ADJUSTING ENTRIES

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Learning objectives:

1. Identify the different types of

adjustments

2. Compute for the amount of

adjustments necessary

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 The Accounting Cycle

Transaction
Analysis 1 2 Journalizing Journal

Documents 1 Ledger
3 Posting

4 Adjusting Working
Paper

5 1 Reporting

Statement of Financial
Income Statement Cash Flow Statement
Position

Statement of Changes in Notes to Financial

Equity Statements

6 7
Closing Reversing
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Why do we need to adjust?

1. To bring the accounts up-to-date

2. To assure the proper matching of

revenues and expenses.

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 What are adjusting entries?
 Adjusting entries are journal entries
recorded at the end of an accounting
period to adjust income and expense
accounts so that they comply with the
accrual concept of accounting.
 They are usually made at the end of
accounting period in order for revenues to
be recognized within the period earned,
and for expenses to be recognized within
the period they are incurred.
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Accounts to adjust:
1. Accruals
2. Deferrals
3. Depreciation and amortization
4. Estimated uncollectible accounts
5. Ending inventory
(applicable to merchandising and manufacturing
businesses)

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Things to remember:
 Adjustingof accounts is made at the end
of the period before FS are prepared.

 Adjusting is done to make sure that

financials comply with the standards of
GAAP.

 Apply appropriate account relationships.

 Asset & Revenue, Liability and Expense
 Asset and Expense, Liability and Revenue

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ACCRUALS
1. Accrued Revenues
Accruing revenue – means bringing into existence an
income that is already earned but not yet received and not
yet recorded.
Asset (Accrued revenue) xxx
Revenue xxx

2. Accrued Expenses
Accruing an expense means recognizing an incurred and
unrecorded expense that is unpaid because payment is not
yet due.
Expenses xxx
Liability (Accrued Expense) xxx

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 DEFERRALS
(Prepayments & Precollections)

(a) Prepaid expenses

◦ Expenses that are paid in cash and recorded
as assets before they are used or consumed

(b) Unearned (precollected) revenue

◦ Cash that is received before revenue is
earned and recorded as liabilities

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1 Question 1
The primary difference between prepaid and
accrued expenses is that prepaid expenses have
…
A. been incurred and accrued expenses have not
B. not been paid and accrued expenses have
C. been recorded and accrued expenses have not
D. not been recorded and accrued expenses have

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Adjusting entries for prepayments
1. Prepaid expenses
 Expenses paid in cash and recorded as assets
before they are used or consumed
 Expire either with the passage of time or
through use and consumption
 Adjusting entry

Asset Expense
Unadjusted Credit Debit
balance adjusting adjusting
entry (-) entry (+)

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Adjusting entries for prepayments
continued

(a) Supplies
◦ Supplies on hand 31 December: P1000
◦ Expense of P2500 recorded as an asset 10 May
◦ Journal entry:

Dec. 31 Supplies Expense 1 500

Supplies 1 500
(To record supplies used)

◦ General Ledger entry:

Supplies Supplies Expense
5/10 2 500 12/31 Adj. 1 500 12/31 Adj. 1 500
12/31 Bal. 1 000

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Adjusting entries for prepayments
continued

(b) Insurance
◦ Insurance paid for 1 year in advance: P600, 10 Dec.
◦ Insurance for 31 December P600/12 = P50
◦ Journal entry:
Dec. 31 Insurance Expense 50
Prepaid Insurance 50
(To record insurance expired)

◦ General ledger:
Prepaid Insurance Insurance Expense
12/4 600 12/31 Adj. 50 12/31 Adj. 50
12/31 Bal. 550

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Adjusting entries for precollections
2. Unearned revenue
 Revenue received before it is earned and
recorded as a liability
 It is earned by providing a service to the
customer
e.g., rent, magazine subscriptions
 Adjusting entry
Liability Revenue
Debit Unadjusted Credit
adjusting balance adjusting
entry (-) entry (+)

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 Adjusting entries for precollections
continued

Example
◦ P1,600 received 2 December Year A for advertising
services to be completed 31 March Year B
◦ Journal entry:
Dec. 31 Unearned Revenue 400
Service Revenue 400
(To record revenue for services provided)

