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co-dreamers
AB M - S H S
box Team
by Sand

T O R I A L
TU
A C T I V I T Y
 D J U S T I N G
A by Sandb
ox Team
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F S ANT D
E U
D DJ T D A N
• A SE O Y
• AS TH LIT
• ME BI OD
A H
LI ET
• M
 A DJ US TI NG
E NTRIES
-made prior to the preparation of
financial statements to update
certain accounts in line with the
accrual method of accounting and
the matching principle
 ADJUSTING
- E NTR I ES
affect one real account and atleast
one nominal account
- Note: not all entries that the
company records at end of an
accounting period are adjusting
entry.
 ADJ US TI NG
E NTRIES
• Why is it needed?
• Benefits?
• Types?
 •To ensure that Income
Statement only reports
Why is there a revenues/losses/expens
need for
es that is
adjusting
entries? earned/incurred during
accounting period.
•Receivable and
liabilities in balance
sheet represent true
amount.
 •It helps the
company to calculate
Benefits exact revenue and
expenses, update
financial statements,
and fix error and
calculate exact
expense.
 •Accrued Revenues
•Accrued Expenses
Types •Deferred Revenues
•Deferred Expenses
•Doubtful Accounts
or Bad Debts
•Depreciation
Expense
Accruals •Accrued Revenues
•Accrued Expenses
Deferrals
•Deferred Revenues
•Deferred Expenses
Estimates •Doubtful Accounts
or Bad Debts
•Depreciation
Expense
 TI M E PER I OD
PRINCIPLE
-the life of the business is
divided into equal periods.
DEFINITIO
N OF
TERMS
 REAL
ACCOUN
-accounts appearing TS
in the
Statement of Financial
Position (SFP).
-referred to as permanent
accounts
 RE A L
AC CO UN TS
- Assets
- Liabilities
- Equity
 NOMINAL
ACCOUNTS
- accounts appearing in the
Income Statement.
- referred to as temporary
accounts
- Closed at the end of the
period
 MIXED
ACCOUNTS
- have both the components
of real and nominal
accounts.
 
 A CCO U NTI NG
P E RI O D
•Calendar Year
•Fiscal Year
 report financial
statements

Calendar year
every December 31 year end

Fiscal year
A PERIOD OF 12
MONTHS
ACRUAL BASIS
✓Expenses are incurred but not yet recorded
in accounts.
✓Revenues are recorded when earned but not
yet recorded in accounts.
CASH BASIS
✓Revenue is recorded when cash is
received
✓Expense is recorded when cash is paid
AC C R UED EX PEN SES

- Expenses incurred but not

yet recorded in the accounts
EXAMPLES
Assume that Dec.31 is the end of
the accounting period. And no
interest has been paid for a 60-day,
6% note for P3,000,000 issued on
Nov. 11,2019.
EXAMPLES
Adjusting Journal Entry:
12/31/19 Interest Expense 25,000
Accrued Interest Payable 25,000
To record accrual of interest

** I=PRT
I= (3,000,000 x 6% x 50/360)
I= 25,000
AC C R UED R EVEN UE

- Income earned but not yet

recorded in the accounts
EXAMPLES
The business subleases a portion of the store
to an album vendor for P3,000 a month. The
end of the fiscal period is March 31,2020. No
payment has been made for the last three
months and no entry has been made to record
this income.
EXAMPLES
3/31/20 Rent Receivable 9,000
Rent Income 9,000
To record accrual of rent from Jan-March 2020

**
P3,000 x 3 months
EXAMPLES
Assume that June 30, 2020 is the end of
the accounting period. And no interest has
been paid foe a 120-day, 12% note for
P5,000,000 issued on April 16,2020.
EXAMPLES
6/30/20 Interest Receivable 125,000
Interest Income 125,000
To record accrual of interest from May-June 30

**
I= PRT
I= 5,000,000 x 12% x 75/360
I= P 125,000
DEPRECIATION OF
FIXED ASSETS
-Fixed assets also referred to as Plant,
Property and Equipment and Non- Current
Assets are those long-lived and permanent in
nature
-The gradual decrease in the value of a fixed
asset attributable is called depreciation.
COMPUTATION OF
DEPRECIATION
•Original Cost – refers to the invoice price less
discounts plus incidental costs such as installation
and freight.

