Measuring Business

Income: The Adjusting

Process

Jerissa De Las Llagas

 • Distinguish between accrual-basis and
cash basis of accounting
• Explain the basic accounting principles
such as accounting period, revenue
and matching principle and time
Learning concept.

Objectives • Understand the nature and need to

prepare adjusting entries.
: • Explain the 5 types of adjusting entries
• Prepare adjusting journal entries
• Prepare the adjusted trial balance
• Prepare financial statements from the
adjusted trial balance
Concepts and Principles in
Measuring the Business Income
• Accrual-Basis Accounting vs. Cash-Basis Accounting
 Accrual-Basis: recognizes the impact of a business event as it occurs.
 Cash-Basis: not record a transaction until cash is received or paid

• The Accounting Period – One year is the most basic accounting period and
virtually most business prepare annual financial statements not only for internal
use but more so for external reporting purposes particularly to meet the BIR, SEC
and creditors’ reportorial requirements.
• Revenue and Matching Principle
 Revenue Principle: requires that revenue should be recorded once it has
been earned and the amount of the revenue that should be recorded is
equal to the cash value of the goods or the service transferred to the
customer.
 Matching Principle: requires that all expenses incurred during the
accounting period should be identified, measured and subtracted from the
revenues earned during the same span of time.
• Time-Period Concept – interacts with the revenue principle and matching principle
that underlie the use of accruals and it also ensures that accounting information
is reported at regular intervals
The Need for
Adjusting Entries
Adjusting the Books is the process of doing some additional
accounting at the end of the period to bring the records up to
date before preparing the financial statements and it consists
of making special entries called adjusting entries. The
following are the reasons to adjust the trial balance:
1. To report all revenues earned during the accounting
period.
2. To report all expenses incurred to produce the revenues
during the accounting period
3. To report accurately the assets on the balance sheet.
Some may have been used up during the accounting
period.
4. To report accurately the liabilities on the balance sheet
date. Expenses may have been incurred but not yet paid.
 • Recognition of Unrecorded Expenses or Accrued Expenses
• Recognition of Unrecorded Revenues or Accrued Revenues
• Allocation of Recorded Expenditures Between Two or More
Accounting Periods

Type of 1. Prepaid Expenses

2. Depreciation of Property and Equipment

Adjusting • Allocation of Recorded Revenues Between Two or More Accounting

Periods

Entries • Valuation Adjustments of Certain Accounts

1. Estimated Uncollectible Accounts Receivable or Bad Debts
Expenses
2. Adjustment for Change in Market Value of Investment in
Trading and Available-for-Sale Securities
I. Accrued Expense
Dr. Expenses Account xx
Cr. LiabilityAccount xx

Illustrative Case 1. Accrued Wages

The accountant of XYZ Laundry Company is preparing financial statements
for the month of August. Assume that employees of the Company are paid on the last
day of the workweek or Saturday while the end of a particular month falls on a
Tuesday. Wages earned from Sunday to Tuesday will therefore be paid on Saturday
following the end of the month. Assume further that the total payroll for a workweek
is P35,000 and the accountant is preparing the financial statements for the month of
August. August falls on a Tuesday. The unpaid salaries, therefore, at the end of
August will correspond to 3 days-Sunday to Tuesday or P15,000.
The adjusting entry will
be
Dr. Wages Expense 15,000
Cr. Accrued Wages Payable
15,000
To accrue wages owned to
employees but unpaid as
month-end
I. Accrued Expense
Dr. Expenses Account xx
Cr. LiabilityAccount xx

Illustrative Case 2. Accrued Interest Expense

On August 1, 2023, XYZ Laundry Company borrowed P40,000 FROM
Equitable Bank by issuing an interest-bearing note payable. This loan is to be repaid
in three months (November 2, 2023) along with interest at 9% per annum. If financial
statements are to be prepared as of August 31, 2023, an adjusting entry should be
made to charge August operations with one-month’s interest expense and to record
the amount of interest owed to the bank at month-end.
The adjusting entry will
be
Dr. Interest Expense 15,000
Cr. Interest Payable 15,000
To accrue interest expense
for August on Note Payable
(P40,000*9%*1/12)
II. Accrued Revenue
Dr. Asset Account xx
Cr. Revenue Account xx
Illustrative Case 3. Accrued Rent Income
XYZ Laundry Company sublets a portion of their premises to a newspaper
and magazine store at P3,000 a month. At the end of August, rentals for the months
of July and August have not been received and accordingly, no entries have been
made for this income.
The adjusting entry will
be

