

291
 GOLD CO.
Income Statement
For the Year Ended December 31, 2018
Net Sales (Note 4) P239,325
Cost of Sales (Note 5) (131,360)
Gross Profit P107,965
Operating Expenses:
Selling Expenses(Note 6) (49,920)
Administrative Expense (Note 7) (33,564)
Total Operating Expenses (83,484)
Profit from operation P24,481

LY
GOLD CO.

ON
Statement of Changes in Owner’s Equity
For the Year Ended December 31, 2018
Gold Capital, Jan 1 P118,352

E
Profit for the Period P 24,481

US
Gold, Drawing 20,000
Increase in Capital 4,481
T
Gold, Capital, Dec. 31 P122,833
======
EN

GOLD CO.
Statement of Financial Position
UD

December 31, 2018

ASSETS
ST

Current Assets:
Cash P29,410
U

Accounts Receivable 42,400

Inventory 48,300
CP

Prepaid Insurance 11,600

Store Supplies 1,060
R

Office Supplies 636 P133,406

FO

Non Current Assets:

Fixed Assets (Note 8) P20,110
TOTAL ASSETS P153,516
=========
LIABILITIES
Current Liabilities:
Accounts Payable P25,683
Salaries Payable 5,000 P30,683
OWNER’S EQUITY
Gold, Capital 122,833
TOTAL LIABILITIES & CAPITAL P153,516
=========

292
Note 4 Sales P246,350
Sales Ret. & Allow (2,750)
Sales Discounts (4,275) (7,025)
Net Sales P239,325
=======
Note 5 Cost f Sales:
Inventory, beg P52,800
Purchases 126,400
Purchase Ret. & Allow (5,640)
Purchase Discounts\ (2,136) (7,776)
Net 118,624
Freight In 8,236

LY
Net Purchases 126,860
Total Goods Available for Sale 179660

ON
Inventory, end (48300)
Cost of Goods Sold P131,360
=======

E
Note 6 Selling Expenses

US
Salaries P32,640
Freight Out 5,740
Advertising 10,000
T
Store Supplies 1,540
EN

Total Operating Expenses P49,920

======
UD

Note 7 Administrative Expenses:

Salaries P21.760
ST

Insurance 5.800
Office Supplies 1,204
Depr’n. Expense – Bldg 2,600
U

Depr’n. Expense – Bldg. 2,200

CP

Total Administrative Expenses P33,564

======
R

Note 8 Non Current Assets:

Fixed Assets
FO

Land P4,500
Building P20,260
Accum. Depreciation (8,250) 12,010
Office Equipment P8,600
Accum. Depreciation (5,000) 3,600
Net Fixed Assets P20,110
========

293
 ADJUSTING ENTRIES
2018
Dec. 31 Income Summary 52,800
Inventory 52,800
Close beginning inventory to income summary

31 Inventory 48,300
Income Summary 48,300
Set up ending inventory.

31 Insurance Expense 5,800

Prepaid Insurance 5,800

LY
31 Store Supplies Expense 1,540

ON
Store Supplies 1,540

31 Office Supplies Expense 1,206

E
Office Supplies 1,206

31 Depreciation Expense – Building

Accum. Depr’n. – Building US 2,600
2,600
T
EN

31 Depreciation Expense – Office Equipment 2,200

Accum. Depr’n. - Office Equipment 2,200
UD

CLOSING ENTRIES
ST

Dec. 31 Sales 246,350

Purchase Ret. & Allow 5,640
Purchase Discounts 2,136
U

Income Summary 254,126

CP

31 Income Summary 225,145

R

Sales Ret. & Allow 2,750

Sales Discounts 4,275
FO

Purchases 126,400
Freight In 8,236
Salaries Expense – Selling 32,640
Freight Out 5,740
Advertising Expense 10,000
Salaries Expense – Admin 21,760
Insurance Expense 5,800
Store Supplies Expense 1,540
Office Supplies Expense 1,204
Depreciation Expense – Building 2,600
Depreciation Expense – Office Equipment 2,200

294
 31 Income Summary 24,481
Gold, Capital 24,481
Close income summary to capital account.

