ADJUSTING

ENTRIES
S

PREPARED BY: MELANIE C. TACSAN

 CASH VS. ACCRUAL BASIS

Recognizes REVENUE when cash is

CASH BASIS RECEIVED. And recognizes
EXPENSES when cash is PAID.

• Recognizes REVENUES
when SALES are made or
SERVICES are
PERFORMED ,regarldess of
ACCRUAL BASIS when cash is RECEIVED.
• Recognizes EXPENSES as
incurred, whether or not
cash is paid out.
 CASH VS. ACCRUAL BASIS

• Recognizes REVENUES 01
when SALES are made or
SERVICES are
PERFORMED ,regarldess of
REVENUE
ACCRUAL BASIS when cash is RECEIVED. PRINCIPL
• Recognizes EXPENSES as E
incurred, whether or not
cash is paid out.

MATCHING
02

PRINCIPLE
 ADJUSTING ENTRIES

Usually
To be prepared at Often called
JOURNAL recorded in the END of end of the
ENTRIES the GENERAL an PERIOD
JOURNAL. accounting ADJUSTMENTS.
period.
 WHAT IS PERIODICITY CONCEPT?

Accounting periods are generally

JAN. a month, quarter or a year. Most
basic ACCOUNTING PERIOD is
ONE YEAR.

Calendar Year – One year period

JUNE BETWEEN January 1 and
December 31 20xx.

Fiscal Year – Start and end at any

SEPT. point DURING the year, as long as
it within 12 months.

Business are required to prepare

DEC. financial statement at specified
intervals and periods.
 ADJUSTING ENTRIES

ACCRUALS DEFERRALS
Cash flows after the Cash flows before the
revenue is earned or revenue is earned or
expense is incurred. expense is incurred.
SEVEN CATEGORIES OF ADJUSTING ENTRIES

ACCRUAL

ACCRUED
ACCRUED REVENUE
EXPENSES
These are These are revenues that
expenses that have been earned but not
have been incurred yet received in cash
but not yet paid in
cash.
 ADJUSTING ENTRIES: ACCRUED EXPENSES

ACC. EXP PRO-FORMA

ENTRY OF
Consider utilities
expenses like ACCRUED EXP.
Telephone and
electricity. Expense Account xx
02 Liability Account xx
01

EXAMPLE
If you are a BUSINESS Therefore, if at of the end of the
ENTITY, you get the period, it is determined that your
benefits of using the 03 business entity has accrued expense,
facilities provided by the adjusting entry will be: debit the
Meralco and PLDT, for expense and to credit the liability.
example, first before Utilities Expense xx
you are BILLED and will Accrued Exp. Payable xx
PAY. *To accrue utilities Exp.
 ADJUSTING ENTRIES: ACCRUED EXPENSES

ILLUSTRATION :
TAXES
TREASURE Company accounting period is
monthly, January 1-31, 2021. All expenses
incurred during the month of January must
04 be recorded in January. The taxes for the
month of January amounting to 25,000 will
be paid on February 12, 2021.

ENTRY:

01/31/21 Tax Expense P25,000

Tax Payable P25,000
*To record accrual of taxes
 ADJUSTING ENTRIES: ACCRUED EXPENSES

ILLUSTRATION:
SALARIES
On December 31, 2021 BIGBANG
Company has two-day salaries unpaid.
05 The Salaries are 50,000 for a five-day
work week

ENTRY:

12/31/21 Salaries Expense P20,000

Salaries Payable P20,000
*To record accrued salaries
SOLUTION:
(50,000/5) X 2 ( two day salaries unpaid)
= 20,000
 ADJUSTING ENTRIES: ACCRUED EXPENSES

ILLUSTRATION:
INTEREST FROM
On September 1, 2021, Watanabe Haruto NOTES PAYABLE
borrowed P170,000 by issuing a 1 year
05 note with 6% annual interest to Security
Bank.
ENTRY:
i = Prt 12/31/21 Interest Expense P3,400
Where: Interest Payable P3,400
i= interest *To record accrual of Interest
P= Principal SOLUTION:
r= rate INTEREST = Prt
t=time = 170,000 x 0.06 x 4/12 (Sept to Dec.)
= P3,400
 ADJUSTING ENTRIES: ACCRUED REVENUE

