ADJUSTING ENTRIES

for Fundamentals of Accountancy,

Business and Management 1
Senior High School (ABM)
Quarter 2 / Week 6
 FOREWORD

The Self-Learning Kit in Fundamentals of Accountancy,

Business and Management is designed for Grade 11
students of ABM Strand who wish to learn the FABM
which is applicable to service and merchandising
business.

This Self-Learning Kit is composed of the following:

Learning Objectives these are brief statements that describe

what students will be expected to learn from this SLK. These
statements correspond to the learning competencies on
the MELC or Most Essential Learning Competencies. These
goals or objectives would be met through reading
the SLK attentively and doing the reinforced exercises
and problems keyed to the learning objectives.

What Happened? (Pre-test) This section contains questions to

check the prior knowledge of the learners on the new topic.
What I Need to Know? (Discussion) In this portion, learners are
given a discussion and detailed explanations about
the topic that would lead to attaining the learning
objectives.

What I Have Learned? (Evaluation/Post Test) This part is the

assessment or examination prepared that will correlate
with the learning objectives to evaluate the knowledge
and skills gained by the learners from this Self-Learning Kit
(Week 7)

2
OBJECTIVES:
K: Learn the accounting terms introduced in this SLK;
S: Prepare adjusting entries and adjusted trial
balance;
A: Appreciate the importance of preparing
adjusting entries and trial balance in having
accurate financial statements;

I. WHAT HAPPENED

PRE-TEST:

Matching Type

Instruction: Write the letter that corresponds to the correct answer. Write
your answers in your activity sheets/notebook.

1. Are changes to journal entries you've A. Adjusting entries

already recorded. Specifically, they B. Accrued revenue
makesure that the numbers you have C. Accrued expense
recorded match up to the correct D. Deferred revenue
accounting periods. E. Prepaid expense
F. Adjustments
2. Is revenue that has been recognized by
the business, but the customer has not yet
been billed.

3. Is an expense that has been incurred

but not yet paid.

4. Is used when your company receives a

payment in advance of work that has
not been completed.

5. Is a type of asset on the balance

sheet that results from a business making
advanced payments for goods or services
to be received in the future.

3
II. WHAT YOU NEED TO KNOW

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.

Why are adjusting entries important?

1. Revenue will appear too low
If you earned revenue in the month that has not been accounted for
yet, your financial statement revenue totals will be artificially low. For
instance, if Laura provided services on January 31 to three clients, it’s
likely that those clients will not be billed for those services until February.

If Laura does not accrue the revenues earned on January 31, she will not
be abiding by the revenue recognition principle, which states that
revenue must be recognized when it is earned.

2. Expenses may be understated

As important as it is to recognize revenue properly, it’s equally important to
account for all of the expenses that you have incurred during the month.
This is particularly important when accruing payroll expenses as well as
any expenses you have incurred during the month that you have not yet
been invoiced for.

For example, your computer crashes in late February. A computer repair

technician is able to save your data, but as of February 29 you have not
yet received an invoice for his services.

In order to account for that expense in the month in which it was

incurred, you will need to accrue it, and later reverse the journal entry
when you receive the invoice from the technician.

3. Financial statements will not be accurate

At the end of each month, you should run financial statements: a
balance sheet, profit and loss or income statement, and a cash flow
statement. It’s important that these statements reflect the true
financial position of your company.

4
Review on Revenue Recognition and Matching Principle

Revenue Recognition - accounting standards require that revenue

is recognized when it is earned and the amount can be measured
reliably.

To illustrate:
Assume that you are preparing the financial statements for Feb 2021.
Matapang Computer Repairs rendered services amounting to PHP25,000
for the repair of the computer units of Mr. Tamad on Feb 26, 2021.
However, the payment for these services of Matapang will be made on
Mar 15, 2021.

Question: When should you recognize the PHP25,000 as revenue or income,

in February or March?

