Department of Education SPTVE

BUSINESS MATH 9
Introduction to Adjusting Entries
Second Quarter: Week 4 Module

ANTONIO L. BANDILLA JR.

Writer

LEONAIDA L. GUTIERREZ
Validator

DR. VALENTINA A. BALLESTEROS

Quality Assurance Team Chair

Schools Division Office – Muntinlupa City

Student Center for Life Skills Bldg., Centennial Ave., Brgy. Tunasan, Muntinlupa City
(02) 8805-9935 / (02) 8805-9940
 At the end of the lesson, the learner is expected to:

1. define adjusting entries;

2. discuss the different types of adjusting entries; and
3. appreciate the importance of adjusting entries in reporting certain
information and balancing books.

Directions: Read and understand the items being described below. Encircle the best answer.
1. Expenses that are already incurred, used or consumed but not yet paid .
A. prepaid expenses C. utilities expenses
B. accrued expenses D. unearned expense
2. Refers to income or revenue which are already earned but uncollected .
A. prepaid income C. service revenue
B. unearned revenue D. accrued income
3. Represents income that has been collected but not yet earned. It also refers to
customer’s advance payment.
A. accrued income C. sale revenue
B. unearned revenue D. service revenue
4. Concept in accounting wherein income is recognized when earned regardless when
it is collected and expense is recognized when incurred regardless when paid
.
A. accrual C. deferral
B. time period D. matching principle
5. Adjusting entries are necessary to .
A. record the sales of the period
B. balance the books at the end of the period
C. ensure the equality of the debits and credits
D. update the correct accounts at the end of the period

6. It is prepared after the entry of adjustments and posted in the ledger .

A. balance sheet C. income statement
B. adjusted trial balance D. unadjusted trial balance

7. The adjusting entry to record an accrued expense results in which of the following
types of accounts being debited and credited?
A. expense/asset
B. asset/revenue
C. asset/liability
D. expense/liability
 8. Refers to the allocation of the cost of the asset over its estimated useful life.
A. contra asset C. depreciation
B. consumption D. deterioration
9. Which of the following is NOT a type of adjusting entry?
A. prepaid expenses C. accrued expenses
B. unearned revenue D. unearned expenses

10. Which of the following does not have effects on the owner’s capital?
A. owner’s drawings
B. depreciation expense
C. payment of liabilities
D. adjusting entry for unearned revenue
11. Which of the following accounts is not included in the preparation of balance
sheet?
A. assets C. owner’s equity
B. liabilities D. revenue

12. The Becky Velo Co. balance sheet does not have accounts receivable or accounts
payable line terms. This would likely indicate .
A. cash basis of accounting
B. accrual basis of accounting
C. an inaccurate income statement
D. the need for an adjusting entry to owner’s equity

13. Adjusting entries are often made because some business events are not recorded
as they occur.
A. true C. sometimes
B. false D. never

14. Management decisions about future operations are often based on .

A. buying power C. external controls
B. internal controls D. financial information

15. The first step in preparing adjusting entries is to .

A. prepare journal
B. prepare balance sheet
C. prepare income statement
D. prepare unadjusted trial balance

Directions: Encircle the (9) important words related to the lesson. Hint: Words are inside
the box below.
Accrual Deferrals Prepayments
Accrued Revenue Depreciation Adjusting Entries
Accrued Expense Prepaid Expense Unearned Revenue
ADJUSTING ENTRIES – an adjustment to the journal entries you've already recorded.
Specifically, they ensure that the figures you have reported match the relevant
accounting periods.
Adjustments
Adjusting entries, or adjusting journal entries (AJE), are made
to update the accounts and bring them to their correct
balances.
In the accounting period, adjusting entries are made prior to
the preparation of the adjusted trial balance and the
production of financial statements.

Accrual vs. Cash Basis Accounting

The distinction between cash and accrual accounting is the timing of

sales and transactions reported in your accounts. Cash accounting
acknowledges sales and expenditures only when money is received or
₱ paid, while accrual accounting acknowledges profits when they are
earned and expenditures when they are billed (but not paid).

• Accrual Accounting - is a form of accounting where profits and expenditures are

reported when they are earned, regardless of whether the money is actually
collected or paid. For example, you will report revenue when the service is
rendered, rather than when you get paid. This approach is more widely used
than the cash basis accounting.
• Cash Basis Accounting - cash basis for accounting recognizes revenues when cash
is received and expenditures when they are paid. This approach does not
consider accounts receivable or accounts payable.

