fundamentals of

accounting [ADJUSTING JOURNAL ENTRIES]

•Adjusting journal entries are entries used to update the accounts prior to the
preparation of Financial Statement because they affect more than one
accounting period.
•The accounts are adjusted to prevent overstatement or understatement of
balance sheet and income statement items.
•Adjusting entries are needed in order to present in the financial statements
the balances of the accounts in adherence to the accrual principle. This is the
accrual-basis accounting.
 In adherence to the accrual basic assumption principle, revenues should
be recognized in the period in which they are earned regardless of when it is
collected. Expenses should be recognized when they are incurred and not when
they are paid.

TYPES OF ADJUSTMENTS
•ACCRUALS – accrued revenues, accrued expenses
a) Accrued revenues – revenues that have been earned but not yet
collected
Illustrative example:
JM Photocopying Center received an interest-bearing promissory note from
Andres Cruz with a principal amount of P5,500 to be paid after 60 days from
July 16, 2019 which should be on September 14, 2019. On Sept. 14, 2019, JM
Photocopying Center will receive the maturity value of P 5,610. The principal
value of P5,500 and interest of P 110 (P5,500 x 12% x 60 days/360 days).

The initial journal entry to be made on July 16, 2019 should be:
July 16 Notes Receivable 5,500
Photocopying
5,500
Revenues
Note received
for services
rendered

When collecting the note with interest, this should be written on September 14,
2019:
Sept 14 Cash 5,610
Notes Receivable 5,500
Interest Income 110
Collection of
the note plus
interest
 fundamentals of
accounting [ADJUSTING JOURNAL ENTRIES]

Then the adjusting entry to be made on July 31 since it is the end of an

accounting period should be:
July 31 Accrued 27.50
Interest/Interest
Recceivable
Interest Income 27.50
Interest earned

•Since 15 days have passed since July 16 to July 31, JM Photocopying

Center would have earned 15 days’ worth of interest income which is the
“27.50” amount.
 Formula used:
 P5,500 x 12% x 15 days/360 days

•When the adjusting has been posted, this P27.50 should be considered as
income in the Income Statement.
 In the Balance Sheet, this should be recognized as Interest Receivable.

b) Accrued expenses – expenses that are incurred but not yet paid
Illustrative example:
JM Photocopying Center issued a 30-day promissory note with a principal
amount of P5,000 and an interest rate of 12% for the purchase of office tables.

On July 21, 2019, an entry to the journal should be like this:

July 21 Furniture & Fixtures 5,000

Notes Payable 5,000
Purchase of
office tables
and issuance of
the note

On August 20,2019 (30 days after July 21), the journal entry for the payment
of the note and Aug 20 Notes Payable 5,000 interest:
Interest Expense 50
Cash 5,050
Payment of
note and
interest
 fundamentals of
accounting [ADJUSTING JOURNAL ENTRIES]

•Assuming that July 31,2019 is the end of the accounting period, only
ten days after issuing the note, the store’s already incurred 10 days’
worth of interest expense which is P16.67 (P5,000 x 12% x 10 days/360
days)
July 31 Interest Expense 16.67
Interest Payable 16.67
Interest incurred

•After posting, this is already considered as an incurred expense in the

Income Statement AND interest payable (liability) in the Statement of
Financial Position.

c) Accrued salaries – salaries incurred but not yet paid

Illustrative example:
JM Photocopying Center hired an employee on July 28, 2019 at a rate of
P1,000 per week for a five-day work from Monday to Friday and his payday
would be every Monday. But the journal entry to recognize the payment of
salary will still be recorded on the next Monday which is on August 3, 2019.

The accounting period will end on July 31, 2019. The shop has already
incurred four days’ worth of salaries expense.

(P1,000 x 4 days/5 days = P 800)

Adjusting entry to be made on July 31, 2019:

July 31 Salaries Expense 800

Salaries Payable 800
Salaries incurred

•should be considered as expense in the Income Statement and Salaries

Payable should be recognized in the Balance Sheet as a liability
 fundamentals of
accounting [ADJUSTING JOURNAL ENTRIES]

•DEFERRALS – unearned revenues and prepaid expenses. They require an

initial journal entry that refers to the date when cash was collected or paid.

a) Unearned revenues – revenues that have been collected but not yet
earned, these are treated as liabilities
a.1. Liability Method :Unearned Photocopying Revenues

Initial journal entry:

July 20 Cash 3,000

Unearned
Photocopying 3,000
Revenue
Receipt of cash
for services still
to be rendered

a.2. Revenue Method

:Photocopying Revenue

July 20 Cash 3,000

Photocopying
3,000
Revenue
Receipt of cash
for services still
to be rendered
Illustrative example:

JM Photocopying Center received P3,000 from a customer for photocopying

services to be completely rendered on August 5, 2019. Assuming that the end
of the accounting period, July 31, 2019, 40% had already been completed thus
earned.

