ADJUSTING ENTRIES

ACCOUNTING CYCLE

SEQUENCE OF STEPS IN PREPARING

THE FINANCIAL STATEMENTS FOR A
GIVEN PERIOD. 
RECAP….
INDICATE IN EACH INDEPENDENT CASE
WHETHER THE ACCOUNT IS TO BE DEBITED
(DR) OR TO BE CREDITED (CR)
1. INCREASE IN ACCOUNTS PAYABLE
2. DECREASE IN CAPITAL ACCOUNT
3. INCREASE IN SERVICE REVENUE
4. INCREASE IN CASH
5. DECREASE IN ACCOUNTS RECEIVABLE
INDICATE IN EACH INDEPENDENT CASE
WHETHER THE ACCOUNT IS TO BE DEBITED
(DR) OR TO BE CREDITED (CR)
6. INCREASE IN SALARIES EXPENSE
7. INCREASE IN OFFICE EQUIPMENT
8. INCREASE IN UNPAID SALARIES
9. INCREASE IN OWNER’S DRAWING ACCOUNT
10. INCREASE IN INTEREST INCOME
 ADJUSTING ENTRIES

AT THE END OF THE ACCOUNTING PERIOD, SOME ACCOUNTS IN THE

GENERAL LEDGER WOULD REQUIRE UPDATING. THE JOURNAL
ENTRIES THAT BRING THE ACCOUNTS UP TO DATE ARE CALLED
ADJUSTING ENTRIES. ONE PURPOSE OF ADJUSTING ENTRIES IS FOR
INCOME AND EXPENSES TO BE REPORTED IN THE CORRECT PERIOD.

ADJUSTING ENTRIES ENSURE THAT BOTH THE REVENUE RECOGNITION

AND MATCHING PRINCIPLES ARE FOLLOWED.
REVENUE RECOGNITION

ACCOUNTING STANDARDS REQUIRE THAT REVENUE IS

RECOGNIZED WHEN IT IS EARNED AND THE AMOUNT CAN BE
MEASURED RELIABLY.
 ILLUSTRATION:
ASSUME THAT YOU ARE PREPARING THE FINANCIAL STATEMENTS FOR
FEB 2016. MATAPANG COMPUTER REPAIRS RENDERED SERVICES
AMOUNTING TO PHP25,000 FOR THE REPAIR OF THE COMPUTER UNITS
OF MR. TAMAD ON FEB 26, 2016. HOWEVER, THE PAYMENT FOR THESE
SERVICES OF MATAPANG WILL BE MADE ON MAR 15, 2016.

QUESTION: WHEN SHOULD YOU RECOGNIZE THE PHP25,000 AS

REVENUE OR INCOME, IN FEBRUARY OR MARCH?
 ILLUSTRATION:
ASSUME THAT YOU ARE PREPARING THE FINANCIAL STATEMENTS
FOR FEBRUARY 2016. ON FEBRUARY 28, 2016, MATAPANG REPAIRS
RECEIVED PAYMENT FROM MR. TAMAD AMOUNTING TO PHP25,000.
THIS PAYMENT IS FOR THE REPAIR OF THE COMPUTER UNITS OF
MR. TAMAD ON MARCH 5, 2016.

QUESTION: WHEN SHOULD YOU RECOGNIZE THE PHP25,000 AS

REVENUE OR INCOME, IN FEBRUARY OR MARCH?
MATCHING PRINCIPLES

THIS PRINCIPLE DIRECTS A BUSINESS TO REPORT AN EXPENSE

ON ITS INCOME STATEMENT WITHIN THE SAME PERIOD AS ITS
RELATED INCOME.
 ILLUSTRATION:
ASSUME THAT YOU ARE PREPARING THE FINANCIAL STATEMENTS
FOR FEBRUARY 2016. THE BUSINESS GIVES A COMMISSION OF
10% SERVICE INCOME TO ITS EMPLOYEES. THE COMMISSION IS
PAID THE FOLLOWING MONTH. ON FEBRUARY 2016, THE TOTAL
SERVICE INCOME FOR THE MONTH IS PHP100,000. THUS, THE
EMPLOYEES ARE ENTITLED TO A COMMISSION OF PHP10,000. THIS
AMOUNT WILL BE PAID ON MARCH 12, 2016.

