CHAPTER 5

ACCOUNTING CYCLE 2:
ADJUSTING ENTRIES, ADJUSTED
TRIAL BALANCE, WORKSHEET

ACC01a – FINANCIAL
ACCOUNTING
LEARNING OBJECTIVES:
Define adjusting journal entries and their importance
Describe the different types of adjusting journal entries
Make the required adjusting journal entries for the different accounts
To know the purpose of the worksheet
Be familiar with the preparation of a worksheet
Appreciate the worksheet as a working paper to facilitate the accountant’s
job
ADJUSTING JOURNAL ENTRIES
- are entries used to update the accounts prior to the preparation of
Financial Statement because they affect more than one accounting period.
- Transactions are apportioned properly between the accounting period
affected. The accounts affected are adjusted so that there would be no
overstatement or understatement of balance sheet items and income
statement items.
NEED FOR ADJUSTMENTS

To reflect the proper amounts of revenues realized and expenses

incurred during a period.
To show a fairly measure of the assets, liabilities and owner’s equity
ACCOUNTS THAT NEED TO BE ADJUSTED
1. Adjustment for the expiration of prepayments of expenses.
2. Adjustment for the realization of income collected in advance
3. Adjustment for the accrual of expense.
4. Adjustment for the accrual of income.
5. Provision for bad debts.
6. Provision for depreciation.
EXPIRATION OF PREPAYMENT OF
EXPENSES
Prepaid expenses
- are expenses paid in advance.
- At the time of payment, the account is an asset and as it is used it becomes an
expense.
- The adjusting entry for this account depends on the original entries made when it
was paid.
There are two methods to be used:
1. ASSET METHOD
- Under this method, the original entry made is charged to an asset
account.

2. EXPENSE METHOD.
- Under this method, expense account is charged when payment is made
UNEARNED INCOME
Unearned income arises when payment is received before goods are delivered or before
services are rendered.
1. INCOME METHOD
- Under this method, income account is credited when cash is received.

2. LIABILITY METHOD
- Under this method, a liability account is credited upon receipt of cash.
ACCRUAL OF EXPENSES
Accrued expenses
- are those expenses already incurred during the period but are not yet
paid or recorded.
ACCRUAL OF INCOME
Accrued income
- arises when goods have been delivered oi services have
been rendered but no amount of payment have been collected
or if there is payment, such collection is not yet recorded.
PROVISION FOR BAD DEBTS
BAD DEBTS
- loss from uncollectible accounts

ADJUSTING ENTRY:

or

Uncollectible Accounts Php XXX

Allowance for Uncollectible Accounts Php XXX
METHODS OF ESTIMATING THE PROBABLE LOSSES
FROM BAD DEBTS:
1. Increasing the accumulated allowance for bad debts by a certain
percentage of the accounts receivable.

2. Increasing the accumulated allowance for bad debts to a certain

percentage of accounts receivable.
PROVISION FOR DEPRECIATION
Assets which are relatively permanent in nature are fixed assets. They are
used by the business in its operation and are not intended for sale. The
value of these assets, except land decreases as time passes by due to the
following reasons:
1. wear and tear from operations
2. inadequacy and obsolescence
DEPRECIATION FOR A FRACTIONAL PERIOD
If the purchase date of the asset does not coincide with the beginning of
the accounting period, such asset should be depreciated on a fraction of a
period.
SUMMARY OF FORMATS OF ADJUSTING ENTRIES :
WORKSHEET
 On December 31, the end of the accounting period, the following data were taken:
1. An actual count of repair supplies showed a balance of P850.
2. Repair equipment are depreciated at 10% per annum.
3. Furniture and fixtures are estimated to have a useful life of 5 years while service
truck has a useful life of 10 years. Both assets were bought on September 1 of the
current year.
4. A 10% interest has accrued on the note payable.
5. Of the income received, P900 is applicable to the next accounting period.
6. Accrual of expenses: salaries and wages P-250; rent P500.
7. The balance of the advertising expense account represents payment for five months.
Paid on September 1 of the current year.

Required:
a. Adjusting Entries
b. Adjusted Trial Balance
c. Worksheet