Types of Adjusting Entries

Generally, there are 4 types of adjusting entries. Adjusting entries are prepared for
the following:

1. Accrued Revenue – income earned but not yet received. If you earn revenue in
one accounting period, but do not received a payment for it, the business needs
to recognize accrued revenue (receivable).
2. Accrued Expenses – expenses incurred but not yet paid. They account for
expenses consumed in one accounting period, but remains unpaid.
3. Deferred Revenue – or unearned revenue, income received but goods are
undelivered and services are not yet rendered. For example, if the business
received an advance payment from a customer, it’s deferred revenue or
unearned revenue.
4. Prepaid Expenses – advance payment for future use.

Adjusting entries are also made for:

5. Depreciation Expenses – When a fixed asset is purchased by a business, it is
reported at cost (usually the cost is equal to the purchase price of the asset).
This cost is recorded as an asset, not an expense. Costs shall be allocated as
expenses for the periods in which the asset is used. This shall be done by
recording the depreciation expense.
6. Doubtful Accounts or Bad Debts, and other Allowances – is a contra-asset account
that is associated with accounts receivable and serves to reflect the true value
of accounts receivable. The amount represents the value of accounts
receivable that a company does not expect to receive payment for.

Composition of an Adjusting Entry

Adjusting entries affect at least one nominal account and one real account.
o Nominal account is an account whose balance is measured from period to
period. Nominal accounts include all accounts in the Income Statement, plus
owner's withdrawal. They are also called temporary accounts or income
statement accounts.
Example: Service Revenue, Salaries Expense, Rent Expense, Utilities Expense,
Drawing, etc.

o A real account has a balance that is measured cumulatively, rather than from
period to period. Real accounts include all accounts in the balance sheet. They
are also called permanent accounts or balance sheet accounts. Real accounts
include: Cash, Accounts Receivable, Rent Receivable, Accounts Payable,
Capital, and others.

1. ACCRUED REVENUE
When you generate revenue in one accounting period, but don’t recognize it until a
later period, you need to make an accrued revenue adjustment.

Example scenario
Your business makes custom tote bags. In February, you make 1,200 worth for a
client, then invoice them. The client pays the invoice on March 7.

You incurred expenses making the bags—cost of materials and labor, workshop rent,
utilities—in February. To accurately reflect your income for the month, you need to
show the revenue you generated. (Remember: Revenue minus expenses equals
income.)

First, you make an adjusting entry, moving the revenue from a “holding account”
(accrued receivables) to a revenue account (revenue.) Then, on March 7, when you
get paid and deposit the money in the bank, you move the money from revenue to
cash.

In your general ledger, the adjustment looks like this. First, during February, when
you produce the bags and invoice the client, you record the anticipated income.
Date Account Debit Credit
Feb. 27 Accrued Receivables 1, 200
Revenue 1, 200

Then, when you get paid in March, you move the money from accrued receivables to
cash.

Date Account Debit Credit

Mar. 7 Cash 1, 200
Accrued Receivables 1, 200

2. ACCRUED EXPENSES
They account for expenses you generated in one period, but paid for later.

Example scenario
Suppose in February you hire a contract worker to help you out with your tote bags.
You agree in advance to pay them P400 for a weekend’s work. However, they don’t
invoice you until early March.

Example:

In February, you record the money you’ll need to pay the contractor as an accrued
expense, debiting your labor expenses account.
Date Account Debit Credit
Feb. 21 Labor Expense 400
Accrued Expenses 400

In March, when you pay the invoice, you move the money from accrued expenses to
cash, as a withdrawal from your bank account.
Date Account Debit Credit
Feb. 21 Accrued Expenses 400
Cash 400
Directions: Match column A to column B. Write the letter on the space provided.

COLUMN A COLUMN B

1. A form of accounting where profits A. Accrual Accounting

and expenditures are reported when
they are earned, regardless of B. Unearned Revenue
whether the money is actually
C. Accrued Expenses
collected or paid.
2. Advance payments for future use. D. Cash Basis
3. In the accounting period, these are
made prior to the preparation of the E. Prepaid Expenses
adjusted trial balance and the
. 4. Inpcroom
du
e crteio
cenivoefdfibnu
atngco
iaoldsst atreem
uenndtesl.ivered F. Adjusting Entries
and services are not yet rendered.
5. Expenses incurred but not yet paid. They G. Deferred Revenue
account for expenses consumed in one
accounting period, but remains unpaid.
H. Depreciation Expenses
6. This approach recognizes revenues when
cash is received and expenditures when
I. Accrued Revenue
they are paid.
7. A contra-asset account that is associated
with accounts receivable and serves to J. Allowance for Doubtful
reflect the true value of accounts
receivable. K. Accounts
8. Another term for deferred revenue.
9. Cost is recorded as an asset, not an L. Service Revenue
expense.
10. Income earned but not yet received

ACCRUAL ACCOUNTING CASH BASIS ACCOUNTING

Recognizes revenue when it

is earned or rendered (e.g. Recognizes revenue when
when the service is cash is earned
completed)
Recognizes expenses when they
Recognizes spending when cash
are consumed (e.g. after
has been paid
you have received a bill)
Taxes are not paid for
Taxes paid on the money that has
money that has not yet
been owed
been received
 Directions: Check the box of the correct answers.