Answer: Applying the revenue recognition principle, it should be

reported as revenue for February 2021.

Assume that you are preparing the financial statements for February 2021.
On February 28, 2021, 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, 2021.

Question: When should you recognize the PHP25,000 as revenue or income,

in February or March?

Answer: Applying the revenue recognition principle, it should be

reported as revenue in March 2021. Take note that since the service will
be rendered in March, the revenue should also be earned in March.
What about February 2021? The amount is recorded as a liability
because Matapang Repairs has the obligation to render this service in the
future.

Matching Principle - this principle directs a business to report an expense

on its income statement within the same period as its related income.

To illustrate:
Assume that you are preparing the financial statements for February
2021.
The business gives a commission of 10% service income to its employees. The
commission is paid the following month. On February 2021, 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,
2021.

Question: when should the commission expense be recorded in the

book of accounts of the business, in March or in February? Applying
the matching principle, the answer is in February.

5
Adjusting entries are made at the end of each accounting period.
Adjusting entries make it possible to report correct amounts on the
statement of financial position and on the income statement. All
adjusting entries affect at least one income statement account and
one statement of financial position account. Thus, an adjusting entry
will always involve an income or an expense account and an asset or
a liability account.

How to prepare adjusting entries

Each adjusting entry will be prepared slightly differently. Here are
examples on how to record each type of adjusting entry.

Presented here is the Unadjusted Trial Balance of Matapang

Computer
Repairs

MATAPANG COMPUTER REPAIRS

Unadjusted Trial Balance
February 29, 2021
Account Title Debit Credit
Balance Sheet Accounts
Cash 181,000
Accounts Receivable 15,000
Office Equipement 25,000
Accounts Payable 5,000
Matapang, Capital 200,000

Income Statement Accounts

Service Revenue 25,000
Supplies Expense 5,000
Salaries Expense 4,000

230,000 230,000
This now represents the first two money columns in the worksheet

There are five basic sources of adjusting entries:

1. Depreciation expense
2. Deferred expenses or prepaid expenses
3. Deferred Income or unearned income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets

#1 Depreciation . Depreciation is a method of allocating the cost of an

asset to an expense over the accounting periods that make up the
asset’s useful life. Examples of assets subject to depreciation are: Store,
Office, Building, and Transportation equipment. These types of assets
lose their ability to
6
provide useful service as time passes. Depreciation can also be referred to
as the decrease in the usefulness of these types of assets. Take note that
Land is not subject to depreciation because the value of land mostly
increases as time passes.

Exercise on Adjusting entries to record Depreciation

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.
Proper accounting procedures dictates that the cost of PHP25,000 should
be spread over five years. There are several methods to compute the
amount of depreciation. The simplest is the straight line method.

The formula in Annual Depreciation:

(Acquisition Cost - Salvage or Residual Value) / Useful Life.

Applying this formula to the exercise:

Annual Depreciation = (25,000-1,000) / 5 = PHP4,800
If the accounting period being reported by Matapang is for the
month ending February 29, 2021, the adjusting entry to record this
depreciation in the books of Matapang is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/21 Depreciation Expense 200
Accumulated Depreciation-Office 200
Eqpt
The depreciation expense of PHP200 was derived by computing the
monthly depreciation of PHP400 (Annual Depreciation of PHP4,800/12
months) and multiplying the PHP400 by one-half since the equipment
was acquired in the middle of February.

#2 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.

Exercise - Adjusting entries to record deferred expenses or prepaid

expenses Recall that on February 19, 2021 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 February 19, 2021
entry to record the purchase on the account of office supplies was
already posted to the general ledger and included in the balances,
as shown in the unadjusted trial balance above.