QUESTION: WHEN SHOULD THE COMMISSION EXPENSE BE

RECORDED IN THE BOOK OF ACCOUNTS OF THE BUSINESS, IN
SIX BASIC SOURCES OF ADJUSTING
ENTRIES:

1. DEPRECIATION EXPENSE
2. DOUBTFUL ACCOUNTS EXPENSE
3. DEFERRED EXPENSES OR PREPAID EXPENSES
4. DEFERRED INCOME OR UNEARNED INCOME
5. ACCRUED EXPENSES OR ACCRUED LIABILITIES
6. ACCRUED INCOME OR ACCRUED ASSETS
DEPRECIATION

A METHOD OF ALLOCATING THE COST OF AN ASSET TO AN

EXPENSE OVER THE ACCOUNTING PERIODS THAT MAKE UP
THE ASSET’S USEFUL LIFE.

DEPRECIATION ONLY APPLIES TO TANGIBLE NON CURRENT

ASSETS OR PROPERTY PLANT AND EQUIPMENT EXCEPT LAND.
RECALL THAT MATAPANG ACQUIRED OFFICE EQUIPMENT ON
FEBRUARY 01, 2016 FOR HIS REPAIR SHOP BUSINESS. THE
COST OF THE EQUIPMENT IS PHP25,000. IT WAS ESTIMATED TO
HAVE A USEFUL LIFE OF FIVE YEARS. IT IS ESTIMATED THAT
AFTER FIVE YEARS, THE OFFICE EQUIPMENT CAN BE SOLD AT A
SCRAP VALUE OF PHP1,000. THE COMPANY USES THE STRAIGHT
LINE METHOD OF DEPRECIATION.

FORMULA :
( ACQUISITION COST – SALVAGE OR RESIDUAL VALUE) / USEFUL
LIFE.
AT THE END OF THE YEAR 2016:

ADJUSTING JOURNAL ENTRY:

DR CR

DEPRECIATION EXPENSE 4,400

ACCUMULATED DEPRECIATION 4,400
OFFICE TABLES PURCHASED ON JULY 01, 2017 FOR PHP
50,000.00 ARE EXPECTED TO BENEFIT THE COMPANY FOR
FIVE YEARS. ASSUMING THAT THE SALVAGE VALUE WAS
DETERMINED TO BE PHP 5,000, COMPUTE THE (1)
DEPRECCIABLE COST, (2) ANNUAL DEPRECIATION, (3)
DEPRECIATION FOR ONE MONTH PERIOD ENDED JULY 31,
2017, AND THE (4) CARRYING VALUE OF THE OFFICE TABLES
AS OF JULY 31, 2017. ALSO, JOURNALIZE THE ADJUSTING
ENTRY REFERRING TO THE THIRD REQUIREMENT.
 DOUBTFUL ACCOUNTS

AN EXPENSE REFERS TO THE PORTION OF ACCOUNTS RECEIVABLE

THAT IS IN DOUBT OF BEING COLLECTED.

PROFORMA ENTRY:
DR CR
DOUBTFUL ACCOUNT EXPENSE XX
ALLOWANCE FOR DOUBTFUL ACCOUNTS XX
ASSUME THAT THE COMPANY IS USING PERCENTAGE
OF ACCOUNTS RECEIVABLE IN ESTIMATING DOUBTFUL
ACCOUNTS AND HAS DETERMINED THAT THE 2% OF
THE ACCOUNTS RECEIVABLE ARE DOUBTFUL OF BEING
COLLECTED AS OF DECEMBER 31, 2017. NOTE: THE
UNADJUSTED BALANCE OF ACCOUNTS RECEIVABLE IS
PHP 350,000. COMPUTE THE DOUBTFUL ACCOUNT
EXPENSE AS OF DECEMBER 31, 2017.
AA COMPANY USES THE ALLOWANCE METHOD IN ESTIMATING
DOUBTFUL ACCOUNTS. FOR THE YEAR, SALES ARE PHP 2,500,000.
BASED ON PAST EXPERIENCE IT IS ESTIMATED THAT 2% OF SALES
PERCENTAGE TO USE TO ESTIMATED DOUBTFUL ACCOUNTS.

