Professional Documents
Culture Documents
Adjusting Entries
Adjusting Entries
E N T R I E S
B Y : I R I S H A . C A N D E L , C P A
THE NEED FOR ADJUSTMENTS:
• Adjusting entries reflect in the accounts economic activities that have occurred but have not yet
been recorded. It assigns revenues to the period in which they are earned and expenses to the
period in which they are incurred.
• These entries are needed to ensure that the recognition and derecognition 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 to what is the correct balance for proper financial reporting.
TWO GENERAL TYPES OF ADJUSTMENTS:
DEFERRALS & ACCRUALS
1. DEFERRALS – It is the postponement of the recognition of “an expense already paid but not
yet incurred”, or “revenue already collected but not yet earned”. This adjustment deals with
an amount already recorded in the balance sheet account. The entry, in effect, decreases the
balance sheet account and increases an income statement account.
A. Accruing expenses to reflect expenses incurred during the accounting period that are
unpaid and unrecorded.
B. Accruing revenues to reflect revenues earned during the accounting period that are
uncollected and unrecorded.
ADJUSTMENT FOR DEFERRALS
A. Allocating Assets to Expenses – These are expenditures entities made that benefit more than
one period. Generally, these expenditures are 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 to an expense account.
1. Prepaid Expenses – These are expenses paid in advance. Thus, prepaid expenses
are assets not expenses. At the end of an accounting period, a portion or all of these prepayments
may have expired or consumed. The portion of an asset that has expired becomes an expense.
A D J U S T M E N T A . P R E PA I D R E N T
• On May 1, BukSU 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 asset had expired and should be
treated as an expense. The analysis is shown below.
TRANSACTION : Expiration of one month’s rent
ANALYSIS : Asset decreased. Owner’s equity decreased.
RULES : Decrease in assets are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Rent Expense P 4,000
Prepaid Rent P 4,000
A D J U S T M E N T B . P R E PA I D
INSURANCE
• On May 1, BukSU acquired a one-year insurance coverage on the service vehicle and paid
P14,400 premiums.
1. Cost – Asset cost is the amount an entity paid to acquire the depreciable asset.
2. Salvage Value – It is the amount that the asset can probably be sold for at the end of its estimated
useful life.
3. Useful Life – It is the estimated number of periods that an entity can make use of the asset.
C O M P U T AT I O N O F D E P R E C I AT I O N
• STRAIGHT LINE METHOD:
Asset Cost xx
Less: Estimated Salvage Value xx
Depreciable Cost xx
Divided by: Estimated Useful Life xx
Depreciation Expense xx
A D J U S T M E N T D & E . D E P R E C I AT I O N O F
SERVICE VEHICLE AND EQUIPMENT
• Supposed that BukSU bought a service vehicle for P420,000 which will last for seven years and with
a salvage value of P84,000. Meanwhile, the office equipment was acquired on May 1 for P60,000
with five years useful life and will be worthless at that time. Analysis of the transaction is shown
below.
TRANSACTION : Recording of depreciation expense
ANALYSIS : Asset decreased. Owner’s equity decreased.
RULES : Decrease in assets are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Depreciation Expense – Service Vehicle P 4,000
Accumulated Depreciation – Serv. Vehicle P 4,000
B. Allocating Revenues Received in Advance to Revenues – there are times entity received
cash for services or goods even before service is rendered or goods are delivered. When such
is received, the entity has an obligation to perform services or deliver goods. The liability
referred to is UNEARNED REVENUES.
As the company delivers or render services, it earns a part of the advance payments.
This earned portion must be transferred from the unearned revenue account to revenue
account.
A D J U S T M E N T F. U N E A R N E D
REFERRAL REVENUES
• Assume that a publishing company received P10,000 as advance payment for magazine
subscription. At the end of the month, half of it has been delivered. Analysis of the transaction is
shown below.
B. Accrued Revenues – An entity may provide services during the period that are neither paid
for by clients nor billed at the end of the period. The value of these services represents revenue
earned. Any revenue that has been earned but not recorded calls for an adjusting entry.
ADJUSTMENT G. ACCRUED SALARIES
• Assume that BukSU’s office assistant are paid salaries every October 10 and 25 with monthly
salary, P11,000. At month-end, the employee have worked for four days (October 26,27, 30 &
31). The salary for these days is rightfully an expense in October, and a liability should be
recorded that entity owes the employees salaries for those days. Analysis of the transaction is
shown below.
TRANSACTION : Accrual of unrecorded expense
ANALYSIS : Liabilities increased. Owner’s equity decreased.
RULES : Increase in liabilities are recorded by credits. Decrease in owner’s equity are
recorded by debits.
ENTRY : Salaries Expense P 2,000
Salaries Payable P 2,000
ADJUSTMENT H. ACCRUED INTEREST
• On May 2, BukSU 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 accrues interest at 20% annually. Analysis of the transaction is shown below.