ACC. REV PRO-FORMA

Assuming you are a business
ENTRY OF
owner, you may earn revenue ACCRUED EXP.
before you receive the cash
because collection occurs later. A Receivable Account xx
revenue that has been earned 01 02 Income Account xx
but has not been receives in cash
creates an asset called ACCRUED
REVENUE RECEIVABLE.
EXAMPLE The adjusting entry at the end of the
month will be:
Interest income on Accrued Interest Receivable xx
bank deposits earned Interest Income xx
at the end of the month
might be known or
03 *To accrue interest income
posted only in the
following month.
 ADJUSTING ENTRIES: ACCRUED REVENUE

ILLUSTRATION
On December 31, 2019, Bang Yedam
04 Instrument Repair Services rendered 12,000
worth of services to a client. However, the
amount has not been collected. It was
agreed that the customer will pay the
amount on January 7, 2020. The transaction
was not recorded in the books of the
company as of 2019

ENTRY:

01/31/20 Accounts Receivable P12,000

Service Income P12,000
*To record accrued revenues
 ADJUSTING ENTRIES: ACCRUED REVENUE

ILLUSTRATION:
TREASURE MAKERS Company lent P240,000 at
12% interest on December 1, 2020. The amount
will be collected after 1 year. At the end of
05 December, no entry was entered in the journal to
take up the interest income.
ENTRY:

12/31/20 Interest Receivable P2,400

Interest Income P2,400
*To record accrual of interest
SOLUTION:
INTEREST = Prt
= 240,000 x 0.12 x 1/12 (Dec.1 to Dec. 31)
= P 2,400
 SEVEN CATEGORIES OF ADJUSTING ENTRIES

DEFERRAL

PREPAID EXPENSES UNEARNED REVENUES

These are expenses that These are revenues collected
have been paid but will in advance from customers
typically expire or get used but corresponding service or
up in the near future. product to be provided in the
future.
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE

ASSET METHOD
1 01
An asset account is debited
upon payment of the prepaid
expense. Also called “REAL
APPROACH”.
EXPENSE
METHOD 02
2
An Expense is debited upon
payment of the prepaid
expense and also called
“NOMINAL APPROACH
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE
ASSET PREPAID INSURANCE 120,000
EXAMPLE #1 METHOD CASH 120,000

PREPAYMENTS AE INSURANCE EXP. 30,000

: PREPAID INS. 30,000

On OCT. 1, 2021 PARK

JIHOON COMPANY paid 1
year insurance covering If an ASSET ACCOUNT is debited
OCT. 1, 2021 TO SEPT. upon payment (asset method), the
30, 2022 for 120,000 adjusting entry must recognize the
EXPENSE ACCOUNT

EXPLAINATION:
120,000 = 3 MOS EXPIRED AND 9 MOS
UNEXPIRED.
120,000 X 3/12 = 30,000
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE
EXPENSE INSURANCE EXP. 120,000
EXAMPLE #1
METHOD CASH 120,000

AE PREPAID INSURANCE 90,000

PREPAYMENTS
: INSURANCE EXP. 90,000

On OCT. 1, 2021 PARK

JIHOON COMPANY paid 1 If an EXPENSE ACCOUNT is
year insurance covering debited upon payment (expense
OCT. 1, 2021 TO SEPT. method), the adjusting entry must
30, 2022 for 120,000 recognize the ASSET ACCOUNT

EXPLAINATION:
120,000 = 3 MOS EXPIRED AND 9 MOS
UNEXPIRED.
120,000 X 9/12 = 90,000
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE
ILLUSTRATION:
On August 7, 2021, Choi Hyunsuk
05 Company bought supplies amounting to
12,000.

ASSET METHOD: EXPENSE METHOD:

Initial Entry: Initial Entry:

08/07/21 Supplies P12,000 08/07/21 Supplies Expense P12,000
Cash P12,000 Cash P12,000
*To record *To record purchase of
purchase of supplies supplies
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE
ILLUSTRATION:
On August 7, 2021, Choi Hyunsuk CASE 1
Company bought supplies amounting to
05 12,000.
Assuming at December 31, 2021,
Supplies on hand amounting to
ASSET METHOD:
3,000 EXPENSE METHOD:

Adjusting Entry: Initial Entry:

08/07/21 Supplies Expense 08/07/21 Supplies Expense P3,000
P9,000 Cash P3,000
Supplies P9,000 *To record the
*To record the cost supplies on hand.
of consumed supplies.
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE
ILLUSTRATION:
On August 7, 2021, Choi Hyunsuk CASE 2
Company bought supplies amounting to
05 12,000.
Assuming at December 31, 2021,
Supplies expense amounting to
ASSET METHOD:
3,500 EXPENSE METHOD:

Adjusting Entry: Initial Entry:

