Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 1

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

ADJUSTING ENTRIES - ACCRUALS

Learning Objectives:
At the end of this module, learners must be able to:
a. Identify accounts to be adjusted;
b. properly record adjusted transactions;

Adjusting phase in the Accounting Cycle

There are events that cause silent or gradual changes on the elements of financial statements
but they are not directly observable and not usually captured by the accountant or bookkeeper
during the accounting process. Accountants need to record these accountable events in the
accounting books thru adjustment called “adjusting entries”. Adjusting entries are made at the end
of the accounting period to have fairly presented financial statements.

These silent or gradual changes include:

1. Accrual of income and expenses
2. Expiration of prepayments and earnings of deferrals
3. Usage of supplies
4. Decrease in the value of receivables due to bad debts
5. Gradual degradation or exhaustion of fixed assets (PPEs)
6. Accounting errors

Adjusting entries are required for the following items:

1) Accrual of income
2) Accrual of expense
3) Deferral of expense or prepayments
a. Asset method
b. Expense method
4) Deferral of pre-collection
a. Liability method
b. Income method
5) Bad debts expense/Doubtful accounts expense – to be discussed thoroughly in FABM-2 ☺
a. Based on revenue
b. Based on accounts receivable
c. Aging of accounts receivable
6) Depreciation expense (systematic allocation) – to be discussed thoroughly in FABM-2 ☺
7) Correcting Entries

Adjusting entries are accounting journal entries that convert a company's accounting records
to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a
company's financial statements.

To demonstrate the need for an accounting adjusting entry let's assume that a company
borrowed money from its bank on December 1, 2020 and that the company's accounting period
ends on December 31. The bank loan specifies that the first interest payment on the loan will be due
on March 1, 2021. This means that the company's accounting records as of December 31 do not
contain any payment to the bank for the interest the company incurred from December 1 through
December 31. (Of course the loan is costing the company interest expense every day, but the actual
payment for the interest will not occur until March 1.)

For the company's December income statement to accurately report the company's
profitability, it must include all of the company's December expenses—not just the expenses that
were paid. Similarly, for the company's balance sheet on December 31 to be accurate, it must report
a liability for the interest owed as of the balance sheet date. An adjusting entry is needed so that

Fundamentals of Accountancy, Business & Management - 1 Page 1 of 6

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

December's interest expense is included on December's income statement and the interest due as of
December 31 is included on the December 31 balance sheet. The adjusting entry will debit Interest
Expense and credit Interest Payable for the amount of interest from December 1 to December 31.

In the next few modules, these adjusting entries will be discussed. In this module we will tackle
on Accruals.

ACCRUALS
Accruals (or accrual-type adjusting entries) involve both expenses and revenues and are
associated with the first scenario mentioned in the introduction to this topic:

• Nothing has been entered in the accounting records for certain expenses and/or revenues,
but those expenses and/or revenues did occur and must be included in the current period's
income statement and balance sheet.

Accrual of Expenses
An accountant might say, "We need to accrue the interest expense on the bank loan." That
statement is made because nothing had been recorded in the accounts for interest expense, but
the company did indeed incur interest expense during the accounting period. Further, the company
has a liability or obligation for the unpaid interest up to the end of the accounting period. What the
accountant is saying is that an accrual-type adjusting journal entry needs to be recorded.

The accountant might also say, "We need to accrue for the wages earned by the employees
on Sunday, December 30, and Monday, December 31." This means that an accrual-type adjusting
entry is needed because the company incurred wages expenses on December 30-31 but nothing will
be entered routinely into the accounting records by the end of the accounting period on December
31.

A third example is the accrual of utilities expense. Utilities provide the service (gas, electric,
telephone) and then bill for the service they provided based on some type of metering. As a result
the company will incur the utility expense before it receives a bill and before the accounting period
ends. Hence, an accrual-type adjusting journal entry must be made in order to properly report the
correct amount of utilities expenses on the current period's income statement and the correct
amount of liabilities on the balance sheet.

A. Adjusting Entry (Accrued Expense) at the end of the accounting period

DEBIT (in PHP) CREDIT (in PHP)

(Name) EXPENSE ###
(Name) EXPENSE PAYABLE ###
To record unpaid expenses

Take note that you should replace the “(Name)” in the journal entry with the name of the
account being accrued.

For example, if the accrued account is interest, then you should replace the “(Name)” with
“Rent”. Hence it should appear like this:

DEBIT (in PHP) CREDIT (in PHP)

INTEREST EXPENSE ###
INTEREST EXPENSE PAYABLE ###
To record unpaid interest

This will be the standard entry for accruals of expenses. There is always a debit of an expense
account and a credit of a liability account. Following the format above, you simply need to replace
“(Name)” with the proper accounting name of the account being accrued.
Fundamentals of Accountancy, Business & Management - 1 Page 2 of 6
 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

B. Examples

Example 1
AY-YU Company received a BAWADI bill in the amount of P9,800 on Dec. 26, 2020. The
company intends to pay on Jan. 8, 2021.

DEBIT (in PHP) CREDIT (in PHP)

Utilities Expenses 9,800
Utilities Expense Payable (or Utilities Payable) 9,800
To record unpaid utilities expense

ANALYSIS:
This is liability on the part of the company because the BAWADI bill is for the month of
December but the company has not yet paid for it. Hence, a liability on the part of the company
should be recognized at the end of the accounting period.

This is assuming that the end of the accounting period is Dec. 31. We need to record the
liability to comply with the matching principle and realization concept that requires accountants to
record revenues and expenses in the period in which they are incurred regardless of when the
relevant payments are made.

Example 2
AY-NA Company has unpaid salaries at the end of Dec. 31, 2020 amounting to
P18,800.

DEBIT (in PHP) CREDIT (in PHP)

Salaries Expenses 18,800
Salaries Expense Payable (or Salaries Payable) 18,800
To record unpaid salaries

Example 3
EISH Company has issued a note to it’s supplier on Nov. 1, 2020 and will be paid on
March of the following year. The amount was P10,000 and the interest was 10%.

In this problem, we need to show you first the initial entry on Nov. 1,2020.

Initial Entry (Nov. 1, 2020) DEBIT (in PHP) CREDIT (in PHP)
Supplies 10,000
Notes Payable 10,000
To record purchase of supplies on credit

Adjusting Entry (Dec. 31, 2020) DEBIT (in PHP) CREDIT (in PHP)
Interest Expense 166.67*
Interest Expense Payable (or Interest Payable) 166.67
To record unpaid interest

*Remember how to compute for interest? Interest = Principal x rate x time (I = Prt)
I = Prt
I = 10,000 x 10% x 2/12 (Time is always on annual basis. The interest accrued in this problem is only 2 months, hence the 2/12)
I = 10,000 x .10 x 2/12
I = 1,000 x 2/12
I = P166.67 (This is the interest for the 2 months that elapsed)

Fundamentals of Accountancy, Business & Management - 1 Page 3 of 6

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

If you look at the 2 entries, there are 2 recorded accruals, one for the principal amount and
one for the interest. But the principal amount is not an adjusting entry as it was already recorded at
the time the transaction was made, while the accrued interest was recorded at the end of the
accounting period. Hence, it is an adjusting entry.

Accrued Income
Accountants also use the term "accrual" or state that they must "accrue" when discussing
revenues that fit the first scenario. For example, an accountant might say, "We need to accrue for
the interest the company has earned on its certificate of deposit." In that situation the company
probably did not receive any interest nor did the company record any amounts in its accounts, but
the company did indeed earn interest revenue during the accounting period. Further the company
has the right to the interest earned and will need to list that as an asset on its balance sheet.

Similarly, the accountant might say, "We need to prepare an accrual-type adjusting entry for
the revenues we earned by providing services on December 31, even though they will not be billed
until January."

This is basically the same concept as the accrual of expenses, only this time, instead of
recording expense and liability, we will record income and receivable.

A. Adjusting Entry (Accrued Revenue) at the end of the accounting period

DEBIT (in PHP) CREDIT (in PHP)

(Name) RECEIVABLE ###
(Name) INCOME ###
To record income earned

Take note that you should replace the “(Name)” in the journal entry with the name of the
account being accrued.

For example, if the accrued account is interest, then you should replace the “(Name)” with
“Rent”. Hence it should appear like this:

DEBIT (in PHP) CREDIT (in PHP)

INTEREST RECEIVABLE ###
INTEREST INCOME ###
To record interest earned

This will be the standard entry for accruals of revenue. There is always a debit of an receivable
account and a credit of an income account. Following the format above, you simply need to
replace “(Name)” with the proper accounting name of the account being accrued.

B. Examples

Example 1
BAWADI billed AY-YU company in the amount of P9,800 on Dec. 26, 2020. AY-YU
company intends to pay on Jan. 8, 2021.

DEBIT (in PHP) CREDIT (in PHP)

Utilities Receivable 9,800
Service Income 9,800
To record earned income

Fundamentals of Accountancy, Business & Management - 1 Page 4 of 6

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

ANALYSIS:
This is receivable on the part of the BAWADI because the bill is for the month of December but
AY-YU company has not yet paid for it. Hence, a receivable and income on the part of BAWADI
should be recognized at the end of the accounting period.

Just like the previous explanation, matching principle and realization concept is being
observed here.

Example 2
A one-year, 6% note receivable in the amount of P200,000 was received on January 1,
2020. The interest and the principal are payable on maturity date. Give the adjusting entry
on June 30, 2020.

In this problem, we need to show you first the initial entry on Jan. 1,2020.

Initial Entry (Jan. 1, 2020) DEBIT (in PHP) CREDIT (in PHP)
Note Receivable 200,000
Service Income (assumption) 200,000
To record income earned

Adjusting Entry (June 30, 2020) DEBIT (in PHP) CREDIT (in PHP)
Interest Receivable 6,000*
Interest Income 6,000
To record interest earned

*Remember how to compute for interest? Interest = Principal x rate x time (I = Prt)
I = Prt
I = 200,000 x 6% x 6/12 (Time is always on annual basis. The interest accrued in this problem is only 6 months, hence the 6/12)
I = 200,000 x .06 x 6/12
I = 12,000 x 6/12
I = P6,000(This is the interest for the 6 months that elapsed)

If you look at the 2 entries, there are 2 recorded accruals, one for the principal amount and
one for the interest. But the principal amount is not an adjusting entry as it was already recorded at
the time the transaction was made, while the accrued interest was recorded at the end of the
accounting period. Hence, it is an adjusting entry.

Final Example with Explanation

MESEKET Co. gave O-ONGA Inc. a ₱100,000 promissory note which pays 12% interest P.A. on
October 1, 2019. The note has a maturity of 6 months.

analyze this problem, draw a timeline as your guide. Determine the important dates, the date
of the note, the maturity date of the note, the cut-off date (end of year or end of accounting
period), then mark these on the timeline.

Analysis: The amount of ₱6,000 will be

collected and recorded on March 31, 2020.
However, Under the accrual basis of
accounting and realization concept, a
portion of the interest is already earned from
October 1 to December 31, 2019 that is
called “accrued income”. On the part of the
borrower, that portion is referred to as
“accrued expense”.

Fundamentals of Accountancy, Business & Management - 1 Page 5 of 6

 Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: [email protected]; Website: www.uc-bcf.edu.ph

MODULE 5 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

The adjusting entry to record accrual of income would be:

Dec. 31 Accrued Interest Income 3,000
Interest Income 3,000
To record accrued interest income

The lender (GCQ Inc.) should recognize an income due to passage of time. The account title
“Interest Receivable” can be used in lieu of Accrued Interest Income which is an asset account.

The adjusting entry to record accrual of expense would be:

Dec. 31 Interest expense 3,000
Accrued Interest expense 3,000
To record accrued interest expense

The borrower (ECQ Co.) should recognize an expense due to passage of time. The account title
“Interest Payable” can be used in lieu of Accrued Interest expense which is a liability account.

References:
• Banggawan, R., Asuncion, D.(2017).Fundamentals of Accountancy, Business and
Management 1. Aurora Hill, Baguio City: Real Excellence Publishing.
• Ferrer, R., Millan, Z.(2017). Fundamentals of Accountancy, Business and Management 1.
Bakakeng Sur, Baguio City: Bandolin Enterprise.
• Ong, F.(2016). Fundamentals of Accountancy, Business and Management 1. South Triangle,
Quezon City: C & E Publishing.
• Baysa, G., Lupisan, M.(2011). Accounting for Partnership and Corporation. Mandaluyong City:
Millenium books,
• https://www.accountingcoach.com/adjusting-entries/explanation

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