ADJUSTING

JOURNAL ENTRIES
ADJUSTING ENTRIES
When done : At the end of the accounting period

Purpose : To bring the accounts up-to-date; to separate the real accounts

with nominal accounts, to record transactions that need to be
recorded

What to adjust : Accruals -- for revenues earned but not yet collected, and for
expenses, service had been incurred but not yet paid. These
incurred but are not yet recorded.

Deferrals -- postponement of the recognition of revenue for

amount collected but not yet earned and for expenses, already
recorded and paid but applies to future period

Depreciation -- decrease in value of fixed assets except land due

to wear and tear, passage of time, obsolescence, etc
Real Accounts – accounts with balances that can be forwarded to the next accounting
period such as assets, contra assets, liabilities and capital

Nominal Accounts -- accounts with zero balances at the end of the accounting period
(zero balance after books of accounts are closed) such as revenue,
expenses, drawing, income summary

Mixed Accounts -- accounts that are partly nominal and real before adjusting
entries are
made such as prepaid accounts , supplies
Accruals
Accruals -- depending on the position of the business in a transaction, the
accrual can be viewed as an income or expense
As in a lease transaction: Dec. rental for P20,000- was not paid. The business can
either be the lessor or lessee.
Accrued revenue – for the lessor, the Accrued expense -- for the lessee,
rent is already earned but not yet the rent is already due but not yet paid;
collected; revenue and receivable are to expense and liability are to be recognized.
be recognized. (Asset) (Liability)

AJE: Rent Receivable ……. 20,000- AJE: Rent Expense …….. 20,000-
12/31/22 Rent Revenue ……...20,000- Rent Payable ………...20,000-

Collection: Cash ...........…. 20,000 Payment: Rent Payable ….20,000-

1/5/23 Rent Receivable .20,000- Cash ……………..20,000-
On Dec. 1, Co A issued a 90 day 12% interest P100,000- promissory note to Co B.
From Dec 1 to 31, interest has accrued and computed as follows:
Interest = principal X rate X time Dec. 31 days
= 100,000- x 12% x 90/360 1 = 30
= 3,000- Jan.’23 = 31
On due date will pay: Feb. = 28
100,000- + 3,000- interest = 103,000 Mar. due date = 1
BUT on Dec. 31 AJE for interest for 1 month = P1,000-
AJE Dec. 31 Lender/ payee / creditor Borrower / maker / debtor

Co. B -- the payee of the note or the Co. A -- the maker of the note or the
lender -- accrued revenue borrower -- accrued expense

AJE: Interest Receivable … 1,000- AJE: Interest Expense ….. 1,000-

Interest Revenue …… 1,000- Interest Payable …….. 1,000-
 Accrued Salary Expense (for employer)

5 employees paid at P500- each per day on a weekly basis , every Saturday. Nov. 28 to Dec. 3
Nov. 30 -- holiday, no pay 5 days x 500/day x 5 laborers = 12,500
Nov. 28 – 29 2 days
Dec. 1 – 3 3 days
Next pay day will be on Dec. 3 and the employer will pay P12,500-

Nov. 30 AJE Salaries Expense . . . . . 5,000-

Salaries Payable . . . . . . . . . . . . . . . 5,000-
Salary for Nov. 28 - 9 (5 laborers x P500 x 2 days)

Dec. 3 payday Salaries Payable . . . . . . . 5,000- (Nov. 28-29)

Salaries Expense . . . . . . 7,500- (Dec. 1 – 3)
Cash . . . . . . . . . . . . . . . . . . . . . . . 12,500- (1 week = 5 days)
 ACCRUED REVENUE (ASSET):
• Rent – for rent not yet received by
lessor
• Interest – for interest on notes not yet
collected by lender/creditor
• Utilities – for utility companies
ACCRUED EXPENSE (LIABILITY)
• Rent – for rent not yet paid by the
lessee
• Interest – for interest due on notes but
not yet paid by the borrower
• Utilities – unpaid bills by the business
for utility service incurred
• Salaries, commissions, bonus, profit
sharing - unpaid salaries on the part of
the employer
Deferrals
Deferrals – the postponement of income or expense recognition already
recorded
As in a lease transaction, advance payment for rent that will cover several periods
has been made by the lessee to a lessor

For the lessor (deferred revenue -
liability), the transaction may be initially
recorded as:
a) Liability (liability method) as the
rental payment is still unearned; --
Unearned Rent
b) Expense (expense method)
b) Revenue (revenue method)
recognized upon receipt though not yet
earned -- Rent Income
For the lessee(prepaid - asset), the
transaction may be initially recorded as:
a) Asset (asset method) as a
prepayment; -- Prepaid Rent
immediately recognized upon payment
-- Rent Expense
Example: On Dec. 2, P60,000- was received from the lessee for 3 months rent up to Feb. 28. The transaction may
be recorded by the lessor as:

Liability method -- Lessor Revenue method -- Lessor

Dec. 2 Cash . . . . . . . . . . . . . . . . . 60,000- Cash . . . . . . . . . . . . . . . . . . . . . . . . 60,000-
Unearned Rent . . . . . . . . . . . 60,000- Rent Income . . . . . . . . . . . . . . . . . . 60,000-

Dec. 31 AJE: Unearned Rent . . . . . . 20,000- Rent Income . . . . . . . . . . . . . . 40,000-

1 month used Rent Income . . . . . . . . . . . . . 20,000- Unearned Rent . . . . . . . . . . . . . . . . . 40,000-
2 mos unused To record rent revenue earned To record the rent received
this month. applicable in the next 2 months
If AJE would Unearned Rent -- overstated 40,000- Rent Income -- overstated 40,000- (Jan-Feb)
not be made, Rent Income (not recorded) – under 20,000- Unearned Rent (not recorded)-- understated
the effect will Net income – understated 20,000- 40,000-
be Net Income – overstated 40,000-

If AJE was For both methods, the accounts will have the same account balances on Dec. 31 after the
made: adjustment as:
for the 2 months -- Unearned Rent (liability) . . . . . . . . . . 40,000- credit balance
for 1 month -- Rent Income (revenue) . . . . . . . . . . . . 20,000- credit balance
If the company is the lessee, the transaction may be recorded as:

Asset method Expense method

Dec. 2 Prepaid Rent . . . . . . . . . . 60,000- Rent Expense . . . . . . . . . . . . . . . . . .60,000-

Cash . . . . . . . . . . . . . . . . . . . . . . 60,000- Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000-

Dec. 31 Rent Expense . . . . . . . . . . 20,000- Prepaid Rent . . . . . . . . . . . . . . . . . . 40,000-

AJE: Prepaid Rent . . . . . . . . . . . . . . 20,000- Rent Expense . . . . . . . . . . . . . . . . . . . . . 40,000-
(1 month expired – Dec.) (2 months unexpired Jan – Feb)

For both methods, the accounts will have the same account balances after the adjustment as:
for the 2 months -- Prepaid Rent (asset) . . . . . . . . . . 40,000- debit balance for Jan,
Feb
for 1 month -- Rent Expense (expense ) . . . . . . . . . . 20,000- debit balance for
Dec
Effect if no AJE Prepaid Rent ---- overstated -- 20,000 Rent Expense -- overstated --- 40,000
was made
Rent Expense ---- understated– 20,000 Prepaid Rent -- understated --- 40,000
Net income ---- overstated – 20,000 Net income -- understated --- 40,000
Borrowed money P100,000 for 90 days at 12% interest receiving P97,000- on
Dec. 1, 2022: Interest had already been paid in advance, so, on due date,
P100,000- will be paid to creditor/payee. (B Co.)
Liability Method Revenue Method

Dec. 1 Notes Receivable . . . . . . . . . . 100,000- Notes Receivable . . . . . . . . . . . . . . 100,000-

Cash . . . . . . . . . . . . . . . . . 97,000- Cash . . . . . . . . . . . . . . . . . . . . . . . . 97,000-
Unearned Interest . . . . 3,000- Interest Income . . . . . . . . . . . . . 3,000-

Dec. 31 Unearned Interest . . . . . . . . . 1,000- Interest Income . . . . . . . . . . . . . . . . . . 2,000-

AJE Interest Income . . . . . . . 1,000- Unearned Interest . . . . . . . . . . . 2,000-
(30 days) (60 days)

Balances: Unearned Interest . . . . 2,000- cr 2 mos

Interest Income . . . . . . 1,000- cr 1 mo Same
On Aug. 1, Co A issued to Co B a 90 days 12% note for P100,000 with interest paid upon release of loan.

