ADJUSTING ENTRIES

Pure Cash Basis – record the transaction if Cash is

involved
Accrual Basis – even though no Cash is involved, there
is a need to record a transaction.
- record the transaction when they occur and not
when Cash is received or paid.
Periodicity Concept
RECOGNITION
- appropriate if Relevant and faithful
representation
2 GENERAL TYPES OF ADJUSTMENTS
DEFERRALS
ACCRUALS

ADJUSTMENTS FOR DEFERRALS

1) PREPAID EXPENSES – expenses already paid but not yet
consumed/used up. Therefore, it is an Asset.
A. PREPAID RENT
On. Nov. 1, 2020, Mr. A made a 5-months advance rental of office
space to X Co. for P 15,000.
Using Asset Method:
Original Entry
Nov. 1 - Prepaid Rent- - - - - - - - 15,000
Cash - - - - - - - - - - - - - - - - - 15,000
Adjusting entry:
Dec. 31 – Rent Expense - - - - - - - 6,000
Prepaid Rent - - - - - - - - - - - 6,000
_______Prepaid Rent________ ___ _Rent Expense_______
15,000 I 6,000 6,000 I
I I

Using Expense Method

Original Entry
No. 1 – Rent Expense - - - - - - - - - --15,000
Cash - - - - - - - - - - - - - - - -- - 15,000

Adjusting Entry:
Dec. 31 - Prepaid Rent - - - - - - - - - - - 9,000
Rent Expense - - - - - - - - - - - 9,000

_______ Rent_ Expense____ ____ Prepaid Rent______

15,000 I 9,000 9,000 I
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B. PREPAID INSURANCE
On March 1, 2020 Mr. B paid a 1-year insurance premium for his
car amounting to P 12,000.
Using Assets Method:
Original Entry:
March 1 – Prepaid Insurance - - - - - - 12,000
Cash - - - - - - - - - - - - - - - - - - - 12,000

Adjusting Entry:
Dec. 31 - Insurance Expense - - - - - -10,000
Prepaid Insurance - - - - - - - - - - 10,000

_____Prepaid Insurance_____ ____ _InsuranceExpense_____

12,000 I 10,000 10,000 I
I I
Using Expense Method

Original Entry:
Mar. 1 - Insurance Expense - - - - - - - 12,000
Cash - - - - - - - - - - - - - - - - - - - 12,000

Adjusting Entry
Dec. 31 – Prepaid Insurance - - - - - - - - 2,000
Insurance Expense - - - - - - - - - - 2,000

_____Insurance_Expense____ ____ Prepaid Insurance______

12,000 I 2,000 2,000 I
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C. SUPPLIES
On July 1, 2020, Y Corpo. has P 5,000 supplies on hand. On this
date, it purchased P 20,000 worth of supplies. At year end, upon
physical inventory, only P 8,000 worth of supplies left.
Using Asset Method:
Original Entry:
July 1 – Supplies - - - - - - - - - - - - 20,000
Cash - - - - - - - - - - - - - - - - 20,000

Adjusting Entry:
Dec. 31 - Supplies Expense - - - - 17,000
Supplies - - - - - - - - - - - - - - 17,000

______ Supplies_____ Supplies Expense______

5,000 I 17,000 17,000 I
20,00 I I
Using Expense Method

Original Entry
July 1 – Supplies Expense - - - - - - - - -20,000
Cash - - - - - - - - - - - - - - - -- - - - -20,000

Adjusting Entry:
Dec. 31 – Supplies - - - - - - - - - - - - - 8,000
Supplies Expense - - - - - - - - - - 8,000

___Supplies_Expense____ Supplies ________

5,000 I 8,000 8,000 I
20,00 I I
D. DEPRECIATION
Item Purchased - Machinery
Date of Purchase - January 1, 2020
Cost - P 200,000
Estimated Useful life - 4 years
Using Straight-Line Method of Computing Depreciation