7
The entry was shown only for illustration purposes.

General Journal
Date Account Title and Explanation Ref Debit Credit
2/19/21 Supplies Expense 5,000
Accounts Payable 5,000
To record the purchase of office on
Account

2/29/21 Supplies 2,000

Supplies Expense 2,000
To set-up the value of unused supplies

The “Supplies” account debited on February 29, 2021 above is an

asset account and represents the value of supplies unused as of
the end of February 2021. If these journal entries are posted to the
General Ledger, the following should be the balance of each account:

General Ledger
Account Title Debit Credit
Supplies 2,000
Accounts Payable 5,000
Supplies Expense 3,000

The alternative entries to record the above transactions are:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/19/21 Supplies 5,000
Accounts Payable 5,000
To record the purchase of office
Supplies

2/29/21 Supplies Expense 3,000

Supplies 3,000
To set-up the value of unused supplies

If these entries are posted in the general ledger, the following should be
the balances of each account:

General Ledger
Account Title Debit Credit
Supplies 2,000
Accounts Payable 5,000
Supplies Expense 3,000

8
Notice that even with the different approaches in recording the
transactions in the journal entries, the balances in the general ledger
will always be the same whether you used the first approach or the
second approach.

#3 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.

Exercise - Adjusting entries to record deferred or unearned income

On February 15, 2021 Matapang entered into a contract with
Makisig to maintain the computers of Makisig for two months starting
on February 15, 2021 up to April 15, 2021. On the same date, Makisig
paid the total contract amount of PHP40,000 in full.

The entries to record and adjust the books are:

In the February 29, 2021 entry above, as of end of February 2021,
Matapang has already earned the service revenue for the first 15 days,
thus an adjusting entry is recorded

General Journal
Date Account Title and Explanation Ref Debit Credit
2/15/21 Cash 40,000
Unearned Service Revenue 40,000
To record receipt of full payment for
the two-month service contract with
Makisig

2/29/21 Unearned Service Revenue 10,000

Supplies Expense 10,000
To set-up service income earned from
Feb 15-29 2021;
P40,000 x (1/2 month /2
months)
#4 Accrued Expenses or Accrued Liabilities. These are items of expenses that
have been incurred but have not been recorded and paid.

Exercise - Adjusting entries to record Accrued expenses or accrued

liabilities
On February 29, 2021, Matapang received the electric bill for
the month of February amounting to PHP3,800. Matapang will pay this
bill on March 2021. The electric bill represents the cost of electricity
used (or incurred) for February. Although the said bill is still unpaid and
thus was not recorded, the matching principle and accrual basis of
accounting dictates that the same should be recorded in February.
Otherwise, your expense will be understated and thus the company
will be reporting an overstated income (or an erroneous income).
Needless to say, erroneous information may lead to wrong decisions.

9
The entry to record the accrual of this expense is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/21 Supplies Expense 3,800
Accounts Payable 3,000
To accrue the cost of electricity
incurred for the month of February.

#5 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.

Exercise - Adjusting entries to record accrued income or accrued assets

On February 28, 2021, Matapang repaired the computer of
Pedro for PHP15,000. Pedro was on an out of-town trip so he could not
pay Matapang . He told Matapang that he will pay for their services
on March 1, 2021. Matapang has already earned the PHP15,000 but
was not paid as of the end of February 2021. Therefore, an income
should be properly recognized in February 2021 for this transaction. The
entry to record this is:

General Journal
Date Account Title and Explanation Ref Debit Credit
2/29/21 Accounts Receivable 15,000
Service Income 15,000
To record unpaid services already
rendered

10
 Enter all adjustments to the worksheet

Matapang Computer Repairs

Worksheet
For the month ending Unadjusted Adjustments Adjusted Trial
February 29, 2016 Trial Balance Balance Position
DR CR DR CR DR CR
Balance Sheet Accounts
Cash 221,000 221,000

Accounts Receivable 15,000 15,000 30,000

Supplies 2,000 2,000
Office Equipment 25,000 25,000
Accum. Depn-Office Eqpt 200 200
Accounts Payable 5,000 5,000
Utilities Payable 3,800 3,800
Unearned Service Revenue 40,000 10,000 30,000

Matapang Capital 200,000 200,000

Income Statement Accounts

Service Revenue 25,000 25,000 50,000

Supplies Expense 5,000 2,000 3,000

Salaries Expense 4,000 4,000
Utilities Expense 3,800 3,800
Depreciation Expense 200 200
270,000 270,000 31,000 31,000 289,000 289,000

Note: The entry to record the receipt of PhP40,000 from Makisig on February 15, 2021 was reflected
in the unadjusted trial balance columns.

