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    Notes On Adjusting Entries

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    Adjusting entries are prepared at the end of an accounting period to update asset, liability, revenue, and expense accounts for events or transactions that have occurred but have not been recorded. There are two main types of adjusting entries: accruals and deferrals. Accruals recognize revenues when earned and expenses when incurred, even if no cash has been received or paid. Deferrals allocate revenues or expenses between accounting periods using methods like the asset/liability or income/expense approach.

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    Notes On Adjusting Entries

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    Adjusting entries are prepared at the end of an accounting period to update asset, liability, revenue, and expense accounts for events or transactions that have occurred but have not been recorded. There are two main types of adjusting entries: accruals and deferrals. Accruals recognize revenues when earned and expenses when incurred, even if no cash has been received or paid. Deferrals allocate revenues or expenses between accounting periods using methods like the asset/liability or income/expense approach.

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    NOTES ON ADJUSTING ENTRIES

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    Adjusting entries are prepared at the end of an accounting period to update asset, liability, revenue, and expense accounts for events or transactions that have occurred but have not been recorded. There are two main types of adjusting entries: accruals and deferrals. Accruals recognize revenues when earned and expenses when incurred, even if no cash has been received or paid. Deferrals allocate revenues or expenses between accounting periods using methods like the asset/liability or income/expense approach.

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    © All Rights Reserved
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    75 views6 pages

    Notes On Adjusting Entries

    Uploaded by

    Red
    Adjusting entries are prepared at the end of an accounting period to update asset, liability, revenue, and expense accounts for events or transactions that have occurred but have not been recorded. There are two main types of adjusting entries: accruals and deferrals. Accruals recognize revenues when earned and expenses when incurred, even if no cash has been received or paid. Deferrals allocate revenues or expenses between accounting periods using methods like the asset/liability or income/expense approach.

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    of 6

    ADJUSTING ENTRIES

    • ADJUSTMENTS- used to bring the assets, liabilities, revenues and expenses


    up-to-date at the end of an accounting period
    • Prepared at the end of the accounting period
    • Adjustments must be prepared before actual financial statements were
    prepared.

    ACCOUNTING PRINCIPLESOR CONCEPTS BEHIND ADJUSTING ENTRIES


    • TIME PERIOD/ PERIODICITY
    The indefinite life of an entity is being divided into equal time intervals at the
    end of which, business activities are measured and financial statements are
    prepared

    • ACCRUAL BASIS
    • Recognize expenses when incurred whether or not cash has been paid
    • Recognize revenues when earned whether or not cash has been
    received

    • REVENUE RECOGNITION
    • Revenue is recognized when earned.
    • Revenue is considered earned when:
    • Services have been FULLY-RENDERED
    • Goods have been fully delivered

    • MATCHING PRINCIPLE
    • Expenses are recognized when incurred.
    • Applied in recognizing EXPENSES that are incurred in the process of
    generating revenues
    • Cause-and-effect relationships

    BASIC ADJUSTING ENTRIES


    1. ACCRUALS
    a. Adjusting entries to RECOGNIZE revenues earned, regardless of
    when collection was made (Accrued Income/ Accrued Revenue)
    b. Adjusting entries to RECOGNIZE expenses incurred, regardless of
    when payment has been made. (Accrued Expense)

    a. ACCRUED INCOME- a revenue or income that is considered earned but


    not yet received in cash and not yet recorded in the books.
    - Examples of Accrued Revenues:
    - Services performed but not yet collected
    - Accumulated through the passage of time (Interest, Rent)
    - An asset-revenue account relationship exists
    - Prior to adjustment, assets and revenues are understated

    Pro-forma adjusting entry:


    ______ Receivable xxxx
    ______ Income xxxx
    Example:
    Cyril Company received a P24,000 15% 90-day note from a customer on
    November 18, 2016 and due on February 16, 2017. As of December 31,
    2016 Cyril has only recorded the receipt of the promissory note.

    Dec.31 Interest Receivable 430


    Interest Income 430
    (24,000 x 0.15 x 43/360)

    Joey Trading owns a vacant office space that is being leased out to
    tenants for a monthly rent of P12,500. The rent for December 2016 will be
    received by Joey on January 5, 2017, as such no entry has been made
    pertaining to the rent. Assume Joey follows a calendar year.

    Dec.31 Rent Receivable 12,500


    Rent Income 12,500
    To record rent for the month of
    December


    b. ACCRUED EXPENSE - an expense that is already incurred but not yet
    paid in cash and not yet recorded in the books
    -Expenses incurred but not paid yet
    - A liability-expense account relationship exists
    - Prior to adjustment, liabilities and expenses are understated

    Pro-forma adjusting entry:


    ______ Expense xxxx
    ______ Payable xxxx

    Example:
    Sydney issued a P100,000, 12%, 60-day promissory note last
    December 1, 2016. As of December 31, 2016, only the issuance of the
    promissory note was recorded by Sydney.

    Dec.31 Interest Expense 1,000


    Interest Payable 1,000
    (100,000 x 0.12 x 30/360)

    XYZ Company’s unpaid utility bill for the month of December amounted
    to P7,800. XYZ follows a calendar year.

