4

ADJUSTING ENTRIES
for Fundamentals of Accountancy, Business and
Management 1
Senior High School (ABM)
Quarter 2 / Week 6
 FOREWORD

The Self-Learning Kit in Fundamentals of Accountancy,

Business and Management is designed for Grade 11 students
of ABM Strand who wish to learn the FABM which is
applicable to service and merchandising business.

This Self-Learning Kit is composed of the following:

Learning Objectives these are brief statements that describe

what students will be expected to learn from this SLK. These
statements correspond to the learning competencies on the
MELC or Most Essential Learning Competencies. These goals
or objectives would be met through reading the SLK
attentively and doing the reinforced exercises and problems
keyed to the learning objectives.

What Happened? (Pre-test) This section contains questions to

check the prior knowledge of the learners on the new topic.
What I Need to Know? (Discussion) In this portion, learners are
given a discussion and detailed explanations about the
topic that would lead to attaining the learning objectives.

What I Have Learned? (Evaluation/Post Test) This part is the

assessment or examination prepared that will correlate with
the learning objectives to evaluate the knowledge and skills
gained by the learners from this Self-Learning Kit (Week 7)
OBJECTIVES:
K: Learn the accounting terms introduced in this SLK;
S: Prepare adjusting entries and adjusted trial balance;
A: Appreciate the importance of preparing adjusting
entries and trial balance in having accurate financial
statements;

LEARNING COMPETENCY:

Prepare Adjusting Entries. (ABM_FABM11- IVe-j -39)

I. WHAT HAPPENED

PRE-TEST:

Matching Type

Instruction: Write the letter that corresponds to the correct answer. Write your
answers in your activity sheets/notebook.

1. Are changes to journal entries you've A. Adjusting entries

already recorded. Specifically, they make B. Accrued revenue
sure that the numbers you have recorded C. Accrued expense
match up to the D. Deferred revenue
correct accounting periods. E. Prepaid expense
F. Adjustments
2. Is revenue that has been recognized by the
business, but the customer has not yet been
billed.

3. Is an expense that has been incurred but

not yet paid.

4. Is used when your company receives a

payment in advance of work that has not
been completed.

5. Is a type of asset on the balance sheet

that results from a business making
advanced payments for goods or services
to be received in the future.

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II. WHAT YOU NEED TO KNOW

At the end of the accounting period, some accounts in the general ledger
would require updating. The journal entries that bring the accounts up to
date are called adjusting entries. One purpose of adjusting entries is for
income and expenses to be reported in the correct period. Adjusting entries
ensure that both the revenue recognition and matching principles are
followed.

Why are adjusting entries important?

1. Revenue will appear too low
If you earned revenue in the month that has not been accounted for yet,
your financial statement revenue totals will be artificially low. For instance, if
Laura provided services on January 31 to three clients, it’s likely that those
clients will not be billed for those services until February.

If Laura does not accrue the revenues earned on January 31, she will not be
abiding by the revenue recognition principle, which states that revenue must
be recognized when it is earned.

2. Expenses may be understated

As important as it is to recognize revenue properly, it’s equally important to
account for all of the expenses that you have incurred during the month. This
is particularly important when accruing payroll expenses as well as any
expenses you have incurred during the month that you have not yet been
invoiced for.

For example, your computer crashes in late February. A computer repair

technician is able to save your data, but as of February 29 you have not yet
received an invoice for his services.

In order to account for that expense in the month in which it was incurred,
you will need to accrue it, and later reverse the journal entry when you
receive the invoice from the technician.

3. Financial statements will not be accurate

At the end of each month, you should run financial statements: a balance
sheet, profit and loss or income statement, and a cash flow statement. It’s
important that these statements reflect the true financial position of your
company.

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Review on Revenue Recognition and Matching Principle

Revenue Recognition – accounting standards require that revenue is

recognized when it is earned and the amount can be measured reliably.

To illustrate:
Assume that you are preparing the financial statements for Feb 2016.
Matapang Computer Repairs rendered services amounting to PHP25,000 for
the repair of the computer units of Mr. Tamad on Feb 26, 2016. However, the
payment for these services of Matapang will be made on Mar 15, 2016.

