TIME PERIOD PRINCIPLE
 the life of the business is divided into
equal period.
 so that the coverage of each financial
statements of one’s business.
ACCOUNTING PERIOD
1) CALENDAR YEAR
 January 1 – December 31
 Generally used by the
business.
2) FISCAL YEAR
 Any 12-month period other
than those ending December
31.
 Examples: July 1 – June 30
3) NATURAL BUSINESS YEAR
 Accounting periods with
period with year-end at its
lax season.
 LAX SEASON – time that
revenue is decreasing.
ADJUSTING PROCESS - before preparing
financial statement you need first to update
the balance of one’s entity.
ACCRUAL BASIS
 Accounting that is used by the
companies.
 REVENUES are recorded when we
EARNED.
 EXPENSES are recorded when
INCURRED.
Not when:
 CASH is received. (revenue)
 CASH is paid. (expenses)
CASH BASIS
 REVENUE is recorded when CASH is
RECEIVED.
 EXPENSES is recorded when CASH is
PAID.
WHY ADJUST?
 Because of ACCRUAL BASIS OF
ACCOUNTING, accounts need to be
adjusted to report revenues and
expenses at the PROPER PERIOD.
ACCRUAL AND DEFERRALS
6 TYPES OF ADJUSTING ITEMS
 Type 1
Prepaid Asset/Asset Method
(DEFERRALS)
 Type 2
Unearned Revenue/Liability
Method (DEFERRALS)
 Type 3
Accrued Expense (ACCRUAL)
 Type 4
Accrued Revenue (ACCRUAL)
 Type 5
Expense Method (DEFERRAL)
 Type 6
Revenue Method (DEFERRAL)
DEFERRALS
Type 1 - ASSET METHOD/PREPAID ASSET
 Cash is paid in advance for expenses
not yet incurred.
 Initial entry involves recording a
prepaid asset.
Example: ABC Co. paid on October 1 30.000
for a 5-month rent in advance.
INITIAL JOURNAL ENTRY:
ADJUSTING ENTRY:
30,000 x 3/5 = 18,000
DEPRECIATION EXPENSE – systematic
allocation of expenses of particular assets
due to wear and tear.
METHODS OF DEPRECIATION
 SLM (Straight Line Method)
– most common.
Formula: COST – SALVAGE VALUE
USEFUL LIFE
Example: ABC Co. purchased equipment on
January 1, 2019 costing 110,000 with 10
year useful life and 10,000 salvage value.
Depreciation = 110,000 – 10,000
10
Depreciation = 10, 000
ADJUSTING ENTRY: ADJUSTING ENTRY:

ACCUMULATED DEPRECIATION – contra-asset account. 75,000 x 2/3 = 50,000

Financial Statement:
Equipment (COST) 110,000
Less: Accumulated Depreciation (10,000) ACCRUAL
Equipment, Net 100,000
 Recognizing revenues and expenses
Type 5 – EXPENSE METHOD when earned or incurred not when
 Cash is paid in advance for expenses cash is received or paid.
not yet incurred.  MATCHING PRINCIPLE – matching
 Initial entry involves recording an expenses to revenues.
expense account.
Type 3 – ACCRUED EXPENSES
Example: ABC Co. paid on October 1 30.000  Expense is already incurred but cash
for a 5-month rent in advance. is not yet paid.
INITIAL JOURNAL ENTRY:
Example: A company has 5 employees with
200 daily wage paid every Friday. The
ADJUSTING ENTRY: employees work 5 days a week. Assume
December 31 is Wednesday.
ADJUSTING ENTRY:
30,000 x 2/5 = 12,000

Type 2 – LIABILITY METHOD/ UNEARNED 3 Days x 200 x 5 Employees = 3,000

REVENUE
 Cash is received in advance for
revenues not yet rendered.
 Initial entry involves recording a
liability account.
Example: During December 1, 2020, ABC
Co. received 75,000 as advance payment
from customer good for 3 months services.
INITIAL JOURNAL ENTRY:
Example: On December 1, the company
borrowed 100,000 cash with 12% interest.
Principal interest mature after 6 months.
Formula: Interest = Principal x Rate x Time
Interest = 100,000 x 12% x 1/12 month
Interest = 1,000
ADJUSTING ENTRY:

ADJUSTING ENTRY:
Type 4 – Accrued Expense
 Revenue is already earned but cash is
75,000 x 1/3 = 25,000
not yet received.
Type 6 – REVENUE METHOD
 Cash is received in advance for Example: ABC Co. rendered services to
revenues not yet rendered. customer D worth 500,000 on account.
 Initial entry involves recording a ADJUSTING ENTRY:
revenue account.

Example: During December 1, 2020, ABC Assume that 500,000 is collected on

Co. received 75,000 as advance payment January 31 the following year:
from customer good for 3 months services.
INITIAL JOURNAL ENTRY: