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    Adjusting Entries Lecture

    Uploaded by

    Mikylla Batara

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Adjusting Entries Lecture

    Uploaded by

    Mikylla Batara
    0 views5 pages

    Copyright

    © © All Rights Reserved

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    Copyright:

    © All Rights Reserved
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    0 views5 pages

    Adjusting Entries Lecture

    Uploaded by

    Mikylla Batara

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Business Transactions and Their Analysis as Applied to the Accounting Cycle of a Service

    Business
    Pedro Matapang started his Matapang Computer Repairs business on February 14, 2016. The following
    transactions transpired in February 2016:

    14- Pedro Matapang invested PHP200,000 into


    his Matapang Computer Repair business.
    15 - Pedro purchased one computer unit from
    XY Computer Store to be used for his business.
    He issued check number 001 amounting to
    PHP25,000.
    16 - Pedro hired Juana Magaling, an experienced
    secretary.
    17 – Repaired the computer of Jean and
    collected PHP10,000.
    18 – Repaired the computer of Mike; however,
    Mike will pay PHP15,000 only on March 18,
    2016.
    19 – Pedro purchased Office Supplies from MM
    Merchandise amounting to PHP5,000 on
    account. Pedro will pay this on March 30, 2016.
    25 – Paid the salary of Juana amounting to
    PHP4,000.
    Adjusting Entries

    ■ At the end of the accounting period, some accounts in the general ledger would require
    updating. The journal entries that bring the accounts up to date are called adjusting entries.
    One purpose of adjusting entries is for income and expenses to be reported in the correct
    period.

    ■ Adjusting entries ensure that both the revenue recognition and matching principles are
    followed.

    Revenue Recognition

    ■ accounting standards require that revenue is recognized when it is earned and the amount can
    be measured reliably.

    Illustration 1: Assume that you are preparing the financial statements for Feb 2016. Matapang Computer
    Repairs rendered services amounting to PHP25,000 for the repair of the computer units of Mr. Tamad
    on Feb 26, 2016. However, the payment for these services of Matapang will be made on Mar 15, 2016.
    Question: when should you recognize the PHP25,000 as revenue or income, in February or March?

    Applying the revenue recognition principle, it should be reported as revenue for February 2016.

    Illustration 2: Assume that you are preparing the financial statements for February 2016. On February
    28, 2016, Matapang Repairs received payment from Mr. Tamad amounting to PHP25,000. This payment
    is for the repair of the computer units of Mr. Tamad on March 5, 2016.

    Question: When should you recognize the PHP25,000 as revenue or income, in February or March?
    Applying the revenue recognition principle, it should be reported as revenue in March 2016. Take note
    that since the service will be rendered in March, the revenue should also be earned in March.
    What about February 2016? The amount is recorded as a liability because Matapang Repairs has the
    obligation to render this service in the future.

    Matching Principle

    ■ this principle directs a business to report an expense on its income statement within the same
    period as its related income.

    Illustration 1: Assume that you are preparing the financial statements for February 2016. The business
    gives a commission of 10% service income to its employees. The commission is paid the following
    month. On February 2016, the total service income for the month is PHP100,000. Thus, the employees
    are entitled to a commission of PHP10,000. This amount will be paid on March 12, 2016.

    Question: When should the commission expense be recorded in the book of accounts of the business, in
    March or in February?

    Applying the matching principle, the answer is in February.


    Five basic sources of adjusting entries

    1. Depreciation expense
    2. Deferred expenses or prepaid expenses
    3. Deferred Income or unearned income
    4. Accrued expenses or accrued liabilities
    5. Accrued income or accrued assets

    Depreciation

    ■ Depreciation is a method of allocating the cost of an asset to an expense over the accounting
    periods that make up the asset’s useful life.

    ■ Examples of assets subject to depreciation are: Office Equipment, Building, and Transportation
    Equipment/Service Vehicle.

    Note: Land is not subject to depreciation because the value of land mostly increases as time passes.

    Straight line depreciation can be calculated using any of the following formulas:

    ( Cost − Residual Value )


    ● Depreciation per annum=
    Useful Life

    Where:

    ●Cost is the initial acquisition or construction costs related to the asset as well as any subsequent capital
    expenditure.

    ●Residual Value, also known as its scrap value, is the estimated proceeds expected from the disposal of
    an asset at the end of its useful life. The portion of an asset's cost equal to residual value
    is not depreciated because it is expected to be recovered at the end of an asset's useful life.

    ●Useful Life is the estimated time period that the asset is expected to be used starting from the date it
    is available for useup to the date of its disposal or termination of use. Useful life is normally expressed
    in units of years or months.
    Quiz on Depreciation:
    1. Paid P160,000 cash to purchase a delivery van on January 1. The van was expected to have a 3-
    year life and 10,000 salvage value. Prepare the adjusting entry for the year ending Dec. 31,
    2018.
    (160,000−10,000)
    = 3
    150,000
    =
    3

    = 50,000

    2. On January 1, 2018, A. Avanza Company acquired a new computer set for 115,000. It is
    anticipated that the computer will be used for 5 years with no salvage value. Prepare adjusting
    entries for September 30, 2018.

    115,000 9
    = X12
    5
    9
    = 23,000X12
    = 17,250

    3. The equipment costing 80,000 has useful life of 5 years and its estimated salvage value is
    14,000. Prepare adjusting entries for Jan 31. Depreciation is provided using the straight line
    depreciation method.

    (80,000−14,000) 1
    = 5
    X12
    (66,000) 1
    = 5
    X 12
    = 1,100
    4. A parcel of land costing 588,000 has
    a useful life of five years. Record the
    depreciation for December 31, 2016.

    5. On December 1, 2017, B. Alvaro Company acquired a new computer for 131,400. It is


    anticipated that the computer will be used for 4 years with no salvage value. Prepare adjusting
    entries for May 31, 2018.

    131,400 5
    = 4
    X12
    6
    = 32,850X
    12

    = 16,425

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