Question: When should you recognize the PHP25,000 as revenue or income, in

February or March?

Answer: Applying the revenue recognition principle, it should be reported as

revenue for February 2016.

Assume that you are preparing the financial statements for February 2016. On
February 28, 2016, Matapang Repairs received payment from Mr. Tamad
amounting to PHP25,000. This payment is for the repair of the computer units
of Mr. Tamad on March 5, 2016.

Question: When should you recognize the PHP25,000 as revenue or income, in

February or March?

Answer: Applying the revenue recognition principle, it should be reported as

revenue in March 2016. Take note that since the service will be rendered in
March, the revenue should also be earned in March. What about February
2016? The amount is recorded as a liability because Matapang Repairs has
the obligation to render this service in the future.

Matching Principle - this principle directs a business to report an expense on

its income statement within the same period as its related income.

To illustrate:
Assume that you are preparing the financial statements for February 2016.
The business gives a commission of 10% service income to its employees. The
commission is paid the following month. On February 2016, the total service
income for the month is PHP100,000. Thus, the employees are entitled to a
commission of PHP10,000. This amount will be paid on March 12, 2016.

Question: when should the commission expense be recorded in the book of

accounts of the business, in March or in February? Applying the matching
principle, the answer is in February.

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Adjusting entries are made at the end of each accounting period. Adjusting
entries make it possible to report correct amounts on the statement of
financial position and on the income statement. All adjusting entries affect at
least one income statement account and one statement of financial position
account. Thus, an adjusting entry will always involve an income or an
expense account and an asset or a liability account.

How to prepare adjusting entries

Each adjusting entry will be prepared slightly differently. Here are examples
on how to record each type of adjusting entry.

Presented here is the Unadjusted Trial Balance of Matapang Computer

Repairs

MATAPANG COMPUTER REPAIRS

Unadjusted Trial Balance
February 29, 2016
Account Title Debit Credit
Balance Sheet Accounts
Cash 181,000
Accounts Receivable 15,000
Office Equipement 25,000
Accounts Payable 5,000
Matapang Capital 200,000

Income Statement Accounts

Service Revenue 25,000
Supplies Expense 5,000
Salaries Expense 4,000

230,000 230,000
This now represents the first two money columns in the worksheet

There are five basic sources of adjusting entries:

1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred Income or unearned income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets

#1 Depreciation. Depreciation is a method of allocating the cost of an asset

to an expense over the accounting periods that make up the asset’s useful
life. Examples of assets subject to depreciation are: Store, Office, Building,
and Transportation equipment. These types of assets lose their ability to

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provide useful service as time passes. Depreciation can also be referred to as
the decrease in the usefulness of
these types of assets. Take note that Land is not subject to depreciation
because the value of land mostly increases as time passes.

Exercise on Adjusting entries to record Depreciation

The cost of the equipment is PHP25,000. It was estimated to have a useful life
of five years. It is estimated that after five years, the office equipment can be
sold at a scrap value of PHP1,000. The company uses the straight line method
of depreciation.
Proper accounting procedures dictates that the cost of PHP25,000 should be
spread over five years. There are several methods to compute the amount of
depreciation. The simplest is the straight line method.

The formula in Annual Depreciation:

(Acquisition Cost – Salvage or Residual Value) / Useful Life.

Applying this formula to the exercise:

Annual Depreciation = (25,000-1,000) / 5 = PHP4,800
If the accounting period being reported by Matapang is for the month
ending February 29, 2016, the adjusting entry to record this depreciation in
the books of Matapang is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/16 Depreciation Expense 200
Accumulated Depreciation-Office Eqpt 200

The depreciation expense of PHP200 was derived by computing the monthly

depreciation of PHP400 (Annual Depreciation of PHP4,800/12 months) and
multiplying the PHP400 by one-half since the equipment was acquired in the
middle of February.

#2 Deferred Expenses or Prepaid Expenses. These are items that have been
initially recorded as assets but are expected to become expenses over time
or through the operations of the business.

Exercise - Adjusting entries to record deferred expenses or prepaid expenses

Recall that on February 19, 2016 Matapang purchased PHP5,000 worth of
office supplies on account. By the end of the month, PHP2,000 worth of these
supplies are still unused. The February 19, 2016 entry to record the purchase
on the account of office supplies was already posted to the general ledger
and included in the balances, as shown in the unadjusted trial balance
above.

