ADJUSTING THE
ACCOUNTS
Review of accounting concepts
• Accrual basis vs. cash basis
• Revenue and expense recognition
principles
• Periodicity concept
The need for adjustments
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.
Note: Involves changing the current balance
of the account to what is the correct balance
for proper financial reporting.
Adjustments
Note:
Each adjusting entry affects a balance sheet
account and an income statement account.
•Deferral
•Accrual
Deferral
The postponement of the recognition of “an
expense already paid but not yet incurred,”
or of “a revenue already collected but not yet
earned”.
•Prepaid expenses
•Unearned revenues
Prepaid expenses
• Prepaid rent
• Prepaid insurance
• Supplies
Note: Asset method vs. Expense method
Prepaid rent
On July 31, ABC Co. paid 6 months’ rent in
advance. Monthly rent is P2,000.
Prepaid insurance
On March 1, ABC Co. paid P27,000 for an 18-
month insurance coverage.
Supplies
Supplies at the beginning of the year = P16,000
Supplies purchased during the year = P47,000
Supplies at the end of the year = P24,000
Prepaid rent
On July 31, ABC Co. paid 6 months’ rent in
advance. Monthly rent is P2,000.
ASSET METHOD:
July 31 Prepaid Rent 12,000
Cash 12,000
Dec 31 Rent Expense 10,000
Prepaid Rent 10,000
Prepaid rent
On July 31, ABC Co. paid 6 months’ rent in
advance. Monthly rent is P2,000.
EXPENSE METHOD:
July 31 Rent Expense 12,000
Cash 12,000
Dec 31 Prepaid Rent 2,000
Rent Expense 2,000
Prepaid insurance
On March 1, ABC Co. paid P27,000 for an 18-
month insurance coverage.
ASSET METHOD:
March 1 Prepaid Insurance 27,000
Cash 27,000
Dec 31 Insurance Expense 15,000
Prepaid Insurance 15,000
Prepaid insurance
On March 1, ABC Co. paid P27,000 for an 18-
month insurance coverage.
EXPENSE METHOD:
March 1 Insurance Expense 27,000
Cash 27,000
Dec 31 Prepaid Insurance 12,000
Insurance Expense 12,000
Supplies
Supplies at the beginning of the year = P16,000
Supplies purchased during the year = P47,000
Supplies at the end of the year = P24,000
ASSET METHOD:
Purch Supplies 47,000
Cash 47,000
Dec 31 Supplies Expense 39,000
Supplies 39,000
Supplies
Supplies at the beginning of the year = P16,000
Supplies purchased during the year = P47,000
Supplies at the end of the year = P24,000
EXPENSE METHOD:
Purch Supplies Expense 47,000
Cash 47,000
Dec 31 Supplies 24,000
Supplies Expense 24,000
Depreciation of PPE
• Cost
• Salvage value/residual value/scrap value
• Useful life
= (Cost – SV)
Useful life
(Cost – SV) – depreciable amount
Depreciation of PPE
On April 30, 2019, ABC Co. bought an equipment
costing P188,000 with an estimated salvage value
of P8,000 and a useful life of 10 years. Determine
the amount of depreciation as of December 31,
2019.
Depreciation Expense 12,000
Accumulated Depreciation 12,000
Unearned revenue
• Unearned Advertising Revenue
Note: Liability method vs. Income method
Unearned Advertising Revenue
On October 31, ABC Co. received P13,500
from a client for a 3-month advertising
contract beginning December of the current
period.
Unearned Advertising Revenue
On October 31, ABC Co. received P13,500
from a client for a 3-month advertising
contract beginning December 1.
LIABILITY METHOD:
Cash 13,500
Unearned Adv Revenue 13,500
Unearned Adv Revenue 4,500
Advertising Revenue 4,500
Unearned Advertising Revenue
On October 31, ABC Co. received P13,500
from a client for a 3-month advertising
contract beginning December 1.
INCOME METHOD:
Cash 13,500
Advertising Revenue 13,500
Advertising Revenue 9,000
Unearned Adv Revenue 9,000
Accrual
The recognition of “an expense already
incurred but unpaid,” or “revenue earned but
uncollected”.
•Accrued expense
•Accrued income
Accrued expense
• Accrued Salaries
• Accrued interest
– Interest = Principal x Interest Rate x Length of time
Pro forma entry:
Expense Account XXX
Liability Account XXX
Accrued Salaries
Salaries for the 2nd half of December 2019
will be paid on January 5, 2020. Total
salaries is P48,000. No entry was made to
take up the unpaid salaries.
AJE:
Salaries Expense 48,000
Salaries Payable 48,000
Accrued Interest
The company obtained a P500,000, 12%
p.a. loan from the bank on June 1, 2019.
The loan is payable for 5 years. Compute for
the interest expense as of December 31,
2019.
AJE:
Interest Expense 35,000
Interest Payable 35,000
Accrued revenue
• Accrued interest
Pro forma entry:
Receivable Account XXX
Income Account XXX
Accrual for uncollectible
accounts
Doubtful of collection:
Uncollectible Accounts Expense
Allowance for Uncollectible Accounts
Definitely uncollectible:
Allowance for Uncollectible Accounts
Accounts Receivable
Accrual for uncollectible
accounts
Computation:
a. % of credit sales
b. % of receivables
Uncollectible accounts - % of credit sales
The beginning balance of Allowance for
Uncollectible Accounts is P4,500. During the
year, 3% of net credit sales totaling
P300,000 was believed to be doubtful of
collection.
AJE:
Uncoll. Accounts Expense 9,000
Allow. for Uncoll. Accounts 9,000
Uncollectible accounts - % of receivables
The beginning balance of Allowance for
Uncollectible Accounts is P4,500. During the
year, 2% of the Accounts Receivable
balance, P300,000 is doubtful of collection.
AJE:
Uncoll. Accounts Expense 1,500
Allow. for Uncoll. Accounts 1,500