Dr. Rent Receivable 6,000

Cr. Rent Income 6,000
To accrue rent income
for July and August
P3,000*2 months
II. Accrued Revenue
Dr. Asset Account xx
Cr. Revenue Account xx
Illustrative Case 4. Accrued Interest Income
Assume that on July 15, 2023, a customer of XYZ Laundry signed a 30-day,
6% promissory not for P2,000. This note owed by the customer to XYZ for laundry
services that have not been settled. At the end of August, interest for 1 and ½
months have been earned but not yet collected.
The adjusting entry will
be

Dr. Interest Receivable 15

Cr. Interest Income 15
To accrue rent income
for July and August
P2,000*6%*1.5/12
III. Prepaid Expense
Asset Method
Dr. Expense (for the ised or expired portion) xx
Cr. Prepaid Expense xx
Illustrative Case 5. Prepaid Rent; Asset debited upon payment
Suppose XYZ Company prepays three months rent on July 1, 2007,
amounting to P60,000 or P20,000 a month. The accountant recorded the transaction
on July 1 as follows:
After posting, Prepaid Rent and
Rent Expense will appear as
follows:
Dr. Prepaid Rent 60,000 PrepaidRent
Cr. Cash 60,000 1-Jul 60,000.00 31-Aug AJE 40,000.00
The adjusting entry will Balance 20,000.00
be
Dr. Rent Expense 40,000
Cr. Prepaid Rent Rent Expense
40,000 31-Aug AJE 40,000.00
To record Rent for Balance 40,000.00

July and August.

III. Prepaid Expense
Expense Method
Dr. Unused Supplies (for the unused portion) xx
Cr. Supplies Expenses xx

Illustrative Case 6. Unused Supplies; Expense debited upon payment

On August 1, 2023, XYZ Laundry Company paid Cash of P2,000 for
laundry supplies. The accountant made the following entry to record the transaction
on this date:

Dr. Supplies 2,000

Cr. Cash 2,000
During August, XYZ used supplies amounting to P1,500 in performing After posting, Supplies
services for customers. Hence, the unused supplies as of August 31, amounted to Expense and Unused
The adjusting entry will
P500. Supplies will appear as
be follows: Supplies Expense
1-Aug 2,000.00 31-Aug 500.00
Dr. Unused Supplies (Unused Portion) Balance 1,500.00
500
Cr. Supplies Expense UnusedSupplies
500 31-Aug 500.00
Balance 500.00
To record unused supplies
IV. Depreciation of Asset

Depreciation of Propertyand Equipment

Depreciation means the systematic allocation of the cost of a depreciable asset to expense over the asset's useful life.

Depreciation Expense Cost of the Asset - Scrap Value

=
(per period) Estimated Useful Life of the Asset

Dr. Depreciation Expense - Equipment xx

Cr. Accumulated Depreciation - Equipment xx

CarryingValue = Cost of Asset - Accumulated Depreciation

IV. Depreciation of Asset
Dr. Depreciation Expense - Equipment xx
Cr. Accumulated Depreciation - Equipment xx

Illustrative Case 7. Computation of Depreciation and Adjusting Entry Preparation

a. Compute the amount of depreciation for 2023 of office equipment purchased on
January 1, 2023 for P80,000. The estimated useful life is 10 years and the
estimated scrap value at the end of its useful life is P8,000.

Solution: = P80,000-P8,000
Depreciation per Year
10 years

= P7,200.00

The adjusting entry will be

Dr. Depreciation Expense – Office Equipment 7,200

Cr. Accumulated Depreciation – Office Equipment 7,200
To record depreciation expense
IV. Depreciation of Asset
Dr. Depreciation Expense - Equipment xx
Cr. Accumulated Depreciation - Equipment xx