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The entry was shown only for illustration purposes.

General Journal
Date Account Title and Explanation Ref Debit Credit
2/19/16 Supplies Expense 5,000
Accounts Payable 5,000
To record the purchase of office on
account

2/29/16 Supplies 2,000

Supplies Expense 2,000
To set-up the value of unused supplies

The “Supplies” account debited on February 29, 2016 above is an asset

account and represents the value of supplies unused as of the end of
February 2016. If these journal entries are posted to the general ledger, the
following should be the balance of each account:

Account Title Debit Credit

Supplies 2,000
Accounts Payable 5,000
Supplies Expense 3,000

The alternative entries to record the above transactions are:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/19/16 Supplies 5,000
Accounts Payable 5,000
To record the purchase of office
supplies

2/29/16 Supplies Expense 3,000

Supplies 3,000
To set-up the value of unused supplies

If these entries are posted in the general ledger, the following should be the
balances of each account:

Account Title Debit Credit

Supplies 2,000
Accounts Payable 5,000
Supplies Expense 3,000

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Notice that even with the different approaches in recording the transactions
in the journal entries, the balances in the general ledger will always be the
same whether you used the first approach or the second approach.

#3 Deferred Income or Unearned Income. These are items that have been
initially recorded as liabilities but are expected to become income over time
or through the operations of the business.

Exercise – Adjusting entries to record deferred or unearned income

On February 15, 2016 Matapang entered into a contract with Makisig to
maintain the computers of Makisig for two months starting on February 15,
2016 up to April 15, 2016. On the same date, Makisig paid the total contract
amount of PHP40,000 in full.

The entries to record and adjust the books are:

In the February 29, 2016 entry above, as of end of February 2016, Matapang
has already earned the service revenue for the first 15 days, thus an adjusting
entry is recorded

General Journal
Date Account Title and Explanation Ref Debit Credit
2/15/16 Cash 40,000
Unearned Service Revenue 40,000
To record receipt of full payment for
the two-month service contract with
Makisig

2/29/16 Unearned Service Revenue 10,000

Supplies Expense 10,000
To set-up service income earned from
Feb 15-29 2016; P40,000 x (1/2 month /2
months)

#4 Accrued Expenses or Accrued Liabilities. These are items of expenses that

have been incurred but have not been recorded and paid.

Exercise – Adjusting entries to record Accrued expenses or accrued liabilities

On February 29, 2016, Matapang received the electric bill for the month of
February amounting to PHP3,800. Matapang will pay this bill on March 2016.
The electric bill represents the cost of electricity used (or incurred) for
February. Although the said bill is still unpaid and thus was not recorded, the
matching principle and accrual basis of accounting dictates that the same
should be recorded in February. Otherwise, your expense will be understated
and thus the company will be reporting an overstated income (or an
erroneous income). Needless to say, erroneous information may lead to
wrong decisions.

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The entry to record the accrual of this expense is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/16 Supplies Expense 3,800
Accounts Payable 3,000
To accrue the cost of electricity
incurred for the month of February.

#5 Accrued Income or Accrued Assets

These are income items that have been earned but have not been recorded
and paid by the customer. In short, these are receivables of the business.

Exercise – Adjusting entries to record accrued income or accrued assets

On February 28, 2016, Matapang repaired the computer of Pedro for
PHP15,000. Pedro was on an out of-town trip so he could not pay Matapang .
He told Matapang that he will pay for their services on March 1, 2016.
Matapang has already earned the PHP15,000 but was not paid as of the end
of February 2016. Therefore, an income should be properly recognized in
February 2016 for this transaction. The entry to record this is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/16 Accounts Receivable 15,000
Service Income 15,000
To record unpaid services already
rendered

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 Enter all adjustments to the worksheet