•Estimated Useful Life – the length of time expressed

in years during which a depreciable fixed asset is
expected to contribute to operations.
COMPUTATION OF
DEPRECIATION
•Estimated Scrap or Salvage Value – refers
to the estimated amount to be realized
when the asset is
sold after its serviceable life.
COMPUTATION OF
DEPRECIATION
Depreciation per year formula
= (Cost of Asset - Salvage value) /
Useful life of Asset
EXAMPLES
The following items appear on the pre-adjusted trial
balance on June 30,2020:
The delivery equipment was bought on May 4,2020
amounting to 1,200,000 estimated to last 5 yrs with
estimated scrap value of 120,000.
As a matter of company policy, May 4 to 31 is
considered a month.
EXAMPLES
Computation of Annual Depreciation
Original Cost 1,200,000
Less: Estimated Salvage Value 120,000
Depreciable Cost. 1,080,000
Divided by: Estimated useful life 5
Depreciation Expense per year 216,000
EXAMPLES
Adjusting Journal Entry:

6/30/20 Dep. Exp. (216,000/12x2) 36,000

Acc. Dep., Delivery Equipment 36,000
To record depreciation expense from May 4-
June 30
BAD DEBTS
•inevitable risk of doing business on credit
terms
•Failure of collection
•uncollectibles
BAD DEBTS
EXAMPLES
Assume that Accounts Receivable has a
balance of P 240,000. It is estimated that
5% of this will be uncollectible.
EXAMPLES
Adjusting Journal Entry:
Bad Debts Expense 12,000
Allowance for Bad Debts. 12,000

** P 240,000 x 5% = 12,000
EXAMPLES
Experience shows that 7% of accounts
receivable will be uncollectible. The
balance of accounts receivable is P 190,000
and the balance of the allowance for
doubtful accounts is P 5,800.
EXAMPLES
Adjusting Journal Entry:
Doubtful Accounts Expense 7,500
Allowance for Doubtful Accounts. 7,500

**
Estimated doubtful accounts(190,000x7%) 13,300
Less: Amount already setup for allowance 5,800
Doubtful Accounts Expense P 7,500
DEFFERALS
- postponement of the recognition of :
- an expense already paid but not yet incurred
- a revenue/income already collected but not yet
earned
PREPAID EXPENSE
- assets of the current period but expenses of the future
- may include unused supplies and services which have
already been paid for but the benefits apply to future
periods
- 2 methods:
- Asset Method & Expense Method
PREPAID EXPENSE
• ASSET METHOD - debits an asset account upon the
payment of cash
• EXPENSE METHOD - debits an expense upon the
payment of cash

*Adjustments depend on whether the asset or expense method

was used in its original entry
PREPAID EXPENSE
• Payments- either prepaid expenses or unearned revenues
• Adjusting entries for prepayments are required to record
the portion of the prepayment that represents
- the expense incurred or
- the revenue earned in the current accounting period
ASSET AND EXPENSE
METHOD
Notes:
• Expense method - debits an expense in the Original Entry
• Asset method - debits an asset account in the Original Entry
• Expense method - credits or reverses the expense account in
the AJE and debits an asset account
EXAMPLES
A business prepays one-year insurance for
120,000 on October 1, 2021
EXAMPLES
EXAMPLES
a.Incurred portion is recognized as
expense(used portion)
b.Not yet incurred portion is recognized as an
asset(unused portion)
EXAMPLES
a.Used portion- pertains to the first 3 months of
the 1 year Prepaid Insurance.
(120,000 x 3 months/12 months) = 30,000
EXAMPLES
b. Unused portion- pertains to the remaining 9
months
(120,000 x 9 months/12 months) = 90,000
EXAMPLES
ASSET AND EXPENSE
METHOD
Notes:
• Asset method - credits or reverses the asset account in the
AJE and debits an expense account
• Regardless of the method used, the results after adjustment
are the same
• In all AJEs, no cash is involved and no supporting
documents are required.
UNEARNED REVENUE
OR INCOME
- cash is received in the current accounting period and earned
in future accounting period
- considered as a liability
UN EAR N ED R EVE N UE
OR I NC OM E
UN EAR N ED R EVE N UE
OR I NC OM E
2 Methods of Accounting for Deferred Income:
- Liability Method - credits a liability account upon receipt
of Cash in advance
- Income Method - credits an income account upon receipt
of Cash in advance
UN EAR N ED R EVE N UE
OR I NC OM E
2 Methods of Accounting for Deferred Income:
- Liability Method - credits a liability account upon receipt
of Cash in advance
- Income Method - credits an income account upon
receipt of Cash in advance
UN EAR N ED R EVE N UE
OR I NC OM E
Note:
If adjusting entries are to be prepared with the aid of a pre-
adjusted trial balance, the adjustment of DEFERRALS
depends on the related account which appears on such trial
balance.
EXAMPLES
A business rents out its building to various
tenants. On April 1, 2021, the business
receives one-year rent in advance of 120,000
from one of its tenants. Rent per month is
10,000.
EXAMPLES
EXAMPLES
a.Earned portion is recognized as income
(used up)
b.Unearned portion is recognized as a liability
(unused)
EXAMPLES
a.Earned portion- pertains to the first 9 months
of the 1 year Rent in Advance.
(10,000 rent per month x 9 months) = 90,000
Or
(120,000 x 9 months/12 months) = 90,000
EXAMPLES
a.Unearned portion- pertains to the remaining 3
months.
(10,000 rent per month x 3 months) = 30,000
Or
(120,000 x 3 months/12 months) = 30,000
EXAMPLES
T H A N K
YO U !