ADJUSTING

ENTRIES
ACCOUNTING CYCLE

• 1. Journalizing – The process of recording the transactions in the journal/s(books of original

entry)
• 2. Posting – The process of transferring the entries in the journal to the general ledger
• 3. Preliminary Trial Balance (Unadjusted Trial Balance ) – Prepared to check the accuracy of
posting and to prove the equality of debits and credits.
• 4. Adjusting Entries – Prepared at the end of the accounting period to update the books.
• 5. Worksheet (Working Paper) – To facilitate the preparation of the Financial Statements.
– Showing the adjustments in the worksheet and then classifying all the accounts into Real accounts
(Balance Sheet accounts) and Nominal Accounts (Income Statement statement).
ACCOUNTING CYCLE

• 6. Financial Statements – Accounting reports prepared at the end of the accounting period.
– Income Statement (Statement of Comprehensive Income) , Balance Sheet (Statement of Financial Position) ,
Statement of Changes in Owner’s Equity and Statement of Cash Flows.
• COMPLETING THE ACCOUNTING PROCESS (CLOSING THE BOOKS)
• 7. Closing Entries – Entries Prepared at the end of the accounting period.
– Nominal Accounts are closed by REVERSING the position of the accounts (accounts with debit balances are
credited and accounts with credit balances are debited)
– Income and Expense Summary Account is used as balancing account (credit balance means NET INCOME, debit
balance means NET LOSS).
• Closed to the Drawing Account of the owner
– Closed to the CAPITAL ACCOUNT of the owner
ACCOUNTING CYCLE

• 8. Post-Closing Trial Balance

– Prepared after the closing entries
– Trial Balance of all Real accounts
– Real Accounts only (because nominal are already closed)
– Basis for preparing the opening entry in the new books of accounts.
• 9. Ruling the Ledger (Closing the Books)
– Books of accounts (journals and ledgers) are registered with the Bureau of Internal Revenue (year to
year basis)
– Getting the total debits and credits of all the accounts and then double-ruling the totals.
ACCOUNTING CYCLE

• 10. Opening Entry

– Basis is Post closing trial balance
• 11. Reversing Entries
– Reversing the Adjusting Entries
• Prepaid Expenses
• Unearned Income
• Accrued Expenses
• Accrued Income
ACCOUNTING CYCLE

• 1. Journalizing – The process of recording the transactions in the journal/s(books of original

entry)
• 2. Posting – The process of transferring the entries in the journal to the general ledger
• 3. Preliminary Trial Balance (Unadjusted Trial Balance ) – Prepared to check the accuracy of
posting and to prove