Co A – Borrower Co B – lender
Company A received P97,000- with P3,000- advance int. Co B gave P97,000- with P3,000 interest collected immtly.
Asset Method Liability Method
Aug. 1 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . 97,000- Aug. 1 Notes Receivable . . . . . . . . . . . . . 100,000-
Prepaid Interest . . . . . . . . . . . . . . . 3,000- Cash . . . . . . . . . . . . . . . . . . . . . 97,000-
Notes Payable . . . . . . . . . . . . . . . . . . . . 100,000- Unearned Interest . . . . . 3,000-

Aug. 31 Interest Expense . . . . . . . . . . . . .. . 1,000- Aug. 31 Unearned Interest . . . . . . . . . . . 1,000-

AJE Prepaid Interest . . . . . . . . . . . . . 1,000- AJE Interest Income . . . . . . . . . 1,000-
100,000 x 12% x 30/360

Expense Method Revenue Method

Aug. 1 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,000- Aug. 1 Notes Receivable . . . . . . . . . . . . . 100,000-
Interest Expense . . . . . . . . . .. 3,000- Cash . . . . . . . . . . . . . . . . . . . . . 97,000-
Notes Payable . . . . . . . . . . . 100,000- Interest Income . . . . . . . 3,000-

AJE Prepaid Interest . . . . . . . . . . . . . . . 2,000- AJE Interest Income . . . . . . . . . . . . . . 2,000-

Interest Expense . . . . . . . . . 2,000- Unearned Interest . . . . . . . . 2,000-
 DEC. 15 PAID P12,000 FOR 1 YEAR INSURANCE PREMIUM
ON CAR (INSURED)
Asset Method (Prepaid Insurance)
Dec. 15 Prepaid Insurance . . . . . 12,000-
Cash . . . . . . . . . . . . . .
AJE 12/31 Insurance Expense . . . . . 500-
Prepaid Insurance . . . . . . . .
(12,000 /12 x ½) Dec. expired
Balances: Prepaid Insurance . . .
On 11/30 Insurance Expense . .
Expense method (Insurance Expense)
Dec. 15 Insurance Expense . . . . . 12,000-
12,000- Cash . . . . . . . . . . . . . . 12,000-
AJE 12/31 Prepaid Insurance . . . . . . . . 11,500-
500-
Insurance Expense . . . . . . 11,500-
(11.5 months unexpired)
11,500- dr Balances: Prepaid Insurance . . . . . 11,500- dr
500- dr Insurance Expense . .. . 500- dr
Sample Problem: On Dec. 1 bought office supplies, P6,000-. At the end of the month based on physical inventory, P4,000-
supplies are still on hand/unused.
Asset Method Expense Method
Dec. 1 Office Supplies .. . . . . . . .6,000- Office Supplies Expense . . . . . . . . . . 6,000-
Cash . . . . . . . . . . . . . . . . . . . . . .6,000- Cash . . . . . . . . . . . . 6,000-
TB = Office Supplies . . . . . . . . . . 6,000- Office Supplies Expense . . . . . . . . . . . . . . . 6,000-

On Dec. 31, AJE would be:

Office Supplies Expense . . .2,000- Office Supplies . . . . . . . . . . . . . . . . 4,000-
Office Supplies . . . . . . 2,000- Office Supplies Expense . . . . . . . . 4,000-

Balance after adjustment (financial statements):

Office Supplies (unused) ---- 4,00- same
Office Supplies Expense (used) --- 2,000-
 SAMPLE PROBLEM: ON OCT. 1 PAID TAXES AND LICENSES FOR ONE YEAR, P6,000-. NO
ADJUSTMENT HAD BEEN MADE SINCE.
Asset Method
Oct. 1— Prepaid Taxes and Licenses . . .6,000-
Cash . . . . . . . . . . . . . . . . . . . . . 6,000-
Dec. 31 Taxes and Licenses Expense . . 1,500-
AJE Prepaid Taxes and Licenses . . . . 1,500-
(6,000 /12 mos x 3 mos exp)
Balances
Dec. 31 Prepaid Taxes . . . . 4,500- debit
Taxes and Licenses . . . 1,500- debit
Expense Method
Oct. 1 Taxes & Licenses Expense . . . . . . 6,000-
Cash . . . . . . . . . . . . . . . . . 6,000-
Dec. 31 Prepaid Taxes & Licenses 4,500-
AJE Taxes & Licenses Expense 4,500-
Balances
Dec. 31 Prepaid Taxes & Licenses 4,500-
Taxes & Licenses Expense I,500-
 INTEREST -- Borrower INTEREST -- Lender

Accrued Expense Accrued Revenue

-- time has passed and interest had accrued but not paid -- time has passed and interest had not yet been
collected
AJE: Interest Expense . . . . . . . . . . . . . . 1,000-
Interest Payable . . . . . . . . . . 1,000- AJE : Interest Receivable . . . . . . . . . . . . . . 1,000-
Interest Revenue . . . . . . . . . 1,000-
Prepaid Interest Unearned Interest Revenue
-- payment for interest had been paid (deducted from -- interest had been collected immediately upon
loan) in advance release of loan

