ADJUSTING ENTRIES

1.Records transactions of a service business in the general journal

2. Posts transactions in the ledger
3. Prepares a trial balance
Jan.
2 JID invested P500,000 in the business JID Catering Services
3 JID paid business permit to legally operate the business P5,000
5 Bought kitchen equipment for cash, P 75, 000
6 Purchase catering supplies for cash, P 20,000
10 Performed services to wedding reception, P 100,000
11 Paid the food supplies used in the catering business, P30,000
15 Paid the salaries of waiters and helpers, P20,000
20 Performed service amounting to P75, 000. Company received P50,000 on account
25 Received Meralco bill P10,000, Water bill P 5,000 and telephone bill P 2,000
27 Purchased food supplies on account , P30,000
28 Collected the balance of the January 20, transactions
29 Paid the MERALCO, water and telephone incurred for the period.
30 Paid the food supplies acquired on January 27
Adjusting entries
are journal entries recorded at the end of
an accounting period to alter the ending
balances in various general ledger accounts.
These adjustments are made to more closely
align the reported results and financial
position of a business with the requirements
of an accounting framework, such as GAAP
or IFRS.
•Adjusting Entries
-are needed in order to present in the
financial statements the balances of the
account in adherence to the accrual
principle. This the accrual basis
accounting.
Take note that “adjusting” should not be interchangeably
with “correcting”.
Reasons of Adjusting entries:
1. Recall the accrual basis assumption, as guiding
principle in in presenting revenues and expenses.
•Revenues should be recognized in the period in
which they are earned without regard to when
they are collected by the business.
•Expenses should be recognized in the period in
which they are incurred without regard to when
they are paid by the business.
 Cont. of Mechanics
2. Time period principle
• In time period principle, time issues exist and the
use of adjusting entries ensures that accounting
periods are observed in preparing financial statements
• Movements in the accounts should be reflected in
the right accounting period and the principle being
used is in identifying which “movements” to reflect is
the accrual principle.
• Accrual-basis accounting contrasted with Cash-basis
accounting :

Items Concerned Accrual-basis Cash-basis

1.Revenue is recognized in When received

When earned
the period.
2.Expense is recognized in When incurred When paid
the period
•In line with this, businesses are
expected to prepare adjusting entries
at the end of accounting period to
ensure that revenues are recognized in
the period which they are earned and
that expenses are recognized in the
period which they are incurred.
• Types of Adjustment
1. Accrual
 Accrued revenues – revenues that have been earned but not yet collected.
Illustration:
July 1 Evon Tutorial Services, provided education to five students and billed
them with a total revenue of P60,000 for the period.
Date Account Title/Explanation PR Debit Credit

July 1 Accounts Receivable 102 600000

Tutorial Revenues 410 600000

To record accrued income for

the period
Accrued expenses – are expenses already incurred but are not yet paid
Illustration:
• On January 31, Meralco bill amounting to P5000 which was incurred last
month but was not yet recorded.
Date Account PR Debit Credit
2016 Title/Explanation
Jan 31 Utilities Expense 5000
Accrued Utilities 5000
Expense
To record the Meralco
bill for the month
2.Deferral
Unearned revenues – is a revenue collected in advance but are not yet
performed
Illustration:
• On Date
July 15, company received P20, 000 cash
Account Title/Explanation PR for catering services to be
2017
performed
July 15
on July 31.
Cash 200000
Unearned Revenue 200000
Collected for future events

31 Unearned Revenue 200000

Catering Revenue 200000
To adjust the catering revenue account
Prepaid expenses – expenses already paid but not yet incurred.
• Illustration:
• On January 2, company paid P60, 000 for four-month rent deposits to occupy
an office space. Accounting is on a monthly period.
A. Asset
Date Account Title/Explanation PR Debit Credit
2016
Jan 1 Prepaid Rent 60000
Cash 60000
To record the payment of rent in
advance

31 Rent Expense 15000

Prepaid Rent 15000
To adjust prepaid rent account
B.Expense Method
Date Account Title/Explanation PR Debit Credit
2016
Jan 1 Rent Expense 60000
Cash 60000
To record the purchased of
supplies

31 Prepaid Rent 45000

Rent Expense 45000
To adjust the rent expense
account
Other types of adjustment:
Unused supplies – supplies that remain unused at the end of the business
cycle
Illustration:
• On January 1, company purchased supplies, amounting to P20, 000. At the
end of the month the remaining supplies on hand were only worth P5, 000.
Date Account Title/Explanation PR Debit Credit
2016
Jan 1 Supplies 20000
Cash 20000
To record the purchased of supplies

31 Supplies Expense 15000

Supplies 15000
To adjust supplies account
B.Expense Method
Date Account Title/Explanation PR Debit Credit
2016
Jan 1 Supplies Expense 20000
Cash 20000
To record the purchased of
supplies

31 Supplies 5000
Supplies Expense 5000
To adjust the supplies expense
account
•Bad Debts –also known as uncollectible accounts. Doubtful account are
contra account to accounts receivable.
Illustration
• A company made a credit revenue of P1,000,000 for 2016 and prior
experience shows that 1% of revenue is expected to be uncollectible.
Date Account Title/Explanation PR Debit Credit
2016

Jan 31 Bad Debts Expense 10000

Allowance for Bad 10000
Debts
To record Allowance for
bad debts
Depreciation expense – it is the estimated
allocated amount for the gradual usage of a fixed
assets over its useful life. Depreciation is
computed by deducting the salvage value of
property from its cost, then divide it by its useful
life.
•Illustration:
On March 1, company purchased office
equipment for P63,000, which has salvage value
of P3,000 and useful life of five years
Cost-Salvage Value = P63,000 – 3,000 = P 12,000 per year P1,000 per month X 10 months= P10,000
Useful Life 5 12 months

Date Account PR Debit Credit

2016 Title/Explanation
Dec. 31 Depreciation Expense 10000

Accumulated 10000
Depreciation
To record depreciation
for the period
Let’s try this!
•The adjustment for the period were as follows
a.A count for the catering supplies shows only P 7,000
worth still on hand.
b.The food supplies used for the period was P8,000
c.Kitchen Equipment has a ten year life with no salvage
value
d.Salaries of the helper at the end of the month which
was not yet recorded was P6, 000.