08/07/21 Supplies Expense P3,500 08/07/21 Supplies Expense P8,500
Supplies P3,500 Cash P8,500
*To record the cost of *To record the
consumed supplies. supplies on hand.
 ADJUSTING ENTRIES: UNEARNED
REV./PRECOLLECTION

INCOME METHOD 01
1 An Income account is credited
upon collection or receipt of
cash. This method is also
called “NOMINAL
APPROACH”.
LIABILITY
02
2 METHOD
A liability account is credited
upon collection or receipt of
cash. This method is also
called “REAL APPROACH”.
 ADJUSTING ENTRIES: UNEARNED
REV./PRECOLLECTION
INCOME CASH 360,000
EXAMPLE #1 METHOD RENT INCOME 360,000

PRECOLLECTION AE RENT Income 240,000

: UNEARNED RENT Income 240,000

On May 1 2021 Kim Junkyu

received 360,000 cash for
a rent for 2 years covering If an INCOME ACCOUNT is credited
May 1,2017 to April 30, upon receipt of collection (Income
2019. method), the adjusting entry must
recognize the LIABILITY ACCOUNT

EXPLAINATION:
360,000 = 8 MOS EARNED AND 16 MOS UNEARNED.
360,000/24 MOS X 16 MOS = 240,000
 ADJUSTING ENTRIES: UNEARNED
REV./PRECOLLECTION

T-TABLE:
LIABILITY METHOD

RENT INCOME UNEARNED RENT INCOME

AE P240,000 5/1 P360,000 240,000

120,000 Adj.
Bal
 ADJUSTING ENTRIES: UNEARNED
REV./PRECOLLECTION
LIABILITY CASH 360,000
EXAMPLE #1 METHOD UNEARNED RENT
360,000

PRECOLLECTION AE UNEARNED RENT 120,000

: RENT INCOME 120,000

On May 1 2021 Kim Junkyu

received 360,000 cash for
a rent for 2 years covering If an LIABILITY ACCOUNT is credited
May 1,2017 to April 30, upon receipt of collection (Liability
2019. method), the adjusting entry must
recognize the INCOME ACCOUNT

EXPLAINATION:
360,000 = 8 MOS EARNED AND 16 MOS UNEARNED.
360,000/24 MOS X 8 MOS = 120,000
 ADJUSTING ENTRIES: UNEARNED
REV./PRECOLLECTION

T-TABLE:
INCOME METHOD

RENT INCOME UNEARNED RENT REVENUE

120,000 IE AE 120,000 360,000 5/1

240,000 Adj.
Bal
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE
ILLUSTRATION:
On August 1, 2021 Asahi Hamada, a
sculpturer engaged in sculpture making,
05 received 80,000 from Yoon Jaehyuk for 800
statues.

INCOME METHOD: LIABILITY METHOD:

Initial Entry: Initial Entry:

08/01/21 Cash P80,000 08/01/21
Service Revenue P80,000 Cash P80,000
*To record cash received Unearned Service Revenue
for services performed. P80,000
*To record cash received for
services to be performed.
 ADJUSTING ENTRIES: PREPAYMENTS/PREPAID
EXPENSE
On August 1, 2021 Asahi Hamada, a sculpturer
ILLUSTRATION:
engaged in sculpture making, received 80,000 CASE 1
from Yoon Jaehyuk for 800 statues.
05 Assuming at December 31, 2021 worth
50,000 chairs is not yet finished
(unearned).
INCOME METHOD: LIABILITY METHOD:

Adjusting Entry: Adjusting Entry:

12/31/21 12/31/21
Service Revenue P50,000 Unearned Service Revenue P30,000
Unearned Service Revenue Service Revenue P30,000
P50,000 *To adjust revenue to reflect
*To adjust revenue to earned portion.
reflect unearned portion.
 ADJUSTING ENTRIES: UNEARNED
REV./PRECOLLECTION

T-ACCOUNT:
INCOME METHOD

UNEARNED SERVICE REVENUE SERVICE REVENUE

50,000 IE AE 50,000 80,000 8/1

30,000 Adj.
Bal
 ADJUSTING ENTRIES: UNEARNED
REV./PRECOLLECTION

T-ACCOUNT:
LIABILITY METHOD

UNEARNED SERVICE REVENUE SERVICE REVENUE

AE P30,000 8/1 P80,000 P30,000

50,000 Adj.
Bal
 SEVEN CATEGORIES OF ADJUSTING ENTRIES

FIFTH SIXTH SEVENTH

BAD DEBTS/
UNCOLLECTIBL MERCHANDIS
DEPRECIATION
E/DOUBTFUL E INVENTORY
ACCOUNTS