How VITAL are adjusting entries?

In order to have an accurate picture of the financial health of your

business, you need to make adjusting entries. How can you convince a
potential investor to invest in your business if your financial statements are
inaccurate?

How can you prepare financial projections for the coming months if
you don’t have an accurate picture of what your monthly revenue
and operating expenses are?

11
III. WHAT HAVE I LEARNED

EVALUATION/POSTTEST
You are expected to have read and studied the SLK attentively; In
this part, I guess you are now ready to answer the assessment. Write
your answers on your activity sheets/notebook.

A. Matching Type (1-5)

Instruction: Write the letter that corresponds to the correct answer.

1. Are changes to journal entries you've A. Prepaid expense
already recorded. Specifically, they make B. Deferred revenue
sure that the numbers you have C. Accrued expense
recorded match up to the D. Accrued revenue
correct accounting periods. E. Adjusting entries
F. Deferred expense
2. Is revenue that has been recognized by the
business, but the customer has not yet been
billed.

3. Is an expense that has been incurred

before it has been paid.

4. Is used when your company receives a

payment in advance of work that has not
been completed.

5. Is a type of asset on the balance sheet

that results from a business making
advanced payments for goods or
services to be received in the future.

B. True or False. Write TRUE if the statement is correct and FALSE if

otherwise. (6-10)

1. In order to have an accurate picture of the financial health of your

business, you need to make adjusting entries.

2. As a business owner, you cannot convince potential investors to invest

in your business if your financial statements are inaccurate.

3. You can prepare accurate financial projections for the coming

months even if you don’t have an accurate picture of what
your monthly revenue and operating expenses are.

4. Preparation of adjusting entry is part of the accounting cycle.

12
 5. Both accrued expenses and accounts payable are
accounted for under “Current Liabilities” on a company's
balance sheet.

C. Preparation of Adjusting Entries.

NESTOR MARTEL SHOPPE

Unadjusted Trial Balance
December 31, 20CY

ACCOUNT TITLE DEBIT CREDIT

Cash P 78,400
Merchandise Inventory 10,000
Accounts Receivable 8,900
Prepaid Insurance 6,000
Office Supplies 2,500
Furniture and Equipment 75,000
Accounts Payable P 40,000
Loan Payable 60,000
Nestor Martel , Capital 60,000
Nestor Martel, Drawing 12,000
Sales 44,400
Salary Expense 5,500
Advertising Expense 3,600
Utilities Expense 1,500
Miscellaneous Expense 1,000
Total P 104,400 104,400

Additional information:
1. The one-year P 6,000 insurance paid was effective December 1.
2. Office rental of P 4,000 for the month of December was still unpaid.
3. Interest of 18% per annum on P 60,000 bank loan granted on
December 11 has accrued.
4. Advertising placement of P 3,600 for three months was effective
on Dec. 1
5. Fees of P 5,000 collected in advance on December 30 will be
for services to to be rendered next year.
6. Office supplies unused at the end of the month amounted to P 1,600.
7. Furniture and equipment are estimated to have a useful life of
ten years. It was decided to provide one-month depreciation
for December.

