FUNDACC1 Journal Entry:
Basic Accounting - Adjusting the Accounts Dec. 1 Prepaid Rent P8000
Cash P8000
The Need for Adjustments Adjusting Entry:
Dec. 31 Rent Expense P2000
Accountants make adjusting entries to reflect in the accounts Prepaid Rent P2000
information on economic activities that have occurred but have not
yet been recorded. Adjusting entries assign revenues to the period in EXPENSE METHOD - the advance payment is immediately debited as
which they are earned, and expenses to the period in which they are expense
incurred. These entries are needed to measure properly the profit for Journal Entry:
the period and to bring related asset and liability accounts to correct Dec. 1 Rent Expense P8000
balances for the financial statements. Cash P8000
Adjusting Entry:
Dec. 31 Prepaid Rent P6000
Deferrals and Accruals Rent Expense P6000
There are two general types of adjustments made at the end of the
accounting period: deferrals and accruals. 2. Prepaid Insurance
Eysiwanopayb Co. acquired a one-year comprehensive insurance
*Each adjusting entry affects a balance sheet (an asset or a liability coverage on the service vehicle and paid P14400 premiums on Oct. 1.
account) and an income statement (income or expense account).
ASSET METHOD - the advance payment is debited as an asset
Journal Entry:
Deferral - is the postponement of the recognition of “an expense Oct. 1 Prepaid Insurance P14400
already paid but not yet incurred” or of “revenue already collected Cash P14400
but not yet earned”. This adjustment deals with an amount already Adjusting Entry:
recorded in a balance sheet account; the entry, in effect decreases the Dec. 31 Insurance Expense P3600
balance sheet account and increases an income statement account. Prepaid Insurance P3600
Deferrals would be needed in two cases:
EXPENSE METHOD - the advance payment is immediately debited as
1. Allocating assets to expense to reflect expenses incurred during the expense
accounting period (ex. Prepaid Expenses, Supplies and Depreciation) Journal Entry:
2. Allocating revenues received in advance “liability” to revenue to Dec. 1 Insurance Expense P14400
reflect revenues earned during the accounting period (ex. Unearned Cash P14400
Revenue) Adjusting Entry:
Dec. 31 Prepaid Insurance P10800
Insurance Expense P10800
Accrual - is the recognition of “an expense already incurred but
unpaid” or “revenue earned but uncollected”. This adjustment deals
with an amount unrecorded in any account; the entry, in effect 3. Supplies
increases both a balance sheet and an income statement account. On March 1, Kerikeriboomboom Co. bought supplies amounting to
Accruals would be required in two cases: P20000. Unused supplies at the end of the year amounted to P5000
1. Accruing expenses to reflect expenses incurred during the ASSET METHOD - the advance payment is debited as an asset
accounting period that are unpaid and unrecorded. (ex. Accrued Journal Entry:
Salaries and Accrued Interest) Mar. 1 Supplies P20000
2. Accruing revenues to reflect revenues earned during the accounting Cash P20000
period that are uncollected and unrecorded. (ex. Accrued Revenue) Adjusting Entry:
Dec. 31 Supplies Expense P15000
Supplies P15000
Adjustments for DEFERRALS
EXPENSE METHOD - the advance payment is immediately debited as
expense
Journal Entry:
1. Prepaid Rent
Mar. 1 Supplies Expense P20000
On Dec. 1, Kate Ganda Co. paid P8000 for four months’ rent in
Cash P20000
advance. The company made an adjusting entry at the end of the
Adjusting Entry:
month.
Dec. 31 Supplies P5000
Supplies Expense P5000
ASSET METHOD - the advance payment is debited as an asset
Revenue P5000
4. Depreciation
KAP Co. bought a building worth P2000000 that has a useful life of 60
years and a salvage value of P200000 on Jan. 1. Additional Adjustments for ACRRUALS
Straight Line Method:
Cost−Salvage Value 2000000−200000 12 1. Accrued Interest
x Time = x =
Useful Life 60 yrs 12 On Oct. 31, the Lavern Company received a promisory note of P10000,
with an annual 12% interest rate.
30000
Interest = Principal x Rate x Time
= 10000 x 12% x 2/12
Journal Entry:
= 200
Jan. 1 Building P2000000
Adjusting Entry:
Cash P2000000
Dec. 31 Interest Receivable P200
Adjusting Entry:
Interest Revenue P200
Dec. 31 Depreciation Expense P30000
Accumulated Depreciation P30000
*if you are the one who give the promisory note, the entry is:
Adjusting Entry:
Dec. 31 Interest Expense P200
5. Unearned Revenue
Interest Payable P200
AC Company received consulting fees for 5 months on Nov. 1
amounting to P50000
2. Allowance for Doubtful Accounts
LIABILITY METHOD - the advance collection is credited to liability
Accounts Receivable Pxx
account
Allowance for Doubtful Accouunts (xx)
Journal Entry:
Net Realizable Value Pxx
Nov. 1 Cash P50000
Three Ways to Compute:
Unearned Revenue P50000
1. Percentage of Accounts Receivable
Adjusting Entry:
2. Percentage of Sales
Dec. 31 Unearned Revenue P20000
3. Aging - for checking only
Revenue P20000
1. Percentage of AR
INCOME METHOD - the advance payment is immediately debited as
AR P100000; 2% of AR
expense
Journal Entry:
Adjusting Entry:
Nov. 1 Cash P50000
Dec. 31 Doubtful Accounts Expense P2000
Revenue P50000
Allowance for Doubtful Accounts P2000
Adjusting Entry:
Dec. 31 Revenue P30000
*There are different scenarios when it comes to Percentage of AR
Unearned Revenue P30000
2. Percentage of Sales
Credit Sales P300000; 2% of Sales
Adjustments for ACCRUALS
Adjusting Entry:
Dec. 31 Doubtful Accounts Expense P6000
1. Accrued Expense Allowance for Doubtful Accounts P6000
The Coco Co. received an electricity bill amounting to P5000 on
December 28
Adjusting Entry:
Dec. 31 Utilities Expense P5000
Utilities Payable P5000
2. Accrued Revenue
The entity intended to charge fees of P5000 for the services which is
earned but not yet billed
Adjusting Entry:
Dec. 31 Accounts Receivable P5000
