ADJUSTING ENTRIES

(UNIT III)
AGMGT 2115

Ms. Mariss DO. Inducil

Instructor
ACCRUAL BASIS OF ACCOUNTING
It is when accountants record revenues as they are earned and record
expenses as they are incurred
This is more realistic picture of expenses.
 The effect of transactions and other events are recognized when they
occur and not as cash is received nor paid.
Financial statements prepared using accrual basis inform users not
only of past transactions involving the payment and receipt of cash, but
also obligation to pay cash in the future and cash to be received in the
future.
CASH BASIS OF ACCOUNTING
Accountants does not record a transaction until cash is received or
paid.
Cash receipts are treated as revenue and cash payments as
expenses.
Revenue is recorded when received in cash and expenses recorded
in the period in which cash payment is made.
 If cash basis is used:
Revenues will be recorded on June 10.
A client paid the Sea Wind Resort in
Expenses is incurred on August15.
Boracay Island P7000 on June 10, 2017
for one-day super deluxe
accommodation on August 15, 2017.
Under accrual basis, the receipt of
P7000 will be considered as revenues In accrual basis is used:
when the business has rendered its  No revenue or expense will be reported.
services on August 15.  Accrual basis provide a better measure of
the results of transaction.
These are journal entries required to update the accounts before
financial statements are prepared, at the end of the accounting
period.

Accountants make adjusting entries to reflect in the accounts

information on economic activities that have incurred but have not
yet been recorded.
It assign revenues to the period in which they are earned, and
expenses to the period in which they are incurred.

Adjustments ensure that the revenue recognition and expense

recognition principles are followed.

Accounting Period could be a month, a semester, a calendar year, or

a fiscal year.
 End of the period – adjusting entries recorded in the
The General Journal General Journal

_____________ xx
____________ xx

Prepaid
Expenses
Unearned
Revenues

Revenues Payables Expenses

DEFERRALS

o Postponement of the recognition of an expense already paid but

not yet incurred, or revenue already collected but not yet earned.
o Cases of Deferrals:
1. Allocating assets to expense to reflect expenses incurred during the accounting
period.
2. Allocating revenues received in advance to revenue to reflect revenues earned
during the accounting period.
ACCRUALS

o Recognition of an expense already incurred but unpaid, or revenue

earned but uncollected.
o Cases of Accruals:
1. Accruing expenses to reflect expenses incurred during the accounting period that
are unpaid and unrecorded.
2. Accruing revenues to reflect revenues earned during the accounting period that
are uncollected and unrecorded.
DEFERRALS:
This adjustment deals with an amount already recorded in a
balance sheet account, the effect is decrease in balance sheet
account and increase in income statement account.
ACCRUALS:
This adjustment deals with an amount unrecorded in any
account, the effect is increase both the balance sheet and an
income statement account.
Accrued Revenues Accrued Expenses

Prepaid Expenses Unearned Revenue

Depreciation
Expense
 ACCRUED REVENUES
Revenue earned but not yet  Rule:
recorded nor received Debit an asset (receivable)account
Credit a revenue account
Example 1:
Ars, a wedding organizer agreed to arrange a rush but simple civil wedding for a couple in
the afternoon of Oct 31.The entity intended to charge fees of P7,500 for the services, which
is earned but unbilled. This should be recorded as:
Debit Credit
Accounts Receivable 7,500
Consulting Revenue 7,500

:To record the accrued revenue for the month of October

 ACCRUED REVENUES

Example 2:
An interest income was earned for the month, P500 is still unrecorded

Debit Credit
Accounts Receivable 500
Interest Income 500

:To record the accrued interest for the month.

 ACCRUED EXPENSE
Expenses already incurred but  Rule:
not yet paid and recorded by Debit an expense account
transaction entries. Credit a liability account
Examples of expenses incurred before payment is made:
salaries, utilities, interest, electricity

Example 1: Rent expense incurred for the month of October, P5000 is still unrecorded.
This should be recorded as:
Debit Credit
Oct 31 Rent Expense 5,000
Rent payable 5000

:To record the accrued rent for the month of October.

 ACCRUED EXPENSE
Example 2: Accrual Salaries
The ABC Company compensate its employee with P7,800 per month of P300 per
day. But, at the month end, the two employees have worked for 3 days (October
29,30,31) beyond the last pay period. The salary for these 3 days is rightfully an
expense for the month of October. The transaction must be reflected as:

Debit Credit
Salaries Expense 1,800
Salaries Payable 1800

:To record the accrued salaries for the month of October.