Depreciation = __Cost 200,000 = P 50,000

Useful life 4
Adjusting Entry:
Dec. 31, 2020 - Depreciation - - - - - - - - 50,000
Acc depreciation-Machinery- - 50,000
Using the same data instead it has a Scrap Value of P 10,000.
Depreciation = Cost – Srcap Value 200,000 - 10,000 = 47,500
Useful life 4
Dec. 31, 2020 – Depreciation - - - - - - - - - - - 47,500
Accumulated depreciation - - - - - - -- - 47,500
Item Purchased - Machinery
Date of Purchase - September 1, 2020
Cost - P 200,000
Scrap Value - P 5,000
Estimated Useful life - 4 years
Using Straight-Line Method of Computing Depreciation

Depreciation = __Cost– Scrap V 200,000 - 5,000 = 48,750

Useful life 4
Adjusting Entry:
Dec. 31, 2020 - Depreciation - - - - - - - - 16,250
Acc depreciation-Machinery- - 16,250

Depreciation – is an Expense
Accumulated depreciation – a Contra=Asset account (a deduction
from its related account.
Machinery - - - - - - - - - - - - - - - - - - - - 200,000
Less: Accumulated depreciation- - - - - 16,250
Net Book Value - - - - - - - - - - - - - - - - 183,750
=======
E. UNEARNED REVENUES – are revenues already received but not
yet earned therefore, it is a liability.
On Dec. 1, 2020, ABC Co. received P 20,000 for a 5-month
newspaper subscription.
Using Liability Method
Original Entry
Dec. 1 - Cash - - - - - - - - - - - - - - - 20,000
Unearned Subscription Income- - - 20,000
Adjusting Entry
Dec. 31 - Unearned Subscription Income ------- 4,000
Subscription Income - - - - - - - - - - - - - -4,000

___Unearned Sub. Income____ Subscription Income__

4,000 I 20,000 I 4,000
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Using Income Method
Original Entry
Dec. 1 - Cash - - - - - - - - - - - - - - - 20,000
Subscription Income- - - - - - - - -20,000

Adjusting Entry
Dec. 31 - Subscription Income ------- 16,000
Unearned Subscription Income - - - 16,000

___Subscription Income____ Unearned Subsc. Income__

16,000 I 20,000 I 16,000
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 ADJUSTMENTS FOR ACCRUALS
1. ACCRUED EXPENSES – EXPENSES already incurred but not yet
paid therefore, it is a liability.
A. ACCRUED SALARIES

Calendar for Dec. 2020

S M T W T F Sat.
26 27 28 29 30 31 1
No. of workers = 5
Daily Payroll = P 500 / worker (5 days workweek and payroll is
given every Saturday)
Dec. 30 and 31 are holidays
Computation += 500 x 5 x 3 = 7,500
Adjusting entry:
Dec. 31 - Salaries and Wages- - - - - - - - - 7,500
Salaries and Wages Payable - - - - - - - 7,500
B. ACCRUED INTEREST Expense

Date borrowed = May 1, 2020

Principal amount = P 100,000
Interest rate = 5 % per annum
Term = 1 year
Principal together with the interest are payable upon maturity.

Interest = Principal x rate x time = 100,000 x 5% =

5,000/year / 12 x 8 = 3,333.33

Adjusting entry:
Dec. 31 2020 – Interest Expense =- - - - - - - 3,333.33
Interest Payable - - - - - - - - - - - - - - - - 3,333.33
C. ACCRUED REVENUES - revenues already earned but not yet
received therefore, it is a receivable.
On Nov. 1, 2020, Mr. X rented an office space in the building
owned by Mr. Cruz at P 5,000 per month. But, 2 months had
passed, Mr. X. has not yet paid the rentals.
Adjusting entry:
Dec. 31 – Rent Receivable- - - - - - - 10,000
Rent Income - - - - - - - - - - - - - - 10,000

D. UNCOLLECTIBLE ACCOUNT
On Dec. 31, 2020, Z Inc. has an accounts receivable amounting to
P 300,000 but 2 % of is doubtful of collection.

Adjusting entry:
Dec. 31 –Bad debts - - - - - - - - - - 6,000
Allowance for Bad debts - - - - - - 6,000
Accounts Receivable - - - - - - - - - -300,000
Less: Allowance for Bad debts - - - 6,000 (contra-asset account)
Net Realizable Value - - - - - - - - -294,000