Matapang Computer Repairs

Worksheet
For the month ending Unadjusted Adjustments Adjusted Trial
February 29, 2016 Trial Balance Balance Position
DR CR DR CR DR CR
Balance Sheet Accounts
Cash 221,00 221,00
0 0
Accounts Receivable 15,000 15,000 30,000
Supplies 2,000 2,000
Office Equipment 25,000 25,000
Accum. Depm-Office Eqpt 200 200
Accounts Payable 5,000 5,000
Utilities Payable 3,800 3,800
Unearned Service Revenue 40,00 10,000 30,000
0
Matapang Capital 200,0 200,000
00

Income Statement Accounts

Service Revenue 25,00 25,000 50,000
0
Supplies Expense 5,000 2,000 3,000
Salaries Expense 4,000 4,000
Utilities Expense 3,800 3,800
Depreciation Expense 200 200
270,00 270,0 31,000 31,000 289,00 289,000
0 00 0
Note: The entry to record the receipt of PhP40,000 from Makisig on February 15, 2016 was reflected in
the unadjusted trial balance columns.

How VITAL are adjusting entries?

In order to have an accurate picture of the financial health of your business,

you need to make adjusting entries. How can you convince a potential
investor to invest in your business if your financial statements are inaccurate?

How can you prepare financial projections for the coming months if you
don’t have an accurate picture of what your monthly revenue
and operating expenses are?

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III. WHAT HAVE I LEARNED

EVALUATION/POSTTEST
You are expected to have read and studied the SLK attentively; In this
part, I guess you are now ready to answer the assessment. Write your
answers on your activity sheets/notebook.

A. Matching Type (1-5)

Instruction: Write the letter that corresponds to the correct answer.

1. Are changes to journal entries you've A. Prepaid expense
already recorded. Specifically, they make B. Deferred revenue
sure that the numbers you have recorded C. Accrued expense
match up to the D. Accrued revenue
correct accounting periods. E. Adjusting entries
F. Deferred expense
2. Is revenue that has been recognized by the
business, but the customer has not yet been
billed.

3. Is an expense that has been incurred

before it has been paid.

4. Is used when your company receives a

payment in advance of work that has not
been completed.

5. Is a type of asset on the balance sheet

that results from a business making
advanced payments for goods or services
to be received in the future.

B. True or False. Write TRUE if the statement is correct and FALSE if

otherwise. (6-10)

1. In order to have an accurate picture of the financial health of your

business, you need to make adjusting entries.

2. As a business owner, you cannot convince potential investors to invest

in your business if your financial statements are inaccurate.

3. You can prepare accurate financial projections for the coming

months even if you don’t have an accurate picture of what your
monthly revenue and operating expenses are.

4. Preparation of adjusting entry is part of the accounting cycle.

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 5. Both accrued expenses and accounts payable are accounted for
under “Current Liabilities” on a company's balance sheet.

C. Preparation of Adjusting Entries.

NESTOR MARTEL SHOPPE

Unadjusted Trial Balance
December 31, 20CY

ACCOUNT TITLE DEBIT CREDIT

Cash P 78,400
Merchandise Inventory 10,000
Accounts Receivable 8,900
Prepaid Insurance 6,000
Office Supplies 2,500
Furniture and Equipment 75,000
Accounts Payable P 40,000
Loan Payable 60,000
Nestor Martel , Capital 60,000
Nestor Martel, Drawing 12,000
Sales 44,400
Salary Expense 5,500
Advertising Expense 3,600
Utilities Expense 1,500
Miscellaneous Expense 1,000
Total P 104,400 104,400

Additional information:
1. The one-year P 6,000 insurance paid was effective December 1.
2. Office rental of P 4,000 for the month of December was still unpaid.
3. Interest of 18% per annum on P 60,000 bank loan granted on
December 11 has accrued.
4. Advertising placement of P 3,600 for three months was effective on
Dec. 1
5. Fees of P 5,000 collected in advance on December 30 will be for
services to to be rendered next year.
6. Office supplies unused at the end of the month amounted to P 1,600.
7. Furniture and equipment are estimated to have a useful life of ten
years. It was decided to provide one-month depreciation for
December.

