ADJUSTING ENTRY

Pedro Matapang, a computer technician decided to open his own

computer repair shop. The business have the following transactions
during the month of February 2016.

February 14, 2016 – Pedro invested P 200,000 in cash for the

business.
February 15, 2016 - Pedro purchased one computer unit from XY
Computer Store to be used for the business.
He paid in cash amounting to P 25,000.
February 17, 2016 – Repaired the computer of Jean and
collected P 10,000.
February 18, 2016 – Repaired Mike’s computer. However, Mike
will pay P 15,000 on March18, 2016.
February 19, 2016 – Pedro purchased Office Supplies from MM
Merchandise amounting to P 5,000 on account. Pedro
will pay this on March 30, 2016.
February 25, 2016 – Paid the salary of Juana amounting to P 4,000.
 MATAPANG COMPUTER REPAIRS
Unadjusted Trial Balance
February 29, 2016
Account Title Debit Credit
Balance Sheet
Cash 181,000
Accounts Receivable 15,000
Office Equipment 25,000
Supplies 5,000
Accounts Payable 5,000
Matapang, Capital 200,000

Income Statement
Service Revenue 25,000
Salaries Expense 4,000
230,000 230,000
 Step 6: Adjusting Entries
• 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.
• Adjusting entries make it possible to report
correct amounts on the statement of financial
position and on the income statement.
• Adjusting entries ensure that both the revenue
recognition and matching principles are followed.
 Step 6: Adjusting Entries
• Revenue Recognition – accounting standards require that revenue
is recognized when it is earned and the amount can be measured
reliably.
Illustration:
1. Matapang Computer Repairs rendered services amounting to
PHP25,000 for the repair of the computer units of Mr. Tamad on Feb
26, 2016. However, the payment for these services of Matapang will
be made on Mar 15, 2016.

2. On February 28, 2016, 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, 2016.
 Step 6: Adjusting Entries
• Matching Principle - this principle directs a business to report an
expense on its income statement within the same period as its related
income.
Illustration:
1. The business gives a commission of 10% service income to its
employees. The commission is paid the following month. On February
2016, 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, 2016.

2. The business receives an internet bill for the month February 2016 in
the amount of PHP2,000.00. The business will pay the bill on March 15,
2016.
 Step 6: Adjusting Entries
• An adjusting entry will always involve an income or
an expense account and an asset or a liability
account. 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 provide useful service as time passes.
Depreciation can also be referred to as the
decrease in the usefulness of these types of assets.
1. Depreciation
• There are several methods or formulas to
compute the amount of depreciation.
- Straight line method
- Declining balance method          
- Sum-of-the-years'-digits method

Straight Line method

Annual depreciation = ( Acquisition Cost - Salvage or Residual
Value) / Useful Life)
1. Depreciation
• Ex. 1. Recall that Matapang acquired office equipment on
February 15, 2016 for his repair shop business. 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.
• A. How much is the annual depreciation?
• B. What should be the adjusting entry at the end of the month?
• How much would be the depreciation expense at the end of
December 31, 2016?
1. Depreciation
• Ex. 2. Pedro Reyes purchased a delivery vehicle on
April 10, 2016 amounting to PHP250,000. It is
estimated that the vehicle will be useful for 10 years.
The vehicle can be sold for PHP10,000 at the end of its
useful life.
• A. How much is the annual depreciation?
• B. What is the adjusting entry the end of April 30,
2016?
• C. How much is the depreciation expense at the end of
December 31, 2016?
2. Deferred Expense or Prepaid Expense

• 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.
2. Deferred Expense or Prepaid Expense

• Ex. 1. Recall that on February 19, 2016

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. What is the adjusting entry for the
month of February 26, 2016?
2. Deferred Expense or Prepaid Expense

• Ex. 2. On December 1, paid rental for six

months beginning December 1, 2016 to May
31, 2017, at PHP3,000 per month. What is the
adjusting entry for December 31, 2016?
2. Deferred Expense or Prepaid Expense
• Ex. 3. Kay Travel occupies a rented space. On
November 1, 2016, she pay P 7,700.00 as rental for
the month of November and December 2016. Supply
the journal entry and the necessary adjusting entry.