1. Adjusting entries, or adjusting journal entries (AJE), are made to update the
accounts and bring them to their correct balances .
TRUE
FALSE

2. The distinction between cash and accrual accounting is the timing of sales
and transactions reported in your accounts.
TRUE
FALSE

3. Cash accounting acknowledges sales and expenditures only when money is

received or paid.
TRUE
FALSE

4. Accrual accounting acknowledges profits when they are earned and

expenditures when they are billed (but not paid).
TRUE
FALSE
5. If you earn revenue in one accounting period, but do not received a payment
for it, the business needs to recognize accrued revenue (receivable).
TRUE
FALSE

6. Accrued Expenses is an expense incurred but not yet paid.

TRUE
FALSE

7. Prepaid Expenses are advance payment for future use.

TRUE
FALSE

8. Costs shall be allocated as expenses for the periods in which the asset is used.
TRUE
FALSE
9. Nominal account is an account whose balance is measured from period to
period.
TRUE
FALSE

10.A real account has a balance that is measured cumulatively, rather than from
period to period.
TRUE
FALSE
Directions: Read each question carefully. Encircle the best answer.
1. Reporting income when it is earned and expenses when they are incurred
.
A. trial balance C. accrual accounting
B. adjusting entries D. cash basis accounting
2. Changes records on a worksheet to update general ledger accounts at the end
of a period .
A. fiscal year C. adjustments
B. fiscal period D. adjusting entries
3. It is the reporting of income when the cash is received and expenses are paid
.
A. balance sheet C. accrual accounting
B. income statement D. cash basis accounting
4. Cash paid for an expense in on fiscal period that will be used in the future
.
A. assets C. liabilities
B. revenue D. prepaid expenses
5. Under accrual accounting, you recognize revenue when .
A. you received payment
B. you have earned the revenue
C. you have earned the revenue and received the payment
D. you have earned the revenue and received at least some of the
payment
6. In accrual accounting, you recognize an expense when you have .
A. paid the expense
B. incurred the expense
C. incurred the expense and paid for it
D. recorded payment of the expense on your books

7. It refers to the expenses that are already incurred, but have not yet been paid.
A. prepaid expenses C. accrued expenses
B. accounts expenses D. unearned expenses
8. Represent revenue already collected but not yet earned; also referred to
advances from customers.
A. sales revenue C. service revenue
B. accrued income D. unearned revenue
9. The allocation of the cost of the equipment over its estimated useful life refers
to
A. depreciation C. contra asset
B. consumption D. appreciation
10. Which of the following is not a type of adjusting entry?
A. prepaid expenses C. unearned revenue
B. accrued expenses D. unearned expenses
 11. Management decisions about future operations are often based on .
A. buying power C. external controls
B. internal controls D. financial information

12. Which of the following accounts is not included in the preparation of the balance
sheet?
A. assets C. owner’s equity
B. liabilities D. expense
13. Adjusting entries are often made because some business events are not recorded
as they occur .
A. true C. sometimes
B. false D. never

14. The first step in preparing adjusting entries is to .

A. prepare journal
B. prepare balance sheet
C. prepare income statement
D. prepare unadjusted trial balance

15. The Becky Velo Co. balance sheet does not have accounts receivable or
accounts payable line terms. This would likely indicate .
A. cash basis of accounting
B. accrual basis of accounting
C. an inaccurate income statement
D. the need for an adjusting entry to owner’s equity

Reference
1. Bryce Warnes — Reviewed by Janet Berry-Johnson, CPA on February 26,
2020. help@bench.co, 2011-2020. “Adjusting Entries: A Simple
Introduction” https://bench.co/blog/bookkeeping/adjusting-entries/ Date
Retrieved: September 11, 2020
Image: https://bench.co/blog/bookkeeping/adjusting-entries/ Date
Retrieved: September 11, 2020
2. Quizizz, 2017.
https://quizizz.com/admin/quiz/5a65d417a8a332531244d5c8/adjusting-
entries Date Retrieved: September 11, 2020
3. By Cameron McCool, October 2, 2019. “Cash Basis vs. Accrual Accounting
https://bench.co/blog/accounting/cash-vs-accrual-accounting/ Date
Retrieved: September 12, 2020

Answer key