Required:
a. Prepare the necessary adjusting entries.
b. Prepare a worksheet indicating the unadjusted trial balance,
adjustments and the adjusted trial balance

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12
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 REFERENCES

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QIABBDMgQIABBDMgQIABAKMgQIABAKMgQIABAKMgQIABAKMgQIABAKMgQ
IABAKOgcIABDJAxBDOggIABDJAxCRAjoFCAAQkQI6BwgAELEDEEM6AggAOggIA
BCxAxCRAjoHCAAQyQMQCjoGCAAQFhAeUMOlAViZ1AFgtP8BaAJwAXgBgAH7Ao
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AAQsQMQgwEQyQNQrRNYsiZgrUJoAHAAeACAAZECiAHwDJIBBTAuNC40mAEAo
AEBqgEHZ3dzLXdpeg&sclient=psy-ab

3. https://www.fool.com/the-blueprint/adjusting-entries/

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04795582013&source=hp&ei=vTynX8bcO67xhwOQjpiwBA&q=accrued+revenue+meaning
&oq=ACCRUED+REVENUE&gs_lcp=CgZwc3ktYWIQARgBMggIABCxAxDJAzICCAAy
AggAMgIIADICCAAyAggAMgIIADICCAAyAggAMgIIADoLCC4QsQMQyQMQkwI6CA
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7. Harina, Ricardo M; (2007). College 1 Accounting: Cacho Hermanos, Inc.,

Pines cor Union Sts. Mandaluyong City

8. FABM1 TG

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ANSWER KEY
WORKSHEET

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 DEPARTMENT OF EDUCATION
SCHOOLS DIVISION OF NEGROS ORIENTAL

SENEN PRISCILLO P. PAULIN, CESO V

Schools Division Superintendent

FAY C. LUAREZ, TM, Ed.D., Ph.D.

OIC - Assistant Schools Division Superintendent
Acting CID Chief

NILITA L. RAGAY, Ed.D.

OIC - Assistant Schools Division Superintendent

ROSELA R. ABIERA
Education Program Supervisor – (LRMS)

ARNOLD R. JUNGCO
Education Program Supervisor – (SCIENCE & MATH)

MARICEL S. RASID
Librarian II (LRMDS)

ELMAR L. CABRERA
PDO II (LRMDS)

DONNA DIAZ-FRANCISCO
Writer

IVANNE RAY A. GIDOR

Lay-out Artist
_________________________________

ALPHA QA TEAM
RICKLEOBEN V. BAYKING
LITTIE BETH S. BERNADEZ
MERCYDITHA D. ENOLPE
RONALD TOLENTINO

BETA QA TEAM
RICKLEOBEN V. BAYKING
LITTIE BETH S. BERNADEZ
GIL S. DAEL
MARIA SOLEDAD M. DAYUPAY
MARIA ACENITH D PASTOR
JEE LIZA T. INGUITO
MERCYDITHA D. ENOLPE
RONALD G. TOLENTINO
DISCLAIMER

The information, activities and assessments used in this material are designed to provide accessible learning modality to the teachers
and learners of the Division of Negros Oriental. The contents of this module are carefully researched, chosen, and evaluated to comply with the
set learning competencies. The writers and evaluator were clearly instructed to give credits to in formation and illustrations used to substantiate
this material. All content is subject to copyright and may not be reproduced in any form without expressed written consent from the division.

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 SYNOPSIS AND ABOUT THE AUTHOR

This SLK aims to present ANSWERS KEY

a thorough and clear ANSWERS TO PRE TEST:
discussion on the topic, 1.A 2.B 3.C 4.D 5.E
Adjusting Entries.
ANSWER TO EVALUATION A. (MULTIPLE CHOICE)

Importance, Types and 1.E 2.D 3.C 4.B 5.A

Steps of Adjusting Entries are
ANSWERS TO EVALUATION B. (TRUE OR FALSE)
emphasized in this kit.
1.TRUE 2. TRUE 3. FALSE 4. TRUE 5. TRUE
This SLK will surely help ANSWERS TO EVALUATION C. (ADJUSTING ENTRIES)
you to understand the topic.

AUTHOR
She graduated Bachelor of Business
Administration major in Management at
Silliman University in the year 1998.

A licensed Professional Teacher and

Trainer’s Methodology Certificate (TMC1) holder
in Bookkeeping. She is currently teaching at
Sumaliring High School, Sumaliring, Siaton, Negros
Oriental
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