What is Adjusting Journal Entries?

Adjusting Journal Entries are entries used to update the accounts prior to the preparation of financial
statements because they affect more than one accounting period.

What are the accounts that require adjusting entries?

1. Prepayments
2. Deferrals
3. Accruals
 Accrued Expense
 Accrued Income
4. Bad Debts/Doubtful Accounts/Uncollectible Accounts
5. Depreciation Expense

Prepayments

Prepayments are expenses already paid but not yet incurred or used.

Adjusting Journal Entries

Asset Method Expense Method

Journal Entry upon Payment Journal Entry upon Payment
Prepaid Expense xx Expense xx
Cash xx Cash xx
Adjusting JE at the end of the period Adjusting JE at the end of the period
Expense xx Prepaid Expense xx
Prepaid Expense xx Expense xx
Note: The amount on the adjusting journal entry Note: The amount on the adjusting journal entry
represents the expired or used portion. represents the unexpired or unused portion.

Problem 1

On April 30, 2018, X Co. paid 36,000 worth of insurance premium for two years. Give the adjusting
journal entry on June 30, 2018.

Asset Method Expense Method

Journal Entry upon Payment on 4/30/2018 Journal Entry upon Payment on 4/30/2018
Prepaid Insurance 36,000 Insurance Expense 36,000
Cash 36,000 Cash 36,000
Adjusting JE at the end of the period, 6/30/2018 Adjusting JE at the end of the period, 6/30/2018
Insurance Expense 3,000 Prepaid Insurance 33,000
Prepaid Insurance 3,000 Insurance Expense 33,000

Computation

The 36,000 amount of insurance premium represents insurance premium for 2 years or 24 months. To
get the monthly premium, divide 36,000 by 24. Multiply it by 2 months representing the premium from
May 1 to June 30, 2018.

36,000/24 = 1,500 x 2 = 3,000 this represents the expired portion of the insurance premium.

36,000 – 3,000 = 33,000 this represents the unexpired portion of the premium.

Used portion is an expense, while unused portion is an asset.

Exercise Problems

1. On September 1, 2018, X Co. paid a one-year advance rent for 30,000. Give the adjusting Journal
entry on December 31, 2018.
2. Supplies account showed a balance of 4,000. Supplies used during the year amounted to 2,300.
Give the adjusting journal entry on December 31, 2018.
3. Supplies account on January 1, 2018, showed a balance of 8,000. On December 31, 2018,
supplies on hand amounted to 3,500. Give the adjusting journal entry on December 31, 2018.
Deferrals

Unearned or deferred income is income already received but not yet earned.

Liability Method Income Method

Journal Entry upon receipt of cash Journal Entry upon receipt of cash
Cash xx Cash xx
Unearned Income xx Income/Revenue xx
Adjusting JE at the end of the period Adjusting JE at the end of the period
Unearned Income xx Income/Revenue xx
Income/Revenue xx Unearned Income xx
Note: The amount on the adjusting journal entry Note: The amount on the adjusting journal entry
represents the earned portion of the amount represents the unearned portion of the amount
initially received. initially received.

Problem 2

On August 1, Dr. Yee received 90,000 for dental fees to be rendered in the next 6 months. Give the
adjusting Journal Entry at the end of September.

Liability Method Income Method

Journal Entry upon receipt of cash on 8/1/2018 Journal Entry upon receipt of cash 8/1/2018
Cash 90,000 Cash 90,000
Unearned Income 90,000 Income/Revenue 90,000
Adjusting JE at the end of the period 9/30/2018 Adjusting JE at the end of the period 9/30/2018
Unearned Income 30,000 Income/Revenue 60,000
Income/Revenue 30,000 Unearned Income 60,000

Computation

The 90,000 amount of cash received represents 6-month dental services to be rendered. Divide 90,000
by 6 to get the dental fees. Multiply The result by 2.

90,000 / 6 = 15,000 x 2 = 30,000 this represents the earned portion.

90,000 – 30,000 = 60,000 this represents the unearned portion.

Earned portion is an Income, while unearned portion is a liability.

Exercise Problems

1. On December 1, 2018, Petit Co. received 48,000 amount of advanced rentals for 6 months. Give
the adjusting Journal entry on December 31, 2018.
2. On August 31, 2018, Pee Co. received 66,000 amount of advanced rentals for 6 months. Give the
adjusting Journal entry on December 31, 2018.