• Ex. 4. Kay purchased supplies on November 5, 2016

amounting to P 8,000.00. She paid in cash. The
supplies on hand at the end of the month amounted
to P 1,500.00. Supply the journal entry and the
necessary adjusting entry.
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.
3. Deferred Income or Unearned Income
• Ex. 1. On February 15, 2016 Matapang entered
into a contract with Makisig to maintain the
computers of Makisig for two months starting
on February 15, 2016 up to April 15, 2016. On
the same date, Makisig paid the total contract
amount of PHP40,000 in full. Supply the
necessary journal entries for the month of
February.
3. Deferred Income or Unearned Income

• Ex. 2. The unadjusted trial balance of Kay

Travel for April shows an unearned service
revenue balance of P 10,000. During April,
P 5,020 of these advances were earned by the
business. What is the adjusting entry?
3. Deferred Income or Unearned Income
• Ex. 3. On June 10, 2016, Pa Rent Aha Co. received
P 8,000 payment for rentals for 2 months up to
August 10, 2016. Supply the necessary journal
entries for the month of June 2016.

• Ex. 4. On January 1, Kugihan Plowing received a P

10,000 advance payment from Bas Acan for
plowing services for the next 5 months. Supply
the neccesary entries for the month of January.
4. Accrued Income or Accrued Asset
• 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.
 4. Accrued Income or Accrued Asset

• Ex. 1. On February 28, 2016, 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, 2016.
4. Accrued Income or Accrued Asset
• Ex. 2. On December 31, 2016, Gray Electronic
Repair Services rendered PHP 300 worth of
services to a client. However, the amount has
not yet been collected. It was agreed that the
customer will pay the amount on January 15,
2017. The transaction was never recorded in
the books of the company.
 4. Accrued Income or Accrued Asset
• Ex. 3. Company ABC leases its building space to a tenant.
The tenant agreed to pay monthly rental fees of $2,000
covering a period from the 1st to the 30th or 31st of every
month. On December 31, 2016, ABC Company did not
receive the rental fee for December yet and no record was
made in the journal.

• Ex. 4. ABC Company lent $9,000 at 10% interest on

December 1, 2016. The amount will be collected after 1
year. At the end of December, no entry was entered in the
journal to take up the interest income.
5. Accrued Expense or Accrued Liabilities

• These are items of expenses that have been

incurred but have not been recorded and paid.
5. Accrued Expense or Accrued Liabilities

• Ex. 1. On February 29, 2016, Matapang

received the electric bill for the month of
February amounting to PHP3,800. Matapang
will pay this bill on March 2016.
5. Accrued Expense or Accrued Liabilities

• Ex. 2. On December 31, 2016, Ron Car rentals

received telephone bills for the month
December amounting to PHP5,600. The bill
will be paid on January 2017.
 Matapang Computer Repairs Worksheet

For the Month ending Unadjusted Trial Adjustments Adjusted Trial

February 29, 2016 Balance Balance
Debit Credit Debit Credit Debit Credit

Balance Sheet
Cash 181,000 40,000 221,000
Accounts Receivable 15,000 15,000 30,000
Supplies 5,000 3,000 2,000

Office Equipment 25,000 25,000

Acc. Dep. (Equip.) 200 200
Accounts Payable 5,000 5,000
Utilities Payable 3,800 3,800
Unearned Ser. Rev. 10,000 40,000 30,000
Matapang Capital 200,000 200,000

Income Statement
Service Revenue 25,000 25,000 50,000
Salaries Expense 4,000 4,000
Supplies Expense 3,000 3,000
Electric Expense 3,800 3,800
Depreciation Expense 200 200