ADJUSTING ENTRIES

Adjusting Entries
- Journal entries usually made at the end of an accounting period to allocate income and
expenditure to the period in which they actually occurred
- An entry in a company's general ledger that occurs at the end of an accounting period to record
any unrecognized income or expenses for the period

Matching Principle
- Income and expenses matches with the proper period
- Expenses (representing the effort of the business) should be matched against the income
(representing the accomplishment of the business) during the period it was earned

Accrual basis
- Income is recognized as earned at the time service is rendered regardless of when cash is
collected
- Expense is recognized as incurred at the time service is received or used up regardless of when
cash is paid

ITEMS FOR ADJUSTMENT

1. Prepaid Expense
- Refers to expenses paid but not yet incurred
- These are expenses paid in advance
- Advance payment recorded as an asset but a portion of which has already expired

Using ASSET METHOD (preferable method)

Journalization:
Prepaid Expense xx
Cash xx

Adjusting Entry:
Expense xx
Prepaid Expense xx

Using EXPENSE METHOD

Journalization:
Expense xx
Cash xx

Adjusting Entry:
Prepaid Expense xx
Expense xx

2. Deferred Income / Unearned Income

- Refers to income collected but not yet earned
- These are income received in advance
- Advance collection recorded as a liability, but a portion of it has already been earned
 Using LIABILITY METHOD (preferable method)
Journalization:
Cash xx
Unearned Income xx

Adjusting Entry:
Unearned Income xx
Income xx

Using INCOME METHOD

Journalization:
Cash xx
Income xx

Adjusting Entry:
Income xx
Unearned Income xx

3. Accrued Expense
- Refers to expenses incurred but not yet paid
- Considered as liability

Adjusting Entry:
Expense xx
Accrued Expense xx

4. Accrued Income
- Refers to income earned but not yet received or collected
- Considered as an asset (receivable)

Adjusting Entry:
Accrued Income xx
Income xx

5. Depreciation
- The systematic allocation of the cost of the property over its estimated useful life
- Recognizing part of the asset as an expense because of its decreasing utility value
- Salvage Value (also called Scrap Value) is the amount that an asset is expected to be
sold at the end of its estimated useful life
- Depreciation Expense is shown in the income statement as part of expenses
Formula:
cost−scrap value ,if any
=depreciation
useful life(¿ years)
Or
Cost of the property xx
Less: salvage value xx
Depreciable cost xx
Divided by: estimated useful life xx
Annual depreciation xx
 - Accumulated Depreciation is shown in the balance sheet as a reduction from the
corresponding aset to get its net book value
Formula:
asset cost−accumulated depreciation=net book value

6. Doubtful Accounts / Uncollectible Accounts / Bad Debts

- An estimate of the amount of receivables that is doubtful as to collection
- Client accounts that may not be collected anymore or are doubtful of collection
- May be estimated based on sales or receivables
- Based on sales: result will be the Doubtful Accounts Expense
- Based on receivables: result will be the Allowance for Doubtful Accounts
- Doubtful Accounts Expense is shown in the income statement as part of expenses
- Allowance for Doubtful Accounts is shown in the balance sheet as a deduction from the
accounts receivable to get the net realizable value

Adjusting Entry:
Doubtful Accounts Expense xx
Allowance for Doubtful Accounts xx

7. Merchandise Inventory End

- Refers to the amount of inventory that remained unsold at the end of the accounting
period

Adjusting Entry:
Merchandise Inventory xx
Income and Expense Summary xx