Required:
a. Prepare the necessary adjusting entries.
b. Prepare a worksheet indicating the unadjusted trial
balance,
adjustments and the adjusted trial balance

13
14
 REFERENCES

1.
https://www.google.com/search?sxsrf=ALeKk01OyLjfJoO5zdTW59VxOnJqjcGTeg%
3A160
4740138222&ei=KmSmX4CLDfmKr7wPqdu02A8&q=adjusting+entries+in+accou
nting&oq
=adjusting+entrries&gs_lcp=CgZwc3ktYWIQARgCMgoIABCxAxDJAxBDMgQIAB
BDMg
QIABBDMgQIABBDMgQIABAKMgQIABAKMgQIABAKMgQIABAKMgQIABAKMgQ
IABAKOgcIABDJAxBDOggIABDJAxCRAjoFCAAQkQI6BwgAELEDEEM6AggAOggI
A
BCxAxCRAjoHCAAQyQMQCjoGCAAQFhAeUMOlAViZ1AFgtP8BaAJwAXgBgAH
7Ao
gBgiGSAQgwLjE3LjMuMpgBAKABAaoBB2d3cy13aXrAAQE&sclient=psy-ab

2. https://www.google.com/search?sxsrf=ALeKk01nyCTxddXT-
G_IWTnxr_yMZOz3Yg%3A1604741478674&source=hp&ei=ZmmmX63GJsfM-
Qay8YugCA&q=prepaid+expenses&oq=prepaid+&gs_lcp=CgZwc3ktYWIQAR
gBMggIAB
CxAxDJAzIFCAAQsQMyBQgAELEDMgUIABCxAzIFCAAQsQMyAggAMgIIADIFCA
A
QsQMyAggAMgIIADoICC4QsQMQgwE6CAgAELEDEIMBOgsILhCxAxDHARCjAjo
LC
AAQsQMQgwEQyQNQrRNYsiZgrUJoAHAAeACAAZECiAHwDJIBBTAuNC40mAE
Ao AEBqgEHZ3dzLXdpeg&sclient=psy-ab

3. https://www.fool.com/the-blueprint/adjusting-entries/

4. https://www.google.com/search?sxsrf=ALeKk00pgVG8KDcZoJDr0HRHbFRzolI8eA%3A16
04795582013&source=hp&ei=vTynX8bcO67xhwOQjpiwBA&q=accrued+revenu
e+meaning
&oq=ACCRUED+REVENUE&gs_lcp=CgZwc3ktYWIQARgBMggIABCxAxDJAzICCA
Ay
AggAMgIIADICCAAyAggAMgIIADICCAAyAggAMgIIADoLCC4QsQMQyQMQk
wI6CA
guELEDEIMBOgUIABCxAzoICAAQsQMQgwE6CwguELEDEMcBEKMCOgsIABCxAx
C
DARDJAzoFCAAQkgNQvQhYnCZgrDdoAHAAeACAAcYBiAGEEZIBBDAuMTWYA
Q
CgAQGqAQdnd3Mtd2l6&sclient=psy-ab

5. https://www.google.com/search?sxsrf=ALeKk03uZUHfjx_fDqjzqHfjvFK50N3tqg%3A1604
796017816&ei=cT6nX4GvMe3EmAW4ir3ACg&q=adjusting+entries+meaning+in+
accounti
ng&oq=adjusting+entries+m&gs_lcp=CgZwc3ktYWIQARgBMgcIABDJAxBDMgQI
ABBD
MgIIADICCAAyAggAMgIIADICCAAyBAgAEAoyAggAMgIIADoECAAQRzoGCAA
QFh
AeUO63AljpvQJgz8wCaABwAngAgAHhAYgB_AeSAQUwLjUuMZgBAKABAaoBB2
d3c
y13aXrIAQjAAQE&sclient=psy-ab