Illustrative Case 7. Computation of Depreciation and Adjusting Entry Preparation

b. Furniture and fixtures purchased on July 1, 2023, costing P50,000 will be
depreciated at the rate of 10% a year. The depreciation rate is based on the
equipment’s estimated useful life of 10years with no expected scrap value. How
much is the depreciation of the asset for 6 months –that is from July 1 to December
31, 2023?
Depreciation for 6 months = P50,000*10%*6/12
Solution: = P2,500.00
The adjusting entry will be
Dr. Depreciation Expense – Furniture and Fixtures 2,500
Cr. Accumulated Depreciation – Furniture and Fixtures
2,500
To record and
The carrying value of the furniture depreciation expense
fixtures as of December 31, 2023, is
determines as follows:
Acquisition Cost P50,000.00
Less: Accumulated Depreciation 2,500.00
CarryValue P47,500.00
V. Unearned Revenue

LiabilityMethod
Dr. Unearned Rent Income xx
Cr. Rent Income xx

Illustrative Case 9. Unearned Revenue: Liability account credited upon receipt of cash
On August 30, 2023, XYZ Laundry Company, received P2,000as advance payment from
a customer for laundry services to be rendered on September 1, 2023. The accountant made
the following entry:
Dr. Cash 2,000
Cr. Unearned Laundry Revenue 2,000
What adjusting entry should be made on August 31, 2023?

The answer to this question is that there is no need to make any adjusting entry since no
revenue is earned yet as of August 31. The total amount of P2,000 will be shown in the
balance sheet among the liabilities or obligations of the company.
VI. Valuation Adjustments of Accounts Receivable
Estimated Uncollectible Accounts Receivable or Bad Debts Expense
Dr. Bad Debt Expense xx
Cr. Allowance for Bad Bad Debts xx

Illustrative Case 10. Adjustment for Uncollectible Accounts

At the end of the current period, the accounts receivable account has a debit balance of
P80,000. Determine the adjusting entry to record the bad debts or the provision for doubtful
accounts under each of the following assumptions:
1. Analysis of the accounts in the customers’ ledger indicates that 10% will be uncollectible.
The allowance for doubtful account has P0.00 balance.
Analysis:
The bad debts expense is 10% of P80,000 or P8,000. The entry to record the provision is:
Dr. Bad Debt Expense 8,000
Cr. Allowance for Bad Debts Accounts 8,000
To record bad debts
2. Assume that Allowance for Bad Debt Accounts has a P2,000.00 credit balance.
Analysis:
Since the total estimated uncollectible accounts amounts to P8,000 and the allowance for bad
debts accounts already has a P2,000 credit balance, there is therefore a need to record
P6,000 as additional provision. Allowance for BadDebts Accounts
Dr. Bad Debt Expense 6,000
Beg. Bal 2,000.00
Cr. Allowance for Bad Debts Accounts 6,000
Add'l Provision 6,000.00
To record bad debts
EndingBalance 8,000.00
 VI. Valuation Adjustments of Accounts Receivable
Estimated Uncollectible Accounts Receivable or Bad Debts Expense
Dr. Bad Debt Expense xx
Cr. Allowance for Bad Bad Debts xx

3. Assume that the allowance for Bad Debts Accounts has a P3,000 debit balance due to
recovery or collection of previously considered uncollectible accounts.

Analysis:

A total of P8,000 allowance for doubtful accounts should be set up. Since the alloawance has
a debit balance of P3,000, there is therefore a need to take up the amount of P11,000 as
uncollectible accounts. The entry to record the provision is:
Dr. Bad Debt Expense 11,000
Cr. Allowance for Bad Debts Accounts 11,000
To record bad debts
Allowance for BadDebts Accounts The Balance Sheet will reflect the
Beg. Bal 3,000.00 AJE 11,000.00 following:
Accounts Receivable P80,000.00
EndingBalance 8,000.00 Less: Allowance for Bad Debts Accounts 8,000.00
Net Amortized Cost P72,000.00
 Analyze Transactions
Using Source Documents

Preparation of Adjusted Trial and Chart of Accounts

Balance and Financial Enter Business

Transactions in the
GENERAL JOURNAL

Statements Post the entries in the

GENERAL JOURNAL to the
GENERAL LEDGER

From a GENERAL LEDGER,

Prepare the TRIAL
After preparing and posting the adjusting BALANCE
entries to the ledger, the adjusted trial
balance is prepared. The financial Prepare and Journalize the
adjusting Entries
statements can then be prepared from
the figures shown in its trial balance.
Prepare the Adjusted Trial
Balance

Prepare the Financial

Statements
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