Adjusting Journal Entries

Adjusting
Journal
Entries
1. Collection and
verification of
9. Preparing source documents
Post-Closing 2. Recording
Trial Balance business
transactions
in journal
8. Journalizing
Post-Closing 3. Posting to
Journal Entries Accounting General
Cycle Ledger
7. Preparing 4. Preparing
Financial unadjusted Trial
Statements Balance
5. Preparing
6. Preparing Adjusting
Worksheets Entries
Accrual Basis VS Cash Basis
 In Accrual basis of accounting, the

accountant recognizes and records events as
they occur, whether or not the cash has
been paid or collected.
 In cash basis of accounting, the accountant
does not record a transaction until a cash is
received or paid.
Accrual Basis VS Cash Basis
Example:
Transaction Accrual Basis Cash Basis
1. Consumed electricity for the Recognized and Not recognized
month recorded
2. Paid electricity consumed Recognized and Recognized &
last month recorded recorded
3. Performed service on Recognized and Not recognized
account recorded
4. Collected fees from Recognized and Recognized &
customer’s account recorded recorded
Adjusting entries
 Entries made at the end of the

accounting period to assign
revenues to the period in which
they are earned and expense to the
period in which they are incurred.
Adjusting entries
 These entries are necessary in

order for the Company to reflect
the actual revenues, expenses,
assets, liabilities and equity for a
given period.
Adjusting entries - Types
 Accrued expenses
 Accrued revenues
 Prepaid expenses
 Unearned revenues
 Depreciation
 These are expenses that has been incurred
but not yet paid in cash
 For example, the Company incurred
telephone expenses from PLDT this month
for P2,000, but the SOA from PLDT will
only be received by the Company on the
following month. This transaction should
be recognized and recorded by the
Company during the current month.
 The Adjusting journal entry from
the previous transaction will be:
Date Particulars Ref Debit Credit
Jan. 10 Utilities expense 2,000
Accrued utilities expense 2,000
To record the adjustment
for the accrued telephone
expenses
 These are revenues that has been
earned but not yet collected in cash
 For example, the Company rendered
professional services to a client this
month for P25,000, on account. This
transaction should be recognized and
recorded by the Company during the
current month, regardless of collection.
 The Adjusting journal entry from
the previous transaction will be:
Jan. 10 Accounts receivable 25,000
Service fee 25,000
To record the adjustment
for the accrued service fee.
 These are expenses that has been
paid in advance, and will only be
used upin the near future.
 For example, the Company paid
P12,000 in advance to Cocolife for
the Company’s annual insurance
covering the period September 2016
to August 2017.
 The initial journal entry from the
previous transaction can be presented in
two methods:
 Asset method – the whole payment is
recorded under asset account, example,
Supplies.
 Expense method – the whole payment is
recorded under an expense account,
example, Supplies expense.
Asset Method
Jan. 10 Prepaid insurance 12,000
Cash 12,000
To record payment for
Company’s insurance.
Expense Method
Jan. 10 Insurance expense 12,000
Cash 12,000
To record payment for
Therefore, the adjusting entries for

prepaid expenses will depend on
what method was used in
journalizing the initial transaction.
The basis for adjustment will be the actual
amount of insurance expense that has been used
up for the current month. In the example:
Total amount paid: P12,000.00
Insurance coverage: September 2016 – August
2017 (12 months).
No. Of months covered in 2016 = 4 months
No. Of months covered in 2017 = 8 months
From the total insurance expense of
P12,000.00 for 12 months, we can spread the
usage of insurance evenly, thereby resulting to
P1,000.00 insurance expense per month.
Therefore, for the year 2016, only P4,000.00 of
the insurance should only be expensed, and
the remaining P8,000.00 should be reported as
Prepaid expense.
2016 2017
S O N D J F M A M J J A
1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
4,000 8,000
Expense portion Prepaid expense portion
12,000
The adjusting entry under the asset method
will include recognition of the expense
portion and deduction of the asset portion:
Asset Method
Jan. 10 Insurance expense 4,000
Prepaid insurance 4,000
To record adjustment for
The adjusting entry under the expense
method will include recognition of the asset
portion and deduction of the expense portion:
Expense Method
Jan. 10 Prepaid insurance 8,000
Insurance expense 8,000
 These are revenues that has been
collected in advance, but the
corresponding service or product will be
provided in the future.
 For example, the Company collected
P50,000 in advance from a customer. As
of December 31, 2016, 60% of the
services pertaining to this collection has
already been rendered by the Company.
 The initial journal entry from the
previous transaction can be presented in
two methods:
 Liability method – the whole receipt or
collection is recorded under a liability
account, Unearned revenues.
 Income method - the whole receipt or
collection is recorded under a revenue
account.
Liability Method
Jan. 10 Cash 50,000
Unearned revenue 50,000
To record advance
collection.
Income Method
Jan. 10 Cash 50,000
Service revenue 50,000
To record advance
collection.
Therefore, the adjusting entries for

unearned revenues will depend on
what method was used in
journalizing the initial transaction.
The basis for adjustment will be the actual

amount of revenue that has been earned for
the current year. In the example:
Total amount collected: P50,000.00
Total service rendered: P30,000 (60%)
From the total unearned revenue of
P50,000.00, 60% of which has already been
rendered and therefore earned (P30,000.00).
Therefore, for the year 2016, the P30,000.00 of
the collection should be recognized as
revenue, and the remaining P20,000.00 should
be reported as liability (not yet rendered).
 Unearned revenue
2016 2017
P30,000 P20,000
Earned portion Unearned portion
P50,000
The adjusting entry under the liability method
will include recognition of the the revenue
portion and deduction of the liability portion:
Liability Method
Jan. 10 Unearned revenue 30,000
Service revenue 30,000
Company’s revenue.
The adjusting entry under the income method
will include recognition of the liability portion
and deduction of the income portion:
Expense Method
Jan. 10 Service revenue 20,000
Unearned revenue 20,000
Company’s revenue.
 Depreciation
- It is the systematic allocation of the cost of

each property and equipment (except Land),
over the years of its useful life.
 Depreciation Formula
= Cost – Salvage Value

Estimated useful life
 Depreciation
For example: ABC Company acquired a building for
P5,300,000.00. This building will remain useful for 20
years. At the end of its useful life, it is highly probable
that the building can still be sold for P500,000.00
Cost = P5,300,000
Estimated useful life = 20 years
Salvage Value = P500,000.00
 Depreciation
Using the formula, the depreciation will
be:
= P5,300,000 – 500,000
20 years
= P240,000 per year

= P20,000 per month
 Depreciation
The adjusting entry to recognize the
depreciation expense will be:
Dec. 31 Depreciation expense 240,000
Accumulated depreciation 240,000
building depreciation.

Adjusting Journal Entries

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Adjusting Journal Entries

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Adjusting

 In Accrual basis of accounting, the

 Entries made at the end of the

 These entries are necessary in

Therefore, the adjusting entries for

Therefore, the adjusting entries for

The basis for adjustment will be the actual

- It is the systematic allocation of the cost of

= Cost – Salvage Value

= P240,000 per year

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