 ACCRUED EXPENSE
Example 3: Accrual Interest
On October 2, Mr. Reyes borrowed P210,000 from a bank. He issued a
promissory note that carried a 20% interest per annum. Both the interest and
principal will be payable in one year. Thus, the interest expense incurred on this
during the month P3,500. The adjusting entries for this transaction is:

Debit Credit
Interest Expense 3,500
Interest Payable 3,500

:To record the accrued interest for the month of October.

 PREPAID EXPENSE/PREPAID ASSET
 Rule:
Asset purchased in advance that will
benefit one or more accounting Debit an owner’s equity account
periods Credit an asset account
Examples of prepaid expenses or asset paid in advance are:
rent, insurance, supplies, depreciation
Example 1: Prepaid Rent
On January 1, Ars Wedding Organizer paid P10,000 for two months rent in advance. This
expenditure resulted to an asset consisting of the right to occupy the office for two months. By
January 31, half of the asset had expired and should be treated as expense. The adjusting of entries
must be:
Debit Credit
Jan 31 Rent Expense 5,000
Prepaid rent 5000
:To record the expiration of one month rent on January.
 PREPAID EXPENSE/PREPAID ASSET
Example 2: Prepaid Insurance
Ars Wedding acquired a one-year comprehensive insurance coverage on the service
vehicle and paid P15,000 premiums. In a manner similar to prepaid rent, prepaid
insurance offers protection that expires daily. The monthly prepaid insurance incurred by
the Ars Wedding is P1,250.
Debit Credit
Insurance Expense 1,250
Prepaid rent 1,250

:To record the expiration of one month insurance

 SUPPLIES
Example : Supplies
Ars Wedding purchased supplies on January 8 amounting to P18,000. During the month,
the entity used supplies in performing their service. At the end of the accounting period,
they conduct a physical count for the supplies. It is shown in the inventory that P15, 000 are
still on hand. To adjust the account, the entries must be:
Debit Credit
Supplies Expense 3,000
Supplies 3, 000

:To record the used supplies at the end of January

UNEARNED REVENUES/ DEFERRED REVENUE
Payment received in advance for the goods  Rule:
not yet delivered or services not yet Debit liability account
performed. Therefore, considered as Liability. Credit an owner’s equity account

Example :
On January 15, Ars Wedding received P10,000 as advance payment for referrals made. Assume that
by the end of the month, one of the three couples referred has already married and an amount of
P4,000 has been realized.
Debit Credit
Unearned Referral Revenues 4,000
Referral Revenues 4, 000

:To record the recognition of income where cash is received in advance

UNEARNED REVENUES/ DEFERRED REVENUE
Example 2:
MAD Boarding House received P9,000 on January 3 as an advance payment for three
months. The rental fee monthly is amounted to P3,000. To adjust the entries for the month
of January, the transaction must be :

Debit Credit
Unearned Rental Revenue 3,000
Rental Revenues 3, 000

:To record the rental revenue earned for the month of January
 DEPRECIATION EXPENSE
It is allocated for the used of assets  Rule:
that depreciates such as building, Debit an owner’s equity account
equipment, machinery etc Credit and asset account

Straight Line Method- common method used to compute depreciation

FORMULA:
Depreciation = Original Cost – Salvage Value
Lifespan
 DEPRECIATION EXPENSE

