ADJUSTING JOURNAL ENTRIES

Adjusting entries are journal entries made at the end of an accounting period
to ensure that:
1. Revenues are recorded in the period they are earned (Revenue
Recognition Principle).
2. Expenses are recorded in the period they are incurred (Matching
Principle).

Adjusting entries fall into five main categories (usually 4):

1. Prepaid Expenses (Deferred Expenses) – Costs paid in advance that are

partially used up by the end of the period.
2. Unearned Revenues (Deferred Revenues) – Cash received before services are
performed or goods are delivered.
3. Accrued Expenses – Expenses incurred but not yet paid or recorded.
4. Accrued Revenues – Revenues earned but not yet received or recorded.
5. Depreciation / Allocation of Long-Term Assets – allocation of the cost of
long-term assets over their useful life

` *Definitions of Terms
Accounting Period / apply the portion of Deferred – cash was
Fiscal Period: The time revenues earned or received or paid first,
the financial reports expenses used, so they but revenue/expense
cover (e.g., July 1, 2021 belong to the right will be recognized later
– June 30, 2022). period
Depreciation –
Day of Payment: The Incurred: the allocation of the cost of
date a business actually expense/obligation a tangible asset over its
pays cash for expenses happened or arose, useful life.
incurred earlier regardless of payment.
(accounts payable or Day of Collection: The
other liabilities). Accrued – date a business actually
earned/incurred but not receives cash for
Day of Adjustment: yet recorded in cash or revenue earned earlier
The end of the period books (accounts receivable).
when you recognize or
1. Prepaid Expenses (asset → expense)
Expenses paid in advance, recognized later as used.

● Prepaid Rent → Rent Expense

● Prepaid Insurance → Insurance Expense
● Supplies → Supplies Expense
● Prepaid Advertising → Advertising Expense
● Prepaid Subscriptions / Licenses

2. Unearned Revenues (liability → revenue)

Cash received before earning, recognized when service/product delivered.

● Unearned Rent → Rent Revenue

● Unearned Service Revenue (advance payments from clients)
● Unearned Tuition Fees (schools)
● Gift Cards / Customer Deposits

3. Accrued Revenues (asset → revenue)

Revenue earned but not yet billed/received.

● Interest Receivable → Interest Income

● Accounts Receivable (services performed but not yet billed) → Service Revenue
● Rent Receivable → Rent Revenue

4. Accrued Expenses (expense → liability)

Expenses incurred but not yet paid.

● Salaries Expense → Salaries Payable

● Interest Expense (on loans/mortgage) → Interest Payable
● Utilities Expense → Utilities Payable
● Taxes Expense → Taxes Payable

5. Estimates / Other Adjustments

Allocations or valuation adjustments.

● Depreciation Expense → Accumulated Depreciation

● Bad Debts Expense → Allowance for Doubtful Accounts
● Amortization Expense → Intangible Assets
● Depletion Expense → Natural Resources
 Types of Accounts
1. Prepaid Expenses (Deferred Expenses): Payments made in advance for goods
or services that will be used up in future periods.

2. Unearned Revenues (Deferred Revenues): Cash received before services are

performed or goods are delivered, recorded as a liability.

3. Accrued Expenses: Expenses that have been incurred but not yet paid or
recorded.

4. Accrued Revenues: Revenues that have been earned but not yet received or
recorded.

5. Depreciation Expense: The systematic allocation of a tangible asset’s cost over

its useful life.

6. Doubtful Accounts / Bad Debts: Estimated losses from accounts receivable

that may not be collectible.

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THE ACTUAL ADJUSTING JOURNAL ENTRIES

Prepaid Expenses – when payment comes before use
Prepaid expenses are assets a business pays in advance, which become expenses as
time passes or are used up.

Examples: Prepaid insurance, Prepaid rent, Prepaid advertising, Supplies

A. Asset Method
Eg. A company pays ₱12,000 for 12 months’ insurance on Jan 1. At the end of
January, 1 month has expired.

Day of Payment (initial recording):

Prepaid Expense → to record the future benefit (asset).
Cash → to record the payment made.
Day of Adjustment (end of period):
(Insert type) Expense → to record the cost consumed.
Prepaid (Insert type) → to reduce the asset since it was used.

B. Expense Method

Day of Payment (initial recording):

(Insert type) Expense → to record the payment immediately as expense.
Cash → to record the payment made.

Day of Adjustment (end of period):

Prepaid (Insert type) → to record the unused portion (asset).
(Insert type) Expense → to reduce the over-recorded expense.

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Unearned Revenues – when payment comes before service

Cash is received in advance, but revenue is only recognized when earned.

Examples: Subscription income, Rent collected in advance, Service fees collected

early

E.g Received ₱6,000 for 3 months’ rent in advance. 1 month earned.

a. Liability Method (preferred)

Day of Payment (initial recording):

● Cash → to record money received.

● Unearned Revenue → to record liability for service still owed.

Day of Adjustment (end of period):

● Unearned Revenue → to reduce liability.

● Revenue (Service/Rent/etc.) → to record revenue earned.

b. Revenue Method
Day of Payment (initial recording):
Cash → to record money received.

_____ Revenue → to record as income immediately.

Day of Adjustment (end of period):

Revenue → to reduce overstatement.

Unearned Revenue → to record the unearned portion as liability.

