LICEO DE LA SALLE SENIOR HIGH SCHOOL

FIRST SEMESTER | QUARTER 2

AY 2021-2022 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

ADJUSTING ENTRIES - ACCRUALS

I. Accrued Expenses

An entity often incurs expenses before paying them and cash payments are usually made at regular
intervals of time such as weekly, monthly, quarterly, or annually. If the accounting period ends on
a date that does not coincide with the scheduled cash payment date, an adjusting entry is needed
to reflect the expense incurred since the last payment.

This adjustment helps the entity avoid the impractical preparation of hourly or daily journal entries
just to accrue expenses. Salaries, interest, utilities, and taxes are examples of expenses that are
incurred before payment is made.

Adjusting Journal Entry at the end of the accounting period:

Expense xxx
Expense Payable xxx
To record unpaid expenses.

Accrued Salaries

Example 1. Unpaid salaries at the end of December 31, 2016 amounted to Php 18,800.

Adjusting journal entry on December 31, 2016:

Salaries Expense 18,800

Salaries Payable 18,800
To record unpaid salaries at year end.

Analysis: This is a liability on the part of the company because the employees have already worked
for this but the company has not paid their salaries yet. Hence, a liability on the part of the company
should be recognized at the end of the accounting period.

Example 2. Del Mundo records an expense for the salaries of his part time employee who earned
Php 1,600 during the last 4 days of December but will not be paid until year-end.

Salaries Expense 1,600

Salaries Payable 1,600
To record unpaid salaries at year end.

Analysis: The liability of Php 1,600 (Php 400 daily rate x 4 days) is now correctly reflected in the
salaries payable account.

Accrued Utilities

Example. The company received a Maynilad bill in the amount of Php 9,800 on December 26,
2016. The company intends to pay on January 8, 2017.

Adjusting journal entry on December 31, 2016:

Utilities Expense 9,800

Utilities Payable 9,800
To record unpaid utilities at year end.

Analysis: This is a liability on the part of the company because the Maynilad bill is for the month
of December but the company has not yet paid for it. Hence, a liability on the part of the company
should be recognized at the end of the accounting period.

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 LICEO DE LA SALLE SENIOR HIGH SCHOOL
FIRST SEMESTER | QUARTER 2
AY 2021-2022 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

Accrued Interest

Interest is the cost of borrowing money. Interest expense is matched to a particular period during
which the benefit, the use of borrowing money, is received. The interest is a fixed obligation and
accrues regardless of the results of the entity’s operations. Interest rates are expressed at annual
rates, so if the interest is being calculated for less than a year, the calculation must express time as
a portion of a year.

Example. Del Mundo’s Php 100,000 note payable, which he signed on November 2, carries an
18% interest rate. Del Mundo uses the formula (for simple interest) to calculate how much interest
expense is accrued during the final 28 days of November.

Interest= Principal x Interest Rate x Time

= Php 100,000 x 18% per year x 28/360 of a year
= Php 100,000 x .18 x 28/360
= Php 1,400

Adjusting journal entry:

Interest Expense 1,400

Interest Payable 1,400
To record unpaid interest at year end.

This is the prepared adjusting entry since in this scenario, Del Mundo is the borrower / debtor. At
the end of November, Del Mundo owed the bank Php 1,400 for interest in addition to the Php
100,000 loan.

II. Accrued Revenues

An entity may provide services during the period that are neither paid by the clients nor billed at
the end of the period. The value of these services represents revenue earned by the entity. Any
revenue that has been earned but not recorded during the accounting period calls for an adjusting
entry that debits an asset account and credits and income account.

Adjusting Journal Entry at the end of the accounting period:

Receivable xxx
Income xxx
To record income earned.

Example 1. On Jan. 1, 2016, Sana received a 1 year, 6% note receivable amounting to Php 200,000.
The interest and principal are payable on maturity date. Give the adjusting entry on June 30, 2016.

Adjusting Journal Entry on June 30, 2016:

Interest Receivable 6,000

Interest Income 6,000
To record interest income earned.

Computation:
Interest= Principal x Interest Rate x Time
= Php 200,000 x 6% x 6/121
= Php 200,000 x 0.06 x 6/12
= Php 6,000

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January 1 to June 30 = 6 months or 6/12 of a year.
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 LICEO DE LA SALLE SENIOR HIGH SCHOOL
FIRST SEMESTER | QUARTER 2
AY 2021-2022 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

This is the prepared adjusting entry since in this scenario, Sana is the lender / creditor. Interest for
6 months is Php 6,000.

Analysis: The note receivable bears interest at 6% per annum. The interest will be received after
1 year on January 1, 2017. However, the note has already earned half year interest on June 30,
2016 in the amount of Php 6,000 although the interest has not been received. With this, an adjusting
journal entry is necessary to recognize the interest earned on the notes receivable for 6 months,
that is, from January 1 to June 30, 2016.

Example 2. During the afternoon of Nov 30, Del Mundo cuts one lawn, and he agrees to mail the
customer a bill for Php 2,500 which he does on December 2. Del Mundo makes an adjusting
journal entry in accordance with the revenue recognition principle.

Accounts Receivable 2,500

Lawn Cutting Revenues 2,500
To record lawn cutting revenues earned.

This example exhibits the accrual of unrecorded revenue assuming that the end of the period is
November 30.

Let’s Practice!

Exercises on Accruals:

Accrued Salaries

Worker’s salaries for the six-day week is Php 4,800, payable every Saturday. December 31 is a
Thursday. Provide the adjusting entry at year end.

Adjusting entry:

Salaries Expense 3,200

Salaries Payable 3,200
To record unpaid salaries at year end.

Computation:

Daily Rate: Php 4,800 / 6 days = Php 800 per day

Amount to be Accrued (Monday to Thursday): Php 800 x 4 days = Php 3,200

Note: The accrued amount is until Thursday only since it’s the end of the year (December 31).
Also, it will be assumed that the week starts on a Monday.

Accrued Utilities

Water bill received December 26 in the amount of Php 800 will be paid January 7 of the following
year. Provide the adjusting entry at year end.

Adjusting entry:

Utilities Expense 800

Utilities Payable 800
To record unpaid utilities at year end.

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 LICEO DE LA SALLE SENIOR HIGH SCHOOL
FIRST SEMESTER | QUARTER 2
AY 2021-2022 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

Accrued Interest

On March 1, 2021, King Co. borrowed Php 100,000 from Queens Bank signing a 6%, four-month
note. King Co. prepares the financial statements on June 30. Provide the adjusting entry at period
end.

Adjusting entry:

Interest Expense 2,000

Interest Payable 2,000
To record unpaid interest at year end.

Computation:

Interest = Principal x Rate x Time

Interest = 100,000 x 6% x 4/12
Interest = Php 2,000

Note: The end of the period is June 30. The time used is 4/12 because it covers the months March
1 – June 30.

Accrued Income

On November 1, Black Co. received a 90-day, Php 120,000, 10% note. Record the interest due on
the note at the end of December 31.

Adjusting entry:

Interest Receivable 2,000

Interest Income 2,000
To record interest income earned.

Computation:

Interest = Principal x Rate x Time

Interest = 120,000 x 10% x 2/12
Interest = Php 2,000

Note: The time used is 2/12 because it covers the months November 1 – December 31.

Source:

Ballada, W. (2020). Fundamentals of Accountancy, Business and Management 1 (2020 ed.).

DomDane and Made Easy Books.

Ong, F. (2016). Fundamentals of Accountancy, Business and Management 1 for Senior High
School (2016 ed.). Quezon City: C&E Publishing.