Adjusting Entries - Adjusting Entries
bring certain account balances up to date
at the end of the accounting period.
o Adjusting entries are required
when changes in certain accounts
have not been recorded in the
accounting records.
o Adjustments are necessary for
items that have either been
deferred or accrued.
o Adjusting Entries are necessary
when accrual basis accounting is
used.
o Adjusting entries allow businesses
to adhere to the Matching
Principle.
Why?
- It can be inefficient and costly to
account for certain types of
transactions on a daily basis.
Characteristics of Adjustments
o Adjusting entries are internal
transactions — no new source
document exists for the
adjustment.
o Adjusting entries are non-cash
transactions — the Cash account
will never be used in an adjusting
entry.
o Adjusting entries will always
involve at least one income
statement account and one
balance sheet account.
Reasons why some accounts need to
be changed or updated:
a. Accruals
1. Accrued Income
2. Accrued Expense
b. Deferrals
1. Prepaid Expense
2. Unearned Income
c. Estimates
1. Bad Debts
2. Depreciation Expense
ACCRUALS
1. Accrued Income
▪ income already earned but were
not collected nor recorded
▪ Debit - Asset Account (Accrued
Income or Accounts Receivable)
▪ Credit - Income Account
Examples:
i. On December 16, Jess Call Center
received a 30-day, 18% note from a
customer for service rendered
amounting to P20,000.
ii. A bill amounting to P30,000 was sent
to a lessee for renting one office unit
belonging to the company for the
month of December in which payment
will be received first week of January
of next year.
2. Accrued Expense
▪ expenses already expired but
were not paid nor recorded
▪ Debit - Expenses Account
▪ Credit - Liability Account (Accrued
Expense)
Examples:
i. Rent for a total of P80,000 for the
months of November and December
have not been paid by end of the year.
ii. Received a bill from the Daily Star for
advertisements placed during the
second week of November. The bill is
 for P20,000 not to be paid until
January 15 of next year.
iii. On December 1, issued a 90 day, 10%
promissory note amounting to
P100,000 to Samson Equipment for
the purchase of a computer.
iii.
iv. Assume that the last day of December
fell on a Thursday and that Valdez’s
employees are paid P25,000 every
Friday (for a 5-day workweek)
DEFERRALS
1. Prepaid Expense – advance payment
recorded as an asset but a portion of
which has already expired
A. Asset Method – recorded as an
asset. At the end of the year, if
there is an expired portion or if
service has been received,
transfer this amount from the
already an expired portion.
B. Expense Method – recorded to
expense account. At the end of the
year, the unexpired portion is
transferred to the asset account.
Examples:
i. On August 01, took out a one-year fire
insurance policy on the business
premises for P24,000.
Last June 1 you paid P372,000 for 1
year rent.
2. Unearned Income – advance
collection recorded as liability, but a
portion of which has already been
earned
A. Liability Method – credited to a
liability account. At year end if the
service has been rendered
decrease liability and increase
revenue account.
B. Income Method – record the
advance collection immediately
with a credit to an income account.
At year end the amount not yet
rendered decrease the revenue
and increase liability.
Examples:
i. Valdez received in advance last
November 1 from the City Government
 of Batangas the amount of P90,000 to
service police vehicles for a nine-
month period commencing on
November 1.
i.
ii. On Sept. 1, you received an advance
rent payment of P280,000. Monthly
rent payment is P40,000.
ii.
iii. ABC took out an insurance policy in
your company for 18 months last April
1 for P41,400.
i.
ESTIMATES
1. Allowance for Bad Debts – client
accounts that may not be collected
anymore or are doubtful of collection
A. Allowance Method – provides
bad debts during the period the
sale of service is recorded. It also
credits a contra asset to indirectly
decrease the accounts receivable.
B. Direct Write-Off – it is certain that
the company will not be able to
collect the account anymore. It
directly decreases the accounts
receivable.
Examples:
The company reports an accounts
receivable of P1,000,000. It
anticipates that 10% will not be paid by
the customers.
The company have a beginning
allowance for bad debts of P70,000.
During the year its revenue is
P3,000,000 and 70% are on account.
The company’s policy is to have an
allowance for bad debts equal to the
10% of its accounts receivable.
Accounts receivable balance is equal
to the sales on account.
2. Depreciation Expense – transfer of
asset cost to expense based on its
declining utility value
Examples:
An equipment bought last October 1
costing P500,000 has useful life of 10
years and its estimated salvage value
is P70,000. The company uses
straight line depreciation method.
ii. The monster company purchased a
machine on July 1, 2018. The cost of
the machine is P300,000 with an
expected useful life of 5 years. The
machine doesn’t have any salvage
value.