Example : Debit Credit

Ars Wedding purchased a new vehicle Depreciation expense 4, 000

amounting to P420,000 that could last for A/D: Vehicle 4,000
7 years with a salvage value of P84,000.
To record the adjusted monthly :To record the monthly depreciation expense
depreciation of the vehicle, the transaction of the company
must be :
 Account Title Account Balance (P) Other data:
Cash 8,105 a. The unexpired insurance is a one year insurance policy.
Unexpired insurance 4,080 Adjusting Entries:
Office supplies 405 Jan 31 Insurance expense 340
Office equipment 7,200 Unexpired insurance 340
Notes payable 3,000 : To record the expired portion of the insurance policy
Unearned storage 1,350 b. The amount of office supplies on hand, based on the
fees physical count on Jan 31, was 55.
De Vera, Capital 11,795
De Vera, Withdrawals 450
Adjusting Entries:
Jan 31 Office supplies expense 350
Storage fees earned 8,850
Office supplies 350
Rent expense 1,800
: To record the used portion of the office supplies
Telephone expense 135
Salaries expense 2,820
 Account Title Account Balance (P) c. A P3,000 one year note payable was signed on January
Cash 8,105
1, with interest at 18% a year.
Unexpired insurance 4,080 Adjusting Entries:
Office supplies 405 Jan 31 Interest expense 45
Interest payable 45
Office equipment 7,200
: To record the accrued expense for the month of January.
Notes payable 3,000
Unearned storage 1,350 d. The useful life of the office equipment was estimated at
fees
5 years.
De Vera, Capital 11,795
Adjusting Entries:
De Vera, Withdrawals 450
Jan 31 Depreciation expense 120
Storage fees earned 8,850 A/D: office equipment 120
Rent expense 1,800 : To record the depreciation expense for the month.
Telephone expense 135
Salaries expense 2,820
 Account Title Account Balance (P) e. Certain clients chose to pay several months’ storage fees
Cash 8,105 in advance. It was determined that P230 of such fees as
Unexpired insurance 4,080 still unearned as of January 31.
Office supplies 405 Adjusting Entries:
Office equipment 7,200 Jan 31 Unearned storage fees 1120
Notes payable 3,000 Storage fees earned 1120
Unearned storage 1,350 : To record the storage fees earned.
fees f. Several clients neglected to send in storage fees
De Vera, Capital 11,795 amounting to P3,850 for the month of January. These
De Vera, Withdrawals 450 amount have not been recorded but are considered
Storage fees earned 8,850
collectibles.
Adjusting Entries:
Rent expense 1,800
Jan 31 Storage fees receivable 3850
Telephone expense 135
Storage fees earned 3850
Salaries expense 2,820
: To record the accrued storage fees earned.
 Account Title Account Balance (P) g. Salaries earned by employees but not yet paid amounted
Cash 8,105 to P1500
Unexpired insurance 4,080
Adjusting Entries:
Office supplies 405 Jan 31 Salaries expense 1500
Office equipment 7,200 Salaries payable 1500
Notes payable 3,000 : To record the accrued salaries expense for the month of
Unearned storage 1,350 January.
fees
De Vera, Capital 11,795
De Vera, Withdrawals 450
Storage fees earned 8,850
Rent expense 1,800
Telephone expense 135
Salaries expense 2,820
Prepare the adjusting entries for each of the following situations: The last day
of the accounting period is December 31.
a. The payment of the P19,000 insurance premium for two years in advance
was originally recorded as prepaid insurance. One year of the policy has
now expired
b. All employees earn a total of P10,000 per day for five-day week
beginning on Monday and ending Friday. They were paid for the
workweek ending Dec.26. They worked on Monday, Dec.29, Tuesday,
Dec.30 and Wednesday, Dec.31.
c. The supplies account had a balance of P4,480 on Jan.1. During the
year,P11,000 of supplies were bought. A year-end inventory showed that
P6,400 worth of supplies are still on hand.
d. Equipment costing P588,000 has a useful life of five years with an
P80,000 salvage value at the end of five years. Record the depreciation for
the year.
ANSWER:
a. The payment of the P19,000 insurance premium for two years in advance
was originally recorded as prepaid insurance. One year of the policy has
now expired.
Debit Credit
Dec 31 Insurance expense 9,500
Prepaid insurance 9,500
:To record the expired portion of the insurance policy
ANSWER:
b. All employees earn a total of P10,000 per day for five-day week beginning
on Monday and ending Friday. They were paid for the workweek ending
Dec.26. They worked on Monday, Dec.29, Tuesday, Dec.30 and
Wednesday, Dec.31.
Debit Credit
Dec 31 Salaries expense 10,000
Salaries payable 10,000
:To record the accrued salaries for the month of December
ANSWER:
c. The supplies account had a balance of P4,480 on Jan.1. During the
year,P11,000 of supplies were bought. A year-end inventory showed that
P6,400 worth of supplies are still on hand

Debit Credit
Dec 31 Supplies expense 9080
Supplies 9080
:To record the used portion of supplies
ANSWER:
d. Equipment costing P588,000 has a useful life of five years with an P80,000
salvage value at the end of five years. Record the depreciation for the year.

Debit Credit
Dec 31 Depreciation expense 101,600
A/D: Equipment 101,600
:To record the depreciation of equipment for the year