ASSUMING THAT THE BEGINNING BALANCE OF ALLOWANCE FOR

DOUBTFUL ACCOUNTS IS PHP35,000, AT WHAT AMOUNT SHOULD
DOUBTFUL ACCOUNTS EXPENSE BE PRESENTED IN THE INCOME
STATEMENT.?
DEFERRED EXPENSES OR PREPAID
EXPENSES

THESE ARE ITEMS THAT HAVE BEEN INITIALLY

RECORDED AS ASSETS BUT ARE EXPECTED TO
BECOME EXPENSES OVER TIME OR THROUGH THE
OPERATIONS OF THE BUSINESS.
FEBRUARY 19, 2016 MATAPANG PURCHASED
PHP5,000 WORTH OF OFFICE SUPPLIES ON
ACCOUNT. BY THE END OF THE MONTH, PHP2,000
WORTH OF THESE SUPPLIES ARE STILL UNUSED.
THE TRIAL BALANCE OF MONGOLIA’S CAFÉ SHOES
KITCHEN SUPPLIES AND KITCHEN SUPPLIES EXPENSE
ACCOUNTS AT BALANCES OF PHP 8,400 AND 0,
RESPECTIVELY. AT YEAREND THERE ARE P1,480.00
OF SUPPLIES ON HAND.
ON JUNE 01, 2015, RUSSIA BEAUTY SHOP PAID PHP
18,000 TO SECURE INSURANCE COMPANY FOR
THREE-YEAR INSURANCE POLICY. THIS WAS TAKEN UP
IN THE BOOKS USING A REAL ACCOUNT.
DEFERRED INCOME OR UNEARNED INCOME

THESE ARE ITEMS THAT HAVE BEEN INITIALLY

RECORDED AS LIABILITIES BUT ARE
EXPECTED TO BECOME INCOME OVER TIME
OR THROUGH THE OPERATIONS OF THE
BUSINESS.
ON FEBRUARY 15, 2016 MATAPANG ENTERED INTO A
CONTRACT WITH MAKISIG TO MAINTAIN THE
COMPUTERS OF MAKISIG FOR TWO MONTHS
STARTING ON FEBRUARY 15, 2016 UP TO APRIL 15,
2016. ON THE SAME DATE, MAKISIG PAID THE TOTAL
CONTRACT AMOUNT OF PHP40,000 IN FULL.
ON MARCH 01, 2017, FINLAND TUTORIALS RECEIVED
PHP 60,000 REPRESENTING AN ADVANCE PAYMENT
FOR SERVICES TO BE RENDERED IN NOVEMBER
2017. THIS WAS BOOKED USING A REAL ACCOUNT.
AS OF THE YEAREND, ONLY 70% OF THE EXPECTED
SERVICE WAS RENDERED.
ACCRUED EXPENSES OR ACCRUED
LIABILITIES

THESE ARE ITEMS OF EXPENSES THAT HAVE

BEEN INCURRED BUT HAVE NOT BEEN
RECORDED AND PAID.
ON FEBRUARY 29, 2016, MATAPANG RECEIVED THE
ELECTRIC BILL FOR THE MONTH OF FEBRUARY
AMOUNTING TO PHP3,800. MATAPANG WILL PAY THIS
BILL ON MARCH 2016
ACCRUED INCOME OR ACCRUED ASSETS

THESE ARE INCOME ITEMS THAT HAVE BEEN

EARNED BUT HAVE NOT BEEN RECORDED
AND PAID BY THE CUSTOMER. IN SHORT,
THESE ARE RECEIVABLES OF THE BUSINESS.
ON FEBRUARY 28, 2016, MATAPANG REPAIRED THE
COMPUTER OF PEDRO FOR PHP15,000. PEDRO WAS
ON AN OUTOF- TOWN TRIP SO HE COULD NOT PAY
MATAPANG . HE TOLD MATAPANG THAT HE WILL PAY
FOR THEIR SERVICES ON
MARCH 1, 2016
EXERCISE
SPENCER COMPANY HAS A FISCAL YEAR-
END OF JUNE 30TH. THE FOLLOWING
ADJUSTING JOURNAL ENTRIES MUST BE
PREPARED IN ORDER TO BRING THE
ACCOUNTING RECORDS UP TO DATE FOR
THE PREPARATION OF YEAR-END FINANCIAL
STATEMENTS.
1. INTEREST ON NOTES PAYABLE OF PHP400
IS ACCRUED.

DR CR
INTEREST EXPENSE 400
INTEREST PAYABLE 400
2. FEES EARNED BUT UNBILLED TOTAL
PHP1,400.

DR CR
ACCOUNTS RECEIVABLE 1,400
SERVICE REVENUE 1,400
3. SALARIES EARNED BY EMPLOYEES OF
PHP700 HAVE NOT BEEN RECORDED.

DR CR
SALARIES EXPENSE 700
SALARIES PAYABLE 700
4. BAD DEBT EXPENSE FOR YEAR IS
PHP900.

DR CR
DOUBTFUL ACCOUNT EXPENSE900
ALLOWANCE FOR DOUBTFUL ACCOUNT 900