 ADJUSTING ENTRIES – journal entries made at the
end of the accounting period so that a company’s
financial statements include the correct amounts
for the current period.
 Only prepared just merely to update the
balances of the accounts. This is the primary
underlying premise of adjusting entry.
 Required to implement the accrual
accounting model. More specifically, these
entries are required to satisfy the realization
principle and matching principle.
 An adjusting entry must contain a balance
sheet account and income statement
account.
 BALANCE SHEET – also provides a more complete
assessment of assets and liabilities as sources of
future cash receipts and disbursements.
 Types of Adjustments
1. Apportionment of prepaid and deferred items
a. Prepaid expenses
b. Deferred revenues
2. Recording of accrued items
a. Accrued expenses
b. Accrued revenue
3. Recording estimated items
 PREPAID EXPENSES (Prepaid Assets) – good or
service purchased by a company for its operations
but not fully used up by the end of the accounting
period.
 Are customarily paid in advance.
 Prepaid expenses are expenses of the
business that are paid in advance.
 UNEARNED REVENUES (Deferred Revenue) –
payment received by a company in advance for
the future sale of inventory or performance of
services.
 Liability account (Unearned revenue) in
initially recording the transaction applied the
liability method for recording deferred
revenue.
 Income method or revenue method may also
be used for initial recording the advance
receipt of payment, which will similarly show
the same amount for the earned and
unearned portion of the account.
 Unearned revenues are advanced collections
for services expected to be rendered in the
future.
 ACCRUED EXPENSES – expense that a company
has incurred during the accounting period but has
neither paid nor recorded.
 An entity often incurs expenses before
paying for them.
 To match expenses against revenues and to
reflect the proper liabilities at the end of the
period, a company must make an adjusting
entry for its accrued expense.
 Accrued expenses are expenses that have
been incurred already, but not yet paid as of
the cut-off date.
 ACCRUED REVENUES – revenues that have been
earned but not yet collected.
 These revenues should have been properly
included in the revenues that have to be
presented in the financial statements.
 An entity may provide services during the
period that are neither paid for by clients nor
billed at the end of the period.
 Revenue that has been earned but not
recorded during the accounting period calls
for an adjusting entry that debits an assets
account and credits an income account.
 Accrued income is income earned already but
not yet received or collected.
 DEPRECIATION – The systematic and rational
allocation of the depreciable cost of an asset over
its useful life and represents the future economic
benefit that has been used in the period.
 Allocation of the cost of property and
equipment to expense over its useful life.
 Depreciation = Cost - Salvage value Estimated
life (years)
 Depreciation is a reduction in the value of an
asset because of the passage of time, or wear
and tear.
 UNCOLLECTIBLE ACCOUNTS – he adjusting entry
to record the increase in expenses and the
decrease in assets requires an estimate of future
uncollectible accounts.
 This account is deducted from Accounts
Receivable on the company’s balance sheet
to report the estimated collectible amount.
 Uncollectible accounts are customers’
accounts arising from sales of goods or
services on credit, but become doubtful in
collectability.
 WORKSHEET – To minimize errors, simplify the
recording of adjusting and closing entries in the
general journal, and make it easier to prepare the
financial statements.
 A working tool that is multi-column in form
and that may be used in the adjustment
process and in preparing the financial
statements.
 A worksheet has two main parts, the heading
and the body.
 The heading of the worksheet is usually
written at the upper most center of the
columnar worksheet
 The main body of the worksheet is identified
with several money columns depending on
the needs of the company and for what
purpose it will serve to the users of the
financial reports.
 A worksheet is helpful in determining the
operation of the business results in net
 income or net loss even without preparing a
financial statement or an income statement
for that matter.
 The worksheet helps in preparing the actual
financial statements.
 The Financial Statements
a. Income statement
b. Statement of financial position
c. Statement of changes in equity
 The purposes of the company’s income
statement are:
a. To help evaluate management’s past
performance – the income statement provides
information that helps current and potential
investors evaluate how well a company’s
management has performed in fulfilling this
responsibility.
b. To help predict the company’s future income
and cash flows - external users review the
components of a company’s net income to
evaluate the earnings quality or ability to predict
its future earnings.
c. To help assess the company’s “credit
worthiness” – A study of the company’s earning
power as reported on its income statement helps
lending institutions, suppliers, employees, and
other external users evaluate the likelihood that
the company will be able to convert its net income
to cash to meet its obligations.
d. To help in comparisons with other companies –
investors are interested in evaluating the risk of
investing in a company as compared to other
companies in the same industry or other
industries.
 BALANCE SHEET shows the financial position of a
company at a particular date. A balance sheet is
also known as a statement of financial position.
 FINANCIAL POSITION of a company includes its
economic resources (i.e., assets), economic
obligations (i.e., liabilities), and equity, and their
relationships to each other at a moment in time.
 STATEMENT OF CHANGES IN EQUITY summarizes
the changes that occurred in owner’s equity.
 STATEMENT OF FINANCIAL POSITION – statement
that shows the financial position or condition of an
entity by listing the assets, liabilities and owner’s
equity as at a specific date.
 LIQUIDITY – refers to the availability of cash
in the near future after taking account of the
financial commitments over this period.
 SOLVENCY – refers to the availability of cash
over the longer term to meet financial
commitments as all due.
 STAEMENT OF CASH FLOWS – provides
information about the cash receipts and cash
payments of an entity during a period.
 CLOSING ENTRIES – journal entries that a
company makes at the end of the accounting
period to reduce the balance in each temporary
account to zero and to update the Income
Summary account.
 Each temporary income statement is debited
or credited for the amount that will result in a
zero balance in that account.
 POST-CLOSING TRIAL BALANCE – when closing
entries have already been prepared, only the
real accounts are left with balances in the
ledger, since all the nominal and drawing
accounts have been closed.
 From these balances, another trial balance
will be prepared. This trial balance is called
the post-closing trial balance.
 The post-closing trial balance ensures that
the ledger balances on the next accounting
period are equal. It also determines the
accuracy of the posting process of adjusting
and closing entries.
 REVERSING ENTRIES – Prior to journalizing the
daily transactions of the new accounting period
in the general journal, most companies prepare
the reversing entries.
 A reversing entry is the exact reverse
(account and amounts) of an adjusting entry.
 A reversing entry is optional and has one
purpose, that is, to simplify the recording of a
later transaction related to the adjusting
entry.
 A reversing entry enables a company to
routinely record the later transaction,
without having to consider the possible
impact of the prior adjusting entry.
 A reversing entry is a journal entry which is
the exact opposite of a related adjusting
entry made at the end of the period.
 It is basically a bookkeeping technique made
to simplify the recoding of regular
transactions in the next accounting period.