AJE: Interest Expense . . . . . . . . . . . . . 1,000- AJE: Unearned Interest . . . . . . . . . . . . . 1,000-

Prepaid Interest . . . . . . . . . 1,000- Interest Revenue . . . . . . . . 1,000-
(1 mo exp asset method) (Liability method for 1 month earned)
or Or
Prepaid Interest . . . . . . . . . . . . . . 2,000- Interest Revenue . . . . . . . . . . . . . . . 2,000-
Interest Expense . . . . . . . . . . . . 2,000- Unearned Interest . . . . . . . 2,000-
(unexpired portion 2 mos) (Revenue method for 2 mos unexpired)
Deferred Assets - June 5 Bought office supplies … 30,000-
Asset Method Expense Method
June 5 – Office Supplies ………… 30,000- Office Supplies Expense ……………. 30,000-
Cash …………………………….30,000- Cash ………………………………………30,000-

June 1 - beginning inventory 20,000-

Trial Balance – Office Supplies . . . 50,000- Office Supplies Expense . . .50,000-

June 30 - inventory taken showed 35,000- counted on hand , therefore, 50,000 less 35,000 = 15,000 used

AJE Office Supplies Expense …. 15,000- Office Supplies ……………………35,000-

Office Supplies …………… 15,000- Office Supplies Expense ……………. 35,000-

Balances Office Supplies …….. 35,000- Dr Balances Office Supplies …….. 35,000- Dr
Office Supplies Expense….. 15,000- Dr Office Supplies Expense….. 15,000- Dr
DEPRECIATION
 DEPRECIATION

• Depreciation -- The decrease in value of fixed assets due to obsolescence, usage, passage of
time, wear and tear.
Cost of the fixed asset less salvage value, the amount to be depreciated.
• Depreciable value --

Residual value is the amount that would remain after the useful life of the asset
• Salavage value --

The time within which the fixed asset would be useful.

• Useful life --

The amount of the decrease in value (depreciation) recognized through out the
• Accumulated Depreciation
useful life of the asset.

• Book value
Cost of the asset less accumulated depreciation
Depreciation -- refers to the decrease in value of a fixed asset resulting from wear and tear,
obsolescence or passage of time except land .

Factors considered are: cost, residual value or salvage value, and estimated useful life. Several methods of
computing depreciation are: straight-line method, declining balance method, double declining method, sum of
the years digit, number of units of production.

In using straight line method, the depreciable value of the fixed asset will be spread equally over the estimated
useful life of the asset. Example: On July. 1, bought office equipment costing P50,000 has a residual value of
P5,000- and is estimated to be useful for 10 years. Depreciation will be:

Cost . . . . . . . . . . . . . . . .
50,000-
Less: Residual value . . . . .5,000-
Depreciable value . . . . . . . . .
45,000-
=====
useful life 10 years or 10% yearly depreciation,
that is 100% ÷ 10 yrs
Depreciation = Depreciable value ÷ est. useful life
= 45,000- ÷ 10 yrs
= 4,500- depreciation for 1 year
= 375- depreciation for 1 month (1/12)
AJE: Depreciation Expense OE . . . . . . . . . . 375-
Accumulated Depreciation OE . . . . . . . . . 375
To record the depreciation for
for July.
The adjusted value of the equipment will be:
Office Equipment . . . . . . . . . P50,000-
- Accum. Depreciation . . . . 375-
Book value . . . . . . . . . . . . . . P49,625-
=======
 Year Depreciation Exp Accumulated Depre Cost of Book value
(nominal account) (real account deduct Office Equipment (Cost – Accum
from cost) Depr.)
2021 July 1 50,000-
Dec. 31 (1) 2,250- 2,250- (2) 47,750-
(375/mo x 6)
2022 Dec. 31 4,500- 6,750- 43,250-
(375/mo x 12)
2023 Dec. 31 4,500- 11,250- 38,750-
2024 Dec. 31 4,500- 15,750- 34,250-
2025 - 2030

2031 June 30 2,250- 45,000- = depr value 5,000- = residual

(6 months) value
Computations (1) depreciation for 6 months 4,500- per year x ½ half year = 2,250-
(2) book value = cost - accumulated depreciation
(3) Accumulated depreciation = accumulated of 2021 + depreciation of the ff year
July 1, 2021 bought equipment for 50,000- est useful life – 10 yrs, residual
value 5,000-

2021, July to 2027, December = 6.5 years

On Dec. 31, 2027, how much is
a) Depreciation expense = 4,500-
b) Accumulated depreciation = 4,500- per year X 6.5 yrs = 29,250-
c) Book value = 50,000 – 29,250- = 20,750
d) Cost = 50,000-