    Dec.31 Utilities Expense 7,800


    Utilities Payable 7,800
    To record utilities for the month
    2. DEFERRALS
    a. PRE-PAYMENTS
    - PREPAID EXPENSES- advanced payments of business expenses or
    supplies to be used in business operations
    - Examples: Supplies, Prepaid Rent, Prepaid Insurance
    - Expires either with the passage of time or through usage
    - ASSET-EXPENSE account relationship

    TWO METHODS TO ACCOUNT FOR PRE-PAYMENTS


    a. Asset Method
    b. Expense Method

    ASSET METHOD
    • Under this method, the prepayments are INITIALLY recorded as ASSETS.

    Initial Entry:
    Prepaid Expense xxxx
    Cash xxxx

    • At the end of the accounting period, the ASSET account is OVERSTATED


    prior to any adjustments. While the EXPENSE account is UNDERSTATED.
    • The adjusting entry is prepared to SEPARATE THE EXPIRED AND THE
    UNEXPIRED PORTION of the prepayment.
    • EXPIRED PORTION- represents an EXPENSE
    • UNEXPIRED PORTION- represents an ASSET

    Pro-forma Adjusting Entry:


    Expense xxxx
    Prepaid Expense xxxx
    (Use the EXPIRED PORTION)

    Example:
    Mango Company who follows a calendar year paid a 1-yr advertising contract
    worth P24,000 last May 1, 2016. Mango recorded the transaction thru a debit
    to Prepaid Advertising

    Initial Entry:
    May 1 Prepaid Advertising 24,000
    Cash 24,000
    Paid 1-yr advertising contract

    Adjusting Entry:
    Dec. 31 Advertising Expense 16,000
    Prepaid Advertising 16,000
    (24,000 x 8/12)
    EXPENSE METHOD
    • Under this method, the prepayments are INITIALLY recorded as
    EXPENSES.

    Initial Entry:
    Expense xxxx
    Cash xxxx

    • At the end of the accounting period, the EXPENSE account is


    OVERSTATED prior to any adjustments. While the ASSET account is
    UNDERSTATED
    • The adjusting entry is prepared to SEPARATE THE EXPIRED AND THE
    UNEXPIRED PORTION of the prepayment.
    • EXPIRED PORTION- represents an EXPENSE
    • UNEXPIRED PORTION- represents an ASSET

    Pro-forma Adjusting Entry:


    Prepaid Expense xxxx
    Expense xxxx
    (Use the UNEXPIRED PORTION)

    Example:
    Mango Company who follows a calendar year paid a 1-yr advertising contract
    worth P24,000 last May 1, 2016. Mango recorded the said transaction thru a
    debit to Advertising Expense.

    Initial Entry:
    May 1 Advertising Expense 24,000
    Cash 24,000
    Paid 1-yr advertising contract

    Adjusting Entry:
    Dec. 31 Prepaid Advertising 8,000
    Advertising Expense 8,000
    (24,000 x 4/12)

    b. PRE-COLLECTIONS
    UNEARNED INCOME-income received or collected in advance, before
    they are earned
    -represents advance collections from customers
    - Examples: Unearned Service Income, Unearned Rent Income
    - LIABILITY-INCOME account relationship

    TWO METHODS TO ACCOUNT FOR PRE-COLLECTIONS


    a. Liability Method
    b. Income Method
    LIABILITY METHOD
    • Under this method, the pre-collections are INITIALLY recorded as
    LIABILITIES.

    Initial Entry:
    Cash xxxx
    Unearned Income xxxx

    • At the end of the accounting period, the LIABILITY account is


    OVERSTATED and the INCOME account is UNDERSTATED prior to any
    adjustments
    • The adjusting entry is prepared to SEPARATE THE EARNED AND THE
    UNEARED PORTION of the pre-collection.
    • EARNED PORTION- represents an INCOME
    • UNEARNED PORTION- represents an LIABILITY

    Pro-forma adjusting entry


    Unearned Income xxxx
    Income xxxx
    (Use the EARNED PORTION)

    Example:
    Aug 31, 2016- Bravo Company received a 1-year advance rental payment
    from a tenant, P72,000. Upon receipt, Bravo recorded the amount as
    Unearned Rent. Assume Bravo follows a calendar year.

    Initial Entry:
    Aug. 31Cash 72,000
    Unearned Income 72,000
    To record receipt of 1-yr rent

    Adjusting entry
    Dec. 31 Unearned Rent 24,000
    Rent Income 24,000
    (72,000 x 4/12)

    INCOME METHOD
    • Under this method, the pre-collections are INITIALLY recorded as INCOME

    Initial Entry:
    Cash xxxx
    Income xxxx

    • At the end of the accounting period, the INCOME account is


    OVERSTATED and the LIABILITY account is UNDERSTATED prior to any
    adjustments
    • The adjusting entry is prepared to SEPARATE THE EARNED AND THE
    UNEARED PORTION of the pre-collection.
    • EARNED PORTION- represents an INCOME
    • UNEARNED PORTION- represents an LIABILITY
    Pro-forma adjusting entry
    Income xxxx
    Unearned Income xxxx
    (Use the UNEARNED PORTION)
    Example:
    Aug 31, 2016- Bravo Company received a 1-year advance rental payment
    from a tenant, P72,000. Upon receipt of the amount, Bravo credited Rent
    Income. Assume a calendar year.

    Initial Entry:
    Aug. 31Cash 72,000
    Rent Income 72,000
    To record receipt of 1-yr rent

    Adjusting entry
    Dec. 31 Rent Income 24,000
    Unearned Rent 24,000
    (72,000 x 8/12)

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