◦ General Ledger:
Unearned Revenue Service Revenue
12/31/A Adj. 400 12/2/A 1 600 12/31 Bal. 10 000
12/310 Bal. 1,200 12/31 Adj. 400

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2 Question 2
As prepaid expenses expire with the passage of
time, the correct adjusting entry will be …
A. debit to an asset account and a credit to an
expense account
B. debit to an expense account and a credit to an
asset account
C. debit to an asset account and a credit to an asset
account
D. debit to an expense account and a credit to an
expense account

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Provision for Depreciation
◦ Depreciation is the used or expired portion of
productive facilities (tangible assets), such as
building, furniture and fixtures, equipment
which have been recorded at their acquisition
costs as capital expenditures in accordance
with the cost principle of accounting.

◦ These productive facilities are also called

“property, plant and equipment” or “fixed
assets”.

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Provision for Depreciation
◦ Allocation of the cost of the asset to expense
over its useful life

◦ Common method is to divide cost of asset by

useful life (straight-line method)

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 Adjusting entries for depreciation
continued

◦ On January 1, 2012, Computromix acquired a

computer for office use with an invoice price of
P50,000. It was estimated to have a useful life of five
years and a salvage value of P5,000.
Dec. 31 Depreciation Expense 9,000
◦ Journal Depreciation
Accumulated entry: - Office Equipment 9,000
(To record annual depreciation)

Office Equipment
1/1 50 000
◦ General Ledger
Accumulated Depreciation
Office Equipment Depreciation Expense
12/31 Adj. 9,000 12/31 Adj. 9,000
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Adjusting entries for depreciation
continued

◦ Carrying amount or book value is the

difference between the cost of any
depreciable asset and its related accumulated
depreciation
◦ It is usually different from the asset’s fair value
(market value)
◦ Statement of Financial Position
Office Equipment P50, 000
Less: Accumulated Depreciation 9,000
Carrying Value P41,000

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Adjusting entries for accruals
1. Accrued revenue
 Revenue earned by not yet received in cash or
recorded
 Adjusting entry is required to:
◦ Show receivable exists at balance date
◦ Record income earned in the period
 Adjusting entry
Asset Income
Debit Credit
adjusting adjusting
entry (+) entry (+)

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 Adjusting entries for accruals
continued

Example:
◦ Service Revenue of $200 earned, but not yet
recorded
◦ Journal entry:
Oct. 31 Accounts Receivable 200
Service Revenue 200
(To record revenue for services provided)

◦ General Ledger:

Accounts Receivable Service Revenue

31/10 Adj. 200 31/10 10 000
31/10 400
31/10 Adj. 200
31/10 Bal. 10 600
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Adjusting entries for accruals
continued

2. Accrued expenses
 Expenses incurred by not yet paid
 Adjusting entry is required to:
◦ Show record obligations at balance date
◦ Recognise expenses incurred in the period
 Adjusting entry

Expenses Liability
Debit Credit
adjusting adjusting
entry (+) entry (+)

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Adjusting entries for accruals
continued

(a) Accrued Interest

◦ Company signed a $5000, 3 month note
payable on 1 October
◦ Interest rate: 12% p.a.
◦ Interest determined by considering
 Face value
 Interest rate
 Length of time note is outstanding
◦ Interest owing:
$5000 x 12% x 1/12 = $50

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Adjusting entries for accruals
continued

◦ Journal entry

Oct. 31 Interest Expense 50

Interest Payable 50
(To accrue interest on notes payable)

◦ General Ledger

Interest Expense Interest Payable

31/10 Adj. 50 31/10 Adj. 50

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Adjusting entries for accruals
continued

(b) Accrued Salaries

◦ Salaries outstanding for October: $1200
(3 days x $400)

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Adjusting entries for accruals
continued

◦ Journal entry

Oct. 31 Salaries Expense 1200

Salaries Payable 1200
(To record accrued salaries)