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Accrued Expenses – when use comes before payment

- Expenses incurred but not yet paid at the end of the period.

Examples: Salaries payable, Utilities payable, Interest payable

e.g: Employees earned ₱5,000 in December but will be paid in January.

Day of Adjustment (end of period):

(Insert type) Expense → to record cost incurred.

(Insert type) Payable → to record liability.

Bad Debts (Allowance Method) – when some receivables will

not be collected
- Estimates losses from customers who might not pay.

Examples: Accounts Receivable – doubtful accounts

Day of Adjustment (end of period):

Bad Debt Expense (Provision for Losses) → to record estimated loss.

Allowance for Doubtful Accounts → contra-asset reducing Accounts

Receivable

(Amount depends on method, e.g., Aging of Receivables or % of Sales.)

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Accrued Revenues – when service comes before payment
- Revenue earned but not yet collected at the end of the period.

e.g: Consulting services ₱2,000 provided in December, payment to be received in

January.

Examples: Interest receivable, Services performed but not yet billed

Day of Adjustment (end of period):

Accounts Receivable (or Interest Receivable) → to record asset owed.
Revenue (or Interest Income) → to record earned income.

Day of Receipt (Future Payment Date)

Cash → to record the cash received.

Credit: Accounts Receivable → to remove the receivable.

Accrued Interest Income: when interest is earned before

cash is received
- when a business earns interest during the period but hasn’t yet received the
payment.

Day of Adjustment (end of period):

Interest Receivable→ to record interest cost incurred.
Interest Payable → to record the liability.
(Formula: I = Principal × Rate × Time)

Day of Collection (future payment date):

Cash → to record the collection of interest.

Interest Receivable → to reduce the receivable since it has been collected.

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Accrued Interest Expense: when interest is incurred before

cash is paid
- When a business owes interest during the period but hasn’t yet paid it.

e.g: A company borrowed ₨100,000 on September 1 at 6% annual interest.

Day of Adjustment (end of period):
Interest Expense → to record interest cost incurred.
Interest Payable → to record the liability.
(Formula: I = Principal × Rate × Time)

Day of Receipt (future payment date):

Interest Payable → to remove the liability.

Cash → to record the payment made.

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Depreciation – when assets are used gradually

- Allocates the cost of tangible assets over their useful life.

Examples: Equipment, Buildings, Vehicles

e.g: Equipment cost ₱12,000, 5-year useful life, no salvage. Annual depreciation =
12,000 ÷ 5 = ₱2,400

Day of Payment (initial recording):

Asset (Equipment/Building/etc.) → to record purchase.

Cash (or Payable) → to record payment/obligation.

Day of Adjustment (end of period):

Depreciation Expense → to record cost of use for the period.
Accumulated Depreciation (Asset type) → contra-asset, reduces book value.

(Amount depends on method, e.g., Straight Line or Declining Balance.)

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Merchandise Inventory (Periodic) – when adjusting ending

stock
- Adjusts inventory to reflect goods actually on hand at year end.

E.g Ending inventory ₱8,000, purchases ₱20,000, beginning inventory ₱5,000.

Day of Payment (initial recording):
Purchases / Merchandise Inventory → to record buying goods.

Cash / Accounts Payable → to record payment or liability.

Day of Adjustment (end of period):

Merchandise Inventory (Ending) → to record remaining goods on hand.
Income and Expense Summary → to adjust cost of goods sold.

METHODS OF CALCULATING DEPRECIATION

Straight Line Method
‘
# Title Formula Journal Entry

a Accrued Interest Expense Principal x Rate x Months ____ Expense

Expired/12 ____ Payable

a.1 Rate Weekly Rate= Salary/7

Monthly Rate = Salary/31
Biweekly Rate = Salary/10

a.2 Accrued Salaries Expense Daily (or period) rate × Number of Salaries Expense
days (or periods) worked in the Salaries Payable
accounting year

b Accrued Interest Revenue Principal x Rate x Months ____ Receivable

expired/12 ____ Revenue

c Prepaid Insurance Total Cost/12 x Months expired Insurance Expense

Prepaid Insurance

c.1 Prepaid Expenses Total Cost x Months Expired/Total ____ Expense

Months in advance Prepaid ____

d Unearned Revenues Total Cash Received - Amount Unearned Revenue

Unearned = Amount Earned ____ Revenue

d.2 Unearned Rent - Liability Total Cost x Months Expired/Total Unearned Rent
Method Months Rent Revenue

d.2 Unearned Rent - Revenue Total Cost x Months Rent Revenue

Method Unexpired/Total Months Unearned Rent

e Annual Depreciation (Cost - Salvage Value)/(Useful Life Depreciation

in years) Expense
Accumulated
Depreciation -
_______

e.1 Monthly Depreciation (Cost - Salvage Value)/12 x Useful Depreciation

Life in Years) x # of months Expense
Accumulated
Depreciation -
_______
e.2 Accumulated Deprecation Monthly Depreciation x Months Depreciation
Expired OR Annual Depreciation x Expense
Months Expired/12 Accumulated
Depreciation -
_______

g Cost of Goods sold (COGS) Beginning Balance + Purchases Merchandise

during the year - Ending Balance Inventory, End
Income and
Expense Summary

Interest Principal x Rate x Time

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