On July 31, there is an earned revenue of P1,200 from P3,000 x 40%.

Adjusting entry under Liability Method:

•when UPR (a liability) is debited, July 31 Unearned Photocopying 1,200

it is being decreased while Revenue
Photocopying Revenue 1,200
crediting PR (an income), Earned portion of
increases the income account unearned
photocopying revenue
 fundamentals of
accounting [ADJUSTING JOURNAL ENTRIES]

Adjusting entry under Revenue Method:

July 31 Photocopying Revenue 1,800

Unearned Photocopying
1,800
Revenue
Unearned portion of
earned photocopying
revenue

•The amount is 1,800 because it is the unearned portion being

recognized in Revenue Method.

b) Prepaid expenses – expenses that have been paid but are yet to be
incurred. The payment of cash can be recorded either through asset
method or expense method.
b.1. Asset Method: Prepaid Expense (Prepaid Rent)

(Initial journal entry)

July 29 Prepaid Rent 10,000

Cash 10,000
Payment of two-months’
rent

(Adjusting Entry)

July 29 Rent Expense 5,000

Prepaid Rent 5,000
Incurred portion of prepaid
rent

b.2.
Expense Method: Rent Expense
(Initial journal entry)

July 29 Rent Expense 10,000

Cash 10,000
Payment of two-months’
rent
 fundamentals of
accounting [ADJUSTING JOURNAL ENTRIES]

(Adjusting entry)

July 29 Prepaid Rent 5,000

Rent Expense 5,000
Recognize the unexpired
portion of rent expense

•DEPRECIATION – the systematic and rational allocation of the depreciable cost

of an asset over its useful life and represents the future
economic benefit that has been used in the period
- Basing on the expense recognition principle or the matching
principle where expenses should be recognized in the period
it is incurred or in the period when the asset was used to
generate economic benefit
- Only applies to tangible and with physical manifestation,
non-current assets such as property, plant, and equipment
- OBJECTIVE: To have each accounting period that benefits
from the asset bear an equitable share of the asset cost
 Just or fair share

Standard format of the adjusting entry for depreciation:

July 31 Depreciation Expense xxx
Accumulated Depreciation
xxx
– Photocopying Equipment
Depreciation for the period

Methods of Computing Depreciation

•Straight line method – most common and convenient to use
- The annual depreciation is calculated by allocating the
depreciable cost equally over the estimated useful life of
the asset
- Depreciable Cost: difference between acquisition cost and
salvage value
- Acquisition Cost: purchase price
- Salvage Value: value of the asset at the end of its useful
life, also called as the residual or scrap value
 fundamentals of
accounting [ADJUSTING JOURNAL ENTRIES]

- Carrying Value: Acquisition Cost subtracted by

Depreciation Cost, the value usually presented in the FS
Illustrative example:
JM Photocopying Center invested P 30,000 on a photocopying machine on July
1, 2019. The salvage value is at P3,000. At 5 years and the depreciable cost
would be P27,000 (from P30,000-P3,000). The annual depreciation would be
P5,400 and for every month, the depreciation expense would be P450 (from
P5,400/12 months). The adjusting entry would be:

July 31 Depreciation Expense 450

Accumulated Depreciation
450
– Photocopying Equipment
Depreciation for the period

•The
carrying value of the equipment will be the one presented in the
Financial Statement which is P29,550 (from P30,000-P450).

•DOUBTFUL ACCOUNTS – an expense that refers to the portion of accounts

receivable that is in doubt of being collected
- Based on the concept of conservatism or prudence
- Determining the doubtful accounts at the end of
each accounting period shows how prudent the
business is in terms of not overstating its income

Methods of Recording Doubtful Accounts

•Allowance Method – conforms to the matching principle
- Requires recognition of doubtful accounts expense
if the accounts receivable are doubtful of collection
- In the FS, the account Accounts Receivable would
be presented at its Net Realizable Value which is
the difference between Outstanding Accounts
Receivable and its corresponding allowance for
doubtful accounts
Standard format of the adjusting entry for Allowance Method for Doubtful
Accounts:

July 31 Doubtful Accounts Expense xxx

Allowance for Doubtful
xxx
Accounts
Provision for doubtful
accounts
 fundamentals of
accounting [ADJUSTING JOURNAL ENTRIES]

Methods in Estimating Doubtful Accounts

•Percentage of Accounts Receivable (Statement of Financial Position Approach)
•Percentage of Services Rendered on Account (Income Statement Approach)
•Aging the Accounts Receivable (Statement of Financial Position Approach)