◦ General Ledger

Salaries Expense Salaries Payable

26/10 4000 31/10 Adj. 1200
31/10 Adj. 1200
31/10 Bal. 5200

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 THE ADJUSTED TRIAL BALANCE
AND FINANCIAL STATEMENTS
 The adjusted trial balance is prepared after
all adjusting entries have been journalised
and posted
 Its purpose is to prove equality of the total
debit and credit balances in the ledger
after adjustments have been made
 The adjusted trial basis is the main basis
for preparation of the financial statements

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Preparing financial statements
 The income statement is prepared from
the revenue and expense accounts
 The statement of changes in equity is
Current prepared using the owner’s
capital and drawings accounts and net
profit (or loss) from income statement
 The statement of financial position is
prepared from asset and liability accounts
and ending owner’s capital balance
reported in statement of changes in
equity
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 PIONEER ADVERTISING AGENCY PIONEER ADVERTISING AGENCY
Adjusted Trial Balance Income Statement
as at 31 October 2010 for the month ended 31 October 2010
Account Debit Credit Income
Cash $15 200 Service revenue $10 600
Accounts Receivable 200
Advertising Supplies 1 000 Expenses
Prepaid Insurance 550 Salaries expense $5 200
Office Equipment 5 000 Advertising supplies expense 1 500
Accumulated Depreciation Rent expense 900
- Office Equipment $ 40 Insurance expense 50
Bank Loan 5 000 Interest expense 50
Notes Payable 2 500 Depreciation expense 40
Unearned Income 800 Total expenses 7 740
Salaries Payable 1 200 Profit $ 2 860
Interest Payable 50
CR Hill, Capital --
CR Hill, Drawings 500
PIONEER ADVERTISING AGENCY
Service Revenue 10 600 Statement of Changes in Equity
Salaries Expense 5 200 for the month ended 31 October 2010
Advertising Supplies Expense 1 500 CR Hill, Capital, 1 October $ 0
Rent Expense 900 Add: Investment by owners 10 000
Insurance Expense 50 CR Hill, Capital 10 000
Interest Expense 50 Profit 2 860
Depreciation Expense 40 12 860
Less: Drawings 500
$30 190 $30 190 CR Hill Capital, 31 October $2 360
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 PIONEER ADVERTISING AGENCY PIONEER
PIONEER ADVERTISING
ADVERTISINGAGENCY
AGENCY
Adjusted Trial Balance StatementBalance
of Financial
SheetPosition
as at 31 October 2010 as as
at at
3131 October
October2010
2007
Account Debit Credit Assets
Assets
Cash $15 200 Cash
Cash $15
$15200
200
Accounts Receivable 200 Accounts
Accounts Receivable
Receivable 200
200
Advertising Supplies 1 000 Adverting
Adverting Supplies
Supplies 1 1000
000
Prepaid Insurance 550 PrepaidInsurance
Prepaid Insurance 550
550
Office Equipment 5 000 Office
OfficeEquipment
Equipment $5$5
000000
Accumulated Depreciation Less:Accumulated
Less: Accumulated Depreciation 40 404 960
Depreciation 4 960
- Office Equipment $ 40 Total
TotalAssets
Assets $21
$21910910
Notes Payable 5 000
Liabilitiesand
Liabilities andOwner’s
Owner’s Equity
Equity
Accounts Payable 2 500
Unearned Income 800 Liabilities
Liabilities
Salaries Payable 1 200 NotesPayable
Notes Payable $5 000
Interest Payable 50 Accounts
Accounts Payable
Payable 2 500
CR Hill, Capital 10 000 UnearnedIncome
Unearned Income 800
CR Hill, Drawings 500 SalariesPayable
Salaries Payable 1 200
Service Revenue 10 600 InterestPayable
Interest Payable 50
Salaries Expense 5 200 Total
Total liabilities
liabilities 9 550
Advertising Supplies Expense 1 500 Owner’sEquity
Owner’s Equity
Rent Expense 900 CRHill,
CR Hill,Capital
Capital 12 360
Insurance Expense 50 Total
Total Liabilities
Liabilities
Interest Expense 50 and
and Owner’s
Owner’s Equity
Equity $21 910
910
Depreciation Expense 40
$30 190 $30 190 Capital balances at 31 Oct.
from statement of changes
in equity on previous slide 31