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Adjusting Entries

The document discusses adjusting entries which are journal entries made at the end of an accounting period to allocate income and expenses to the proper period. There are 6 main types of adjusting entries - prepaid expenses, unearned revenue, accrued expenses, accrued revenue, expense method, and revenue method. Adjusting entries are necessary because of the accrual basis of accounting which requires revenues and expenses to be reported in the period they are earned or incurred rather than when cash is received or paid.

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546 views

Adjusting Entries

The document discusses adjusting entries which are journal entries made at the end of an accounting period to allocate income and expenses to the proper period. There are 6 main types of adjusting entries - prepaid expenses, unearned revenue, accrued expenses, accrued revenue, expense method, and revenue method. Adjusting entries are necessary because of the accrual basis of accounting which requires revenues and expenses to be reported in the period they are earned or incurred rather than when cash is received or paid.

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itsayuhthing
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Adjusting Entries Adjusting Entry: Debit Credit

are journal entries made at the end of accounting period Rent Expense 20,000
to allocate income and expenditure to the period on Prepaid Rent 20,000
which they actually occurred.
From September 1 to Dec 31,2019: September to December
50,000 x 4/10months = 20,000 (EXPIRED) hence, considered
Accounting period as expense.

CALENDAR YEAR
2.) EXPENSE METHOD
– January to December. (Generally used.)
Cash is paid in advance for expenses not yet incurred.
Fiscal Year (initial entry involves recording an expense account)
- Any 12 month period as long as it is not ending in
December.
For example:
Natural basis year ABC Company paid on September 1 P50,000 for a 10
- Accounting period ending in lax season. month rent in advance.
Initial Entry: Debit Credit
ADJUSTING PROCESS Rent Expense 50,000
ACCRUAL BASIS Cash 50,000
Revenues are recorded when earned. Adjusting Entry: Debit Credit
Expenses are recorded when incurred. Prepaid Rent 30,000
CASH BASIS Rent Expanse 30,000
Revenues are recorded when cash received. The remaining unused Rent: Unused rent, should be part
50,000 x 6/10months = 30,000
Expenses are recorded when paid. of an asset account.

3.) DEFERRAL (ASSET METHOD) DEPRECIATION


WHY WE DO ADJUSTING ENTRIES?
Because of the accrual basis of accounting, accounts need Depreciation – is a systematic allocation of expenses
to be adjusted to report revenues and expenses at the of particular assets due to wear and tear.
METHODS OF DEPRECIATION
proper period.
• There are many ways to depreciate an asset.
• The most common is the Straight Line Method (SLM).
ACCRUALS AND DEFERRALS
6 TYPES OF ADJUSTING ITEMS
A. Straight Line Method (SLM)
1. PREPAID ASSET (DEFERRAL)/ASSET METHOD
2. UNEARNED REVENUE (DEFERRAL)/LIABILITY METHOD Formula: Cost – Salvage Value
Useful life
3. ACCRUED EXPENSES (ACCRUAL)
4. ACCRUED REVENUE (ACCRUAL)
5. EXPENSE METHOD For example:
6. REVENUE METHOD JBM Company purchased an equipment on January 1,
2019 costing P220,000 with 10 years useful life and
20,000 salvage value.
DEFERRALS 220,000 – 20,000 Year Depreciation
1.) PREPAID ASSET/ASSET METHOD 10 years = 20,000
Cash is paid in advance for expenses not yet incurred.
B. Accumulated Depreciation
For example: – is a contra asset account.
ABC Company paid on September 1 P50,000 for a 10
month rent in advance. In the Financial Statements, the equivalent will be shown as:
Initial Entry: Debit Credit Equipment (At cost) 220,000
Prepaid Rent 50,000 Accumulated Depreciation (20,000)
Cash 50,000 Net Realizable Value 200,000
4.) DEFERRAL (LIABILITY METHOD) Wages incurred, for which payment to employees has not yet
Unearned Revenue (Liability) – Cash is received in been made.
advance for revenues not yet rendered.
Initial entry involves recording a liability account. For example:
On December 1, 2019 the company borrowed 100,000
For example: cash with 12% interest. Principal and interest mature
During December 1, 2020 JBM Co. received 80,000 as after 6 months.
advance payment from customer good for 4 months of Formula: INTEREST = P x R x T P = Principal
services. R = Rate
T = Time
Initial Entry: Debit Credit
Cash 80,000 100,000 x 12% x 1/12months = 1,000
Unearned Income 80,000 December 31, 2020: Debit Credit
December 31, 2020: Debit Credit Interest Expense 1,000
Unearned Income 20,000 Interest Payable 1,000
Service Income 20,000
80,000/4months = 20,000 ACCRUED REVENUE
Revenue is already earned but cash is not yet received.
5.) DEFERRAL (REVENUE METHOD)
For example:
For example:
JBM Co. rendered services to customer D worth 300,000
During December 1, 2020 JBM Co. received 80,000 as
on account.
advance payment from customer good for 4 months of
Adjusting Entry: Debit Credit
services.
Accounts Receivable 300,000
Initial Entry: Debit Credit Service Revenue 300,000
Cash 80,000
Service Income 80,000
December 31, 2020: Debit Credit
Service Income 60,000
Unearned Income 60,000

ACCRUAL
recognizing revenues and expenses when earned or
incurred not when cash is received or paid.

MATCHING PRINCIPLE
matching expenses to revenues.

ACCRUED EXPENSES
are expenses that are recognized at the time they are
incurred, even though cash has not yet been paid
EXAMPLES OF ACCRUED EXPENSES:
Interest on loans, for which no lender invoice has yet been
received.
Goods received and consumed or sold, for which no supplier invoice
has yet been received.
Services received, for which no supplier invoice has yet been
received.
Taxes incurred, for which no invoice from a government entity
has yet been received.

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