6. Accrued Expense under current liabilities

 https://www.google.com/search?sxsrf=ALeKk02xGN3P4hJpgk6ON7w35BeJ8uV
tuw%3A16
04814694120&ei=ZoenX_P9BuSRr7wPq8mv2Ac&q=accrued+expenses+in+acco
unting+me
aning+normal+balance&oq=accrued+expenses+in+accounting+meaning+no
rmal+balance&g
s_lcp=CgZwc3ktYWIQAzIFCCEQoAE6BAgAEEc6CQgAEMkDEBYQHjoGCAAQFh
AeO
ggIIRAWEB0QHjoHCCEQChCgAToFCAAQzQJQpYMCWJvpAmCj9wJoEnACeA
CAAc
wCiAGjJpIBCDAuMTguNi4xmAEAoAEBqgEHZ3dzLXdpesgBCMABAQ&sclient=ps
y-
ab&ved=0ahUKEwjzyJfOoPLsAhXkyIsBHavkC3sQ4dUDCA0&uact=5

7. Harina, Ricardo M; (2007). College 1 Accounting: Cacho Hermanos, Inc.,

Pines cor Union Sts. Mandaluyong City

8. FABM1 TG

15
ANSWER KEY
WORKSHEET

16
 DEPARTMENT OF EDUCATION
SCHOOLS DIVISION OF NEGROS ORIENTAL

SENEN PRISCILLO P. PAULIN, CESO V

Schools Division Superintendent

JOELYZA M. ARCILLA, EdD

Assistant Schools Division Superintendent

MARCELO K. PALISPIS, EdD

Assistant Schools Division Superintendent

NILITA L. RAGAY, EdD

OIC - Assistant Schools Division Superintendent
CID Chief

ROSELA R. ABIERA
Education Program Supervisor - (LRMS)

ELISA L. BAGUIO, EdD

Division Education Program Supervisor - MATHEMATICS

MARICEL S. RASID
Librarian II (LRMDS)

ELMAR L. CABRERA
PDO II (LRMDS)

DONNA DIAZ-FRANCISCO
Writer

IVANNE RAY A. GIDOR

Lay-out Artist
_________________________________

ALPHA QA TEAM
RICKLEOBEN V. BAYKING
LITTIE BETH S. BERNADEZ
MERCYDITHA D. ENOLPE
RONALD TOLENTINO

BETA QA TEAM
RICKLEOBEN V. BAYKING
LITTIE BETH S. BERNADEZ
GIL S. DAEL
MARIA SOLEDAD M. DAYUPAY
MARIA ACENITH D PASTOR
JEE LIZA T. INGUITO
MERCYDITHA D. ENOLPE
RONALD G. TOLENTINO

ENHANCEMENT TEAM
ROSITA A. LOZANO
MARIA SOLEDAD M. DAYUPAY

DISCLAIMER

The information, activities and assessments used in this material are designed to provide accessible learning modality to the teachers
and learners of the Division of Negros Oriental. The contents of this module are carefully researched, chosen, and eval uated to comply with the
set learning competencies. The writers and evaluator were clearly instructed to give credits to information and illustrations used to substantiate
this material. All content is subject to copyright and may not be reproduced in any form without expressed written consent from the division.

17
 SYNOPSIS AND ABOUT THE AUTHOR

This SLK aims to present a ANSWERS KEY

thorough and clear ANSWERS TO PRE TEST:
discussion on the topic, 1.A 2.B 3.C 4.D 5.E
Adjusting Entries.
ANSWER TO EVALUATION A. (MULTIPLE CHOICE)

Importance, Types and 1.E 2.D 3.C 4.B 5.A

Steps of Adjusting Entries are
ANSWERS TO EVALUATION B. (TRUE OR FALSE)
emphasized in this kit.
1.TRUE 2. TRUE 3. FALSE 4. TRUE 5. TRUE
This SLK will surely help ANSWERS TO EVALUATION C. (ADJUSTING ENTRIES)
you to understand the topic.

AUTHOR
She graduated Bachelor of Business
Administration major in Management at
Silliman University in the year 1998.

A licensed Professional Teacher and

Trainer’s Methodology Certificate (TMC1) holder
in Bookkeeping. She is currently teaching at
Sumaliring High School, Sumaliring, Siaton, Negros
Oriental

18