Adjusting Process
Objectives
[Link] the nature and need for adjusting entries.
[Link] adjusting entries related to:
• Prepaid expenses
• Accrued expenses
• Unearned revenues
• Accrued revenues
The need for adjusting entries
It is prepared at the end of an accounting
period to update or adjust the balances of
accounts.
It is important that adjustment are
recorded corectly so that the company’s
profit for the period be measured properly.
Note for adjusting entries
All adjusting entries affect at least one
income statement account and one balance
sheet account.
Adjusting entries ensure the application of
the accrual basis of accounting and the
matching principle.
Cash basis Example:
Cash basis of accounting On December 27, 2022,
recognizes revenue when A B C C o m p a n y
c a s h i s r e c e i v e d a n d rendered service to a
recognizes expenses client for P12,000
when cash is paid. payable on January 5,
2023.
Date Particulars Debit Credit
2023
Jan. 5 Cash 12,000
Service income 12,000
To record payment received from
the customer.
Cash basis Example:
Cash basis of accounting P a i d r e n t f o r s i x
recognizes revenue when months, P 30,000.
cash is received and
recognizes expenses
when cash is paid.
Particulars Debit Credit
Rent expense 30,000
Cash 30,000
To record payment of rent.
Accrual basis
On December 27, 2022,
Re co g n i ze s reve n u e s ABC Company
when sales are made or rendered service to a
services are performed, client for P12,000 on
regardless of when the account.
cash received.
Date Particulars Debit Credit
2022
Dec. 27 12,000
Service income 12,000
To record service rendered to customer on
account.
Adjusting
Entries
Adjusting Entries
These are journal entries made to assign revenue and
expenses in the proper period and update the related
asset and liability accounts.
They are made in consonance with the accrual basis of
accounting which recognizes revenue when earned
regardless when received and expenses when incurred
regardless when paid.
Revenue Recognition Principle
Revenue is earned when the goods have been
delivered or the service has been rendered.
Matching principle
The matching principle measures all
expenses incurred such as salaries, rent,
and utilities and matches them against the
revenue earned during the same period.
Types of adjusting entries
1. Prepaid Expenses
2. Accrued Expense
3. Unearned Revenue
4. Accrued Revenue
Prepaid Expenses
Are expenses paid in advance.
They are treated as assets.
Prepaid insurance
Prepaid rent
Subscription
Accrued Expenses
They represent accrued expenses are costs that a
company has incurred but hasn't yet paid for.
Wages payable
Interest payable
Utilities payable
Unearned Revenues or Deferred
Revenues Liability account
Are revenue collected or received in advance
by the business.
Unearned rent
Unearned subscription
A company may use any of the two methods since they
are both acceptable.
Scenario
On october 1, 2015, El Nino Apartelle, received P120,000
from SIS Company, a tenant occupying an office space in the
building. The amount is for one year rental beginning month
of October paid in advance by SIS.
Date Liability Method Date Revenue Method
Oct. 1 Cash 120,000
Oct. 1 Cash 120,000
Unearned Rent Revenue Rent Revenue 120,000
120,000
To record receipt of advance To record receipt of advance
payment payment
Accrued Revenues
Accrued revenues are an accounting
concept used to describe revenues that
have been carned but not yet received
in cash or recorded.
We will now illustrate the preparation of
adjusting entries using data appearing on the
December 31 trial balance of ABC Company
and certain additional information.
A. Supplies, P10,000. Unused supplies as of
December 31 amounted to P3,000.
B. Prepaid Insurance, P12,000.
This represents the annual
insurance premium covering the
period April 1 to March 31 of the
following year.
C. Unearned service revenue,
P8,000. the portion earned as of
December 31 amounted to P6,000.
D. Note receivable, P30,000. This
is a six month, 12% note dated
September 1 received from a
customer. Both the principal and
interest are due at maturity.
E. Wages incurred but not yet paid,
P5,000.
Adjusting entries for
depreciation
Depreciation
is the reduction in the value of an
asset with the passage of time,
due in particular to wear and tear
a cost of P7,000, a residual
value of P1,000, and an
estimated useful life of five
years.