Adjusting Entry

Dividing the life of the business into several accounting periods poses some
problems in terms of the proper measurement of profits. This is because there are items
of revenues and expenses that may already occurred but are not yet recorded at the time
of the preparation of the financial statement. This is the reason why adjustment have to
be made at the end of accounting period.

For the purpose of measuring the net profit and preparing the financial
statement, the life of the business is divided into time periods of equal length.

The accounting period defines the time range over which business transactions
are accumulated in the financial statements. It usually covers a period of one
year for external reporting purposes.

Calendar period – accounting period that begins with January 1 and ends on
December 31.

Fiscal period – accounting period that begins at any given month but still covers a one
year period.

Purpose of adjusting entries

1. To take up unrecorded income and expense of the period

2. To split mixed accounts into their real and nominal elements

The objective of accounting is to fairly measure the result of operations for a given
period of time, and the financial position as of a certain or specific date. The result
of operations are shown in the income statement, and the financial position
is shown in the balance sheet or statement of financial position.

Two methods of Accounting:

1. Cash basis of accounting – recognizes revenue or income when cash is

received and recognizes expenses when they are paid.

2. Accrual basis of accounting – recognizes revenues or income in the accounting

period in which it is earned whether or not cash has been received, and recognizes
expenses in the accounting period in which it is incurred whether or not cash has
been paid.
 Types of adjusting Entries

1. Deferrals of income and expenses

2. Recognition of depreciation expense and bad debts expense
3. Accruals of income and expense.

1. DEFERRALS – is the postponement of recognition of “an expense already paid

but not yet incurred” or of “revenue already collected but not yet earned”.

2. ACCRUALS – recognition of an “expense already incurred

but unpaid” or “revenue earned but uncollected”.

Illustration:

Assume that on March 24, Mr Von, owner of a car repair shop, was contracted
by s customer to repair the customer's BMW.

On March 25, the customer brought his BMW to the shop and repair works were
completed the same day. The customer picked up the car the following day, March 26,
and paid Mr. Von the cost of repair amounting to P15,000.

 Using the cash basis of accounting, revenue is recognized when cash is received,
and that is March 26.
 Using the accrual basis, revenue is recognized when earned which is the date
when service is rendered. Accrodingly, P15,000 should be recognized as revenue
when repair works are performed on March 25.

Journal entry using accrual basis.

March 25 Account Receivable P15,000

Service revenue P15,000

March 26 Cash 15,000

Account Receivable 15,000

Resources:

1. https://www.youtube.com/watch?v=9-vPuiiLmZ4

2. https://www.youtube.com/watch?v=GEZZftO_VrE

3. https://www.youtube.com/watch?v=XzkhD7a7kGw