THE TRIAL

BALANCE
 TYPES OF TRIAL BALANCE

A. Unadjusted Trial Balance- is prepared before adjusting entries are made.

Adjusting entries, and consequently financial statements, cannot be prepared
unless the total debits and credits in the unadjusted trial balance are equal.

B. Adjusted Trial Balance- is prepared after adjusting entries but before the
financial statements are prepared.

C.Post-closing Trial Balance- is prepared after the closing process

 ADJUSTING ENTRIES

• are made prior to the

preparation of financial
statements to update certain
accounts so that they reflect
correct balances as of the
designated time.
 PURPOSE OF ADJUSTING ENTRIES

1. To take up unrecorded income and expense of

the period.

2. To split mixed accounts into their real and

nominal elements.
ADJUSTING THE ACCOUNTS
PERIODICITY CONCEPT
Liquidation is the only way to know how
successfully a business has operated is to close
its doors, sell all its assets, pay the liabilities and
return any excess cash to the owners.

• However, it is not a practical way of

measuring business performance.
Accounting information is valued when it is communicated early
enough to be used for economic decision making. To provide
timely information, accountants have divided the economic life of a
business into artificial time periods.

This assumption is referred to as the Periodicity

concept.
• Accounting periods are generally a month, a quarter or a year. The
most basic accounting period is one year. .
• Entities differ in their choice of the accounting year – fiscal, calendar
or natural.
• A fiscal year is a period of any twelve consecutive months.
• A calendar year is an annual period ending of December 31.

• A natural business year is a twelve-month period

that ends when the business activities are at their
lowest level of the annual cycle.
A period less than a year is an interim period. Some even adopt an annual
reporting period of 52 weeks.

Businesses need periodic reports to assess their financial condition and

performance. The periodicity concept ensures that accounting information is
reported at regular intervals. It interacts with the revenue recognition and
expense recognition principles to underlie the use of accruals. To measure profit
in a fair manner, entities update the income and expense accounts immediately
before the end of the period.
REVENUE AND EXPENSE RECOGNITION PRINCIPLES
Revenue should be recognized when earned.
PAS (Philippine Accounting Standards) No. 18, Revenue, states that “
revenue is recognized when it is probable that economic benefit will
flow to the enterprise and these economic benefits can be measured
reliably.” It shall be measured at the fair value of the consideration
received or receivable. In most cases, revenue is earned in the
accounting period when the services are rendered or the goods sold are
delivered.
The expense recognition principle is the
basis for recording expenses. Per the
framework, expenses are recognized in
the income statement when it is
probable that decrease in future
economic benefits related to a decrease
in an asset or an increase of a liability
has arisen, and that the decrease in
economic benefits can be measured
reliably.
This principle directs accountant to identify all
expenses incurred during the accounting period, to
measure the expenses and to match these expenses
against the revenues earned during that same span
of time. To match expenses against revenues
means to subtract the expenses from the revenues
in order to computer profit or loss
THE NEED FOR ADJUSTMENTS
Adjustments are needed to ensure that the revenue recognition and expense recognition
principles are followed thus resulting to financial statements reporting the effects of all
transactions at the end of the period.

Adjusting entries involve changing account balances at the end of the

period from what is the current balance of the account to what is the
correct balance for proper financial reporting. Without adjusting entries,
financial statements may not fairly show the solvency of the entity in the
balance sheet and the profitability in the income statement.
DEFERRALS AND ACCRUALS
Accountants use adjusting entries to apply accrual accounting to
transactions that cover more than one accounting period. There are two
general types of adjustments made at the end of the accounting period-
deferrals and accruals.

Each adjusting entry affects a balance sheet account (an asset

or liability account) and an income statement account (income
or expense account).
Deferrals is the postponement of the recognition of “ an
expense already paid but not yet incurred,” or of “revenue
already collected but not yet earned”. This adjustment deals
with an amount already recorded in a balance sheet account; the
entry, in effect, decreases the balance sheet account and
increases an income statement account.
 Deferrals would be needed in two cases:

1. Allocating assets to expense to reflect

expenses incurred during the accounting period
(e.g. prepaid insurance, supplies and
depreciation).

2. Allocating revenues received in advance

to revenue to reflect revenues earned during the
accounting period.
Accrual is the recognition of an “expense already incurred but
unpaid”, or “revenue earned but uncollected”. This adjustment
deals with an amount unrecorded in any account; the entry, in
effect, increases both a balance sheet and an income statement
account.
 Accruals would be required in to cases:

1. Accruing expense to reflect expenses

incurred during the period that are unpaid and
unrecorded.

2. Accruing revenues to reflect revenues

earned during the accounting period that are
uncollected and unrecorded.
ADJUSTMENTS FOR DEFERRALS (STEP 5)
 Allocating Assets to Expenses
Entities often make expenditures that benefit more than one period. These
expenditures are generally debited to an asset account. At the end of each
accounting period, the estimated amount that has expired during the period or that
has benefited the period is
transferred from the asset account to an expense
account. Two of the more important kinds of
adjustments are prepaid expenses, and
depreciation of property and equipment.
 Prepaid Expenses
Some expenses are customarily paid in advance. These
expenditures (e.g. supplies, rent and insurance) are
called prepaid expenses. Prepaid expenses are assets,
not expenses. At the end of an accounting period, a
portion or all of these prepayments may have expired.
The portion of an asset that has expired becomes an
expense. Prepaid expenses expire either with the
passage of time or through use and consumption.
The flow of cost from balance sheet to income statement is illustrated below:

If adjustments for prepaid expenses are not made at the end of the period, both the balance sheet
and the income statement will be misstated. First, the assets of the entity will be over stated;
second, the expenses of the company will be understated. For this reason owner’s equity in the
balance sheet and profit in the income statement will both be overstated.
EXAMPLE:

On May 1, Wedding “ R” Us paid P8,000 for two months’ rent in advance.

This expenditure resulted to an asset consisting of the right to occupy the
office for two months. A portion of the asset expires and becomes an expense
each day. By May 31, one-half of the assets had expired, and should be treated
as an expense. The
 Transaction Expiration of one month’s rent.

Analysis Assets decrease. Owner’s equity decreased

Decreases in assets are recorded by credits. Decreases in owner’s
Rules
equity are recorded by debits.
Entries Decrease in owner’s equity is recorded by debit to rent expense.
Decrease in assets is recorded by a credit prepaid rent.

DR. CR.
Rent Expense 4,000
Prepaid Rent 4,000

After adjustments, the prepaid rent account has a balance of P4,000 (May 1 prepayment of
P8,000 less the P4,000 expired portion); the rent expense account reflects the P4,000 expense
for the month.
 SUPPLIES

On May 8, Wedding “R” Us purchased supplies, P18,000. During the month, the
entity used supplies in the process of performing services for clients. There is no
need to account for these supplies every day since the financial statements will
not be prepared until the end of the month. At the end of the accounting period,
Gevera makes a careful physical inventory of the supplies. The inventory count
showed that supplies costing P15,000 are still on hand. This transaction is
analyzed and recorded as follows:
 This transaction is analyzed and recorded as follows:

Transaction Consumption of supplies.

Analysis Assets decrease. Owner’s equity decreased

Decreases in assets are recorded by credits. Decreases in owner’s

Rules
equity are recorded by debits.

Supplies Expenses 3,000

Supplies 3,000

The asset account supplies now reflect the adjusted amount of P15,000 (P18,000less 3,000).
In addition, the amount of supplies expensed during the accounting period is reflected as
P3,000.
DEPRECIATION OF PROPERTY AND EQUIPMENT
When entity acquires long-lived assets such as buildings,
service vehicle, computers or office furniture, it is basically
buying or prepaying for the usefulness of that asset. These
assets help generate income for the entity. Therefore, a
portion of cost of the assets should be reported as expense
in each accounting period. Proper accounting requires the
allocation of the cost of asset over estimated useful life. The
estimated amount allocated to any one accounting period is
called depreciation or depreciation expense.
THREE FACTORS ARE INVOLVED IN COMPUTING DEPRECIA
EXPENSE:

• Asset cost is the amount an entity paid to acquire the depreciable

asset.
• Estimated salvage value (fair market value) is the amount that the
asset can probably be sold for at the end of its estimated useful life.
• Estimated useful life is the estimated number of periods that an entity
can make use of the asset. Useful life is an estimate, not an exact
measurement
Accountants estimate periodic depreciation. They have developed a number of methods for
estimating depreciation. The simplest procedure is called the straight-line method. The formula
for determining the amount of depreciation expense for each period using this method is:

Asset cost xx

Less: Estimated salvage value xx

Depreciation xx
Divided by: Estimated useful life xx
Depreciation Expense for each time period xx

Where:
or D = C –S
D= Depreciation S = Salvage value
N N= Useful life
C= Cost of asset
The asset account is not directly reduced when recording depreciation expenses.
Instead, the reduction is recorded in a contra account called accumulated depreciation.
• A contra account is use to record reduction in a related account and its normal
balance is opposite that of the related account. Use of the contra accounts –
accumulated depreciation – allows the disclosure of the original cost of the related
assets in the balance sheet. The balance of the contra account is deducted from the
cost to obtain the book value of the property and
equipment.
 SERVICE VEHICLE AND OFFICE EQUIPMENT.

Suppose that Wedding”R” Us estimated that the service vehicle which was bought of May 4, will
last for seven years (eighty-four months) and with a salvage value of P 84,000. The office
equipment that was acquired on May 5 will have a useful life of five years (sixty months) and will
be worthless at that time. Substitution of the pertinent amounts into the basic formula will yield
depreciation for service vehicle and office equipment for the month as P4,000 [(420,000-84,000)/
84 months] and 1,000 (60,000/60 months), respectively. These amounts represent the cost allocated
to the month, thus reducing the asset accounts and increasing the expense accounts. As a matter of
company policy, the period May 4 to 31 is considered a month.
The analysis follows:

Transaction Recording depreciation expense.

Analysis Assets decrease. Owner’s equity decreased

Decreases in assets are recorded by credits. Decreases in owner’s

Rules
equity are recorded by debits.

Depreciation Expense- Service Vehicle 4,000

Accumulated Depreciation- Service Vehicle 4,000

Depreciation Expense- Office Equipment 1,000

Accumulated Depreciation- Office Equipment 1,000
After adjustments, the property and equipment section of the balance sheet for Wedding “R” Us
will be:
Wedding “R” Us
Partial Balance Sheet
May 31,2019

Property and Equipment (Net):

Service Vehicle P420,000
Less: Accumulated Depreciation 4,000 P416,000

Office equipment P60,000

Less: Accumulated Depreciation 1,000 59,000

475,000
ALLOCATING REVENUES RECEIVED IN ADVANCE TO REVENUES

There are times when an entity receives cash for

services or goods even before service is rendered or
goods are delivered. When such is received in
advance, the entity has the obligation to perform
services or deliver goods. The liability referred to is
unearned revenues.
For example, publishing companies usually receive payments for magazine subscriptions in advance.
These payments must be recorded in a liability account. If the company fails to deliver the magazines
for subscription period, subscribers are entitled to a refund. As the company delivers each issue of the
magazine, it earns a part of the advance payments. This earned portion must be transferred from the
unearned subscription revenues account to the subscription revenues account.

As the goods or
Value of Balance sheet services are provided
Income Statement
goods or
services to be
Liabilities Revenues
provided in
Unearned Revenues Revenue from
future periods
_________
UNEARNED REFERRAL REVENUES.

On May 15, Wedding “R” us received P10,000 as an advance payment for referrals
made. Assume that by the end of the month, one of the three couples referred has
already taken their marriage vows and as a result the amount of P4,000 pertaining to
the referred event has been realized.
 This transaction is analyzed as follows:
Recognition of income where cash is received in advance.
Transaction

Analysis Liabilities decreased. Owner’s equity increase.

Decrease in liabilities are recorded by debits. Increases in owner’s
Rules
equity are recorded by credits.

Unearned Referral Revenues 4,000

Referral Revenues 4,000

The liability account unearned referral reflects the referral revenues still to be earned, P6,000.
The referral revenues account reflects the amount of referrals already completed and considered
as revenues during the month, P4,000.
ADJUSTMENTS FOR ACCRUALS (STEP 5)
 ACCRUED EXPENSES

An entity often incurs expenses before paying for them. Cash

payments are usually made at regular intervals of time such as
weekly, monthly, quarterly or annually. If the accounting period
ends on a date that does not coincide with the scheduled cash
payment date, an adjusting entry is needed to reflect the
expense incurred since the last payment. This adjustment helps
the entity avoid the impractical preparation of hourly or daily
journal entries just to accrue expenses. Salaries, interest,
utilities and taxes are examples of expenses that are incurred
before payment is made.
 ACCRUED SALARIES

Entities pay their employee at regular

intervals. It can be weekly, semi-
monthly or monthly. Weekly payrolls
are usually made on Fridays (for five-
day work week) or Saturdays (for six-
day workweek). Wedding “R” Us pays
salaries every two Saturdays
MAY
The office assistant and the account executive
paid salaries on May 13 and 27. At month-
end, the employees have worked for three
days (May 29, 30 and 31) beyond the last pay
period. The employees have earned the salary
for these days, but are not due to be paid until
the regular pay day in April. The salary for
these three days is rightfully an expense for
May and the liabilities should reflect that the
entity owes the employees’ salaries for those
days.
Each of the employee’s salary rate is P7,800 per month or P300 per day (P7,800/26 working days).
The expense to be accrued is P1,800 (P300 x 3 days x 2 employees). This accrued expense can be
analyzed as shown below:

Transaction Accruals of unrecorded expense.

Analysis Liabilities increased. Owner’s Equity decreased.

Increases in liabilities are recorded by credits. Decreases in

Rules
owner’s equity are recorded by debits.

Salaries Expense 1,800

Salaries Payable 1,800

The liability of P1,800 is now correctly reflected in the salaries payable account. The actual
expense incurred for salaries during the month is P15,600.
 ACCRUED INTEREST.

On May 2, Gevera borrowed P210,000 from Metrobank. She issued a

promissory note that carried a 20% interest per annum. Both the
interest and principal will be payable in one year. The note issued to
the bank accrue interest at 20% annually. At the end of May, Gevera
owed the bank P3,500 (see the computation below) for interest in
addition to the P210,000 loan. Interest is charge for the use of money
over time. Interest expense is matched to a particular period during
which the benefit- the use of borrowed money – is received. The
interest is the fixed obligation and accrues regardless of the results of
the entity’s operations.
Interest rates are expressed at annual rates, so if interest is being calculated for less than a
year, the calculations must express time as a portion of a year. Thus, the interest expense
(simple) incurred on this one during the month is determined by the following formula:

i=Prt

Interest = Principal x Interest Rate x Length of Time

= P 210,000 x 20% per year x 1/12 of the year
= P210,000 x .20 x 1/12
= P3,500
 The adjusting entry to record the interest expense incurred in May is as follows:

Transaction Accruals of unrecorded expense.

Analysis Liabilities increased. Owner’s equity decreased.

Increases in liabilities are recorded by credits. Decreases in

Rules
owner’s equity are recorded by debits.

Interest Expense 3,500

Interest Payable 3,500
 ACCRUED REVENUES

An entity may provide services during the period

that are neither paid for by clients not billed at the
end of the period. The value of these services
represents revenue earned by the entity. Any
revenue that has been earned but not recorded
during the accounting period calls for an adjusting
entry that debits an asset account and credits an
income account.
 UNEARNED REFERRAL
REVENUES.

Suppose that Wedding “R” Us agreed to arrange a rush but simple civil wedding for a
madly-in-love couple in the afternoon of May 31. The entity intended to charge fees of
P3,500 for the services, which is earned but unbilled. This should be recorded as
shown below:
 Transaction Accrual of unrecorded revenue.

Analysis Asset increased. Owner’s equity increased.

Increases in asset are recorded by debits. Increases in owner’s

Rules equity are recorded by credits.

Accounts Receivable 3,500

Consulting Revenues 3,500
ACCRUALS FOR UNCOLLECTIBLE ACCOUNTS
Entities often allow clients to purchase good or avail of services on credit.
Some of these accounts will never be collected; hence there is need to reflect
these as charges against income. In practice, an expense is recognized for the
estimated uncollectible accounts in the current period, rather than when
specific accounts actually become uncollectible. This practice produces a better
matching of income and expenses. Estimates of uncollectible accounts may be
based on credit sales
for the period or on the accountreceivable balance.
EXAMPLE:
Assume that an entity made credit sales of P1,100,000 in 2018 and prior experience
indicates an expected 1% average uncollectible accounts rate based on credit sales. The
contra account—Allowance for Uncollectible account (Allowance for bad debts) has a
normal credit balance and is shown in the balance sheet as a deduction from Accounts
Receivable. The allowance account need to be increases by P11,000 (1,100,000 x 1%)
because accounts receivable in that amount is doubtful of collection. The adjustment will
be:

Uncollectible Accounts Expense 11,000

Allowance for Uncollectible Accounts 11,000
Throughout the accounting period, when there is positive evidence that a specific account
is definitely uncollectible, the appropriate amount is written off against the contra account.
For example, if P1,500 receivable were considered uncollectible, that amount would be
written off as follows:

Allowance for Uncollectible Accounts 1,500

Accounts Receivable 1,500

No entry is made to uncollectible Accounts Expense, since the adjusting entry has already
provided for an estimated expense based on previous experience for all receivables.
In the discussion, all the transactions that required
adjustments are initially recoded in balance sheet
accounts. A prepaid expense is initially recorded in a
prepaid asset account. Likewise, revenue received in
advance is initially recorded in a liability account –
unearned revenues. In the case of a prepaid expense, an
adjusting entry is made at the end of the period to
transfer the portion of the expired asset to an expense
account. Similarly, an adjusting entry is made to transfer
earned revenues from liability account to an income
account.
 PREPAID EXPENSES

On Oct. 10, 2018, Calaguas Company acquired a 3-year insurance policy for
P36,000 paid in advance. Calaguas may record this transaction depending on
which of the two accounting policies it follows. The P36,000 pay may initially
be recorded either as an asset or as an expense.
 Initial entry is recorded as:

1. An asset
2018
Oct 10 Prepaid Insurance 36,000
Cash 36,000
2. An expense
2018
Oct. 10 Insurance Expense 36,000
Cash 36,000

At the end of the year, an adjusting entry is needed to establish the proper balances in the prepaid
insurance and insurance expense accounts. On Dec. 31, 2018, three months’ insurance has been
consumed, or insurance expense is equal to P3,000 (P36,000/36 months x 3 months). Prepaid Insurance
equivalent to P33,000 (P36,000-P3,000) remain. The appropriate adjustment depends on how the initial
transaction was recorded.
Adjusting entry required if initial entry is recorded as:
The effect of adjusting entries on the ledger accounts after posting is the same
regardless of the initial debits as shown below:

As an Asset As an Expense
Dec. 31, balances: Dec. 31, balances:
Prepaid Insurance 33,000 debit Prepaid Insurance 33,000 debit
Insurance Expense 3,000 debit Insurance Expense 3,000 debit
UNEARNED REVENUES

On July 1, 2018, Marasigan Company received a P48,000 check for 2 years’ rent paid in
advance. On this date, Marasigan may record a credit in that amount either as unearned
rental revenue or rental revenue, depending on its accounting policy.
 Initial entry is recorded as:

1. A liability
2018
July 1 Cash 48,000
Unearned Rent Revenue 48,000
2. A revenue
2018
July 1 Cash 48,000
Rent Revenue 48,000

At the end of the year, an adjusting entry is needed to establish the proper balances in the rent revenue
and unearned revenue accounts. On Dec. 31, 2018 six months’ rent has been eared, or rent revenue is
equal to 12,000 (48,000 /24 months by 6 months) . Unearned rent revenues equivalent to 36,000
(48,000- 12,000) remain, the appropriate adjustment depends on how the initial transaction was
recorded.
 Adjusting entry required if initial entry is recorded as:

1. A liability
2018
Dec. 31 Unearned Rent Revenues 12,000
Rent Revenues 12,000

2. A revenue
2018
Dec. 31 Rent Revenues 36,000
Unearned Rent Revenues 36,000
The effect of adjusting entries on the ledger accounts after posting is the same
regardless of the initial debits as shown below:

As an Asset As an Expense

Dec. 31, balances: Dec. 31, balances:

Unearned Rent Revenues 36,000 debit Unearned Rent Revenues 36,000debit Rent Revenues
12,000 credit Rent Revenues 12,000 credit
 "There are no secrets to
success. It is the result of
preparation, hard work and
learning from failure."

-Collin Powell