Gold, Capital
31 Gold, Drawing 20.000
Close drawing account to capital account. 20,200

GOLD CO,
Post-Closing Trial Balance
December 31, 2018

LY
Debits Credits

ON
Cash 29,410
Accounts Receivable 42,400
Inventory 48,300

E
Prepaid Insurance 11,600

US
Store Supplies 1,060
Office Supplies 636
Land 4,500
T
Building 20,260
EN

Accumulated Depr’n.-Building P8,250

Office Equipment 8,600
UD

Accumulated Depr’n-Office Equipt. 5,000

Accounts Payable 25,683
ST

Salaries Payable 5,000

Gold, Capital 122,833
TOTAL P166,766 P166,766
U

============= ===========
CP
R
FO

295
Problem 11 – 1. The trial balance of Love Enterprises is shown below:

Love Enterprises
Trial Balance
December 31, 2018
Debit Credit
Cash 117,660
Accounts Receivable 140,850
Allowance for Bad Debts 6,000
Inventory 171,300
Store Supplies 11,340
Prepaid Insurance 11,200

LY
Prepaid Rent 114,400
Store Equipment 32,000
Accum. Depreciation –Store Equipment

ON
6,400
Accounts Payable 130,700
Love, Capital 307,910

E
Love, Drawing 15,000

US
Income Summary
Sales 580,590
Sales Returns and Allowances 11,290
T
Sales Discounts 1,150
EN

Purchases 225,210
Purchase Returns and Allowances 11,010
UD

Purchase Discounts 1,250

Freight In 11,960
ST

Salaries Expense – Selling 54,600

Advertising Expense 29,500
Salaries Expense – Admin 70,200
U

Utilities Expense 11,200

CP

Miscellaneous Expense 15,000

1,043,860 1,043,860
R

======= ========
FO

Additional Information:
1. Inventory on hand in December 31 is P100,500.
2. Prepaid insurance represents a one year fire insurance policy starting June 1, 2018.
3. Prepaid rent represents rent for one year starting July 1, 2018.
4. Store supplies on hand in December, 2018, P3,300.
5. Store equipment has an estimated useful life of 5 years.
6. Accrued Salaries: Sales – P5,000; Office – 8,000.
7. Companies past experience of uncollectible accounts is 5% of accounts receivable.
Instruction:
1. Prepare an eight column work sheet for the year ended Dec. 31, 2018.
2. Prepare Financial Statements 4. Prepare post closing trial balance
3. Journalize adjusting and closing entries 5. Prepare reversing entries.

296
Problem 11 – 2. The trial balance of Smile Co. is shown below:

Smile Co.
Trial Balance
December 31, 2018

Debit Credit
Cash 134,150
Accounts Receivable 162,750
Allowance for Bad Debts 3,000
Inventory 181,700
Store Supplies 1,890

LY
Office Supplies 1,500
Prepaid Insurance 12,000

ON
Store Equipment 25,500
Accum. Depreciation –Store Equipment 12,750
Office Equipment 28,300

E
Accum. Depreciation – Office Equipment 14,150

US
Accounts Payable 51,650
Mortgage Payable – due 2019 125,000
Smile, Capital 402,110
T
Smile, Drawing 10,000
EN

Income Summary
Sales 757,800
UD

Sales Returns and Allowances 13,300

Sales Discounts 12,000
ST

Purchases 451,800
Purchase Returns and Allowances 12,150
Purchase Discounts 5,930
U

Freight In 12,000
CP

Sales Salaries Expense 161,150

Rent Expenses - Selling 56,000
R

Advertising Expense 26,400

Miscellaneous Selling Expense 11.960
FO

Office Salaries Expense 51,500

Rent Expense – Admin 18,000
Miscellaneous Admin 11,440
Interest Expense 12,000
Gain from Disposal of Plant Assets 10,800
TOTAL 1,395,340 1,395,340
======= ========

297
Additional Information:

1. Inventory on hand in December 31 is P105,000.

2. A one year insurance policy was purchased July 1, 2018, also the starting date of the
coverage to be allocated to Selling 60% and Admin 40%.
3. Store supplies on hand in December, 2018 P550; Office Supplies on hand P400.
4. Store and office equipment have an estimated useful life of 5 years.
5. Accrued Salaries: Sales – P5,500; Admin – 2,500.
6. Companies past experience of uncollectible accounts is 2% of sales.

Instruction:
1. Prepare an eight column work sheet for the year ended Dec. 31, 2018.

LY
2. Prepare Financial Statements
3. Journalize adjusting and closing entries .

ON
4. Prepare post-closing trial balance
5. Prepare reversing entries

E
US
T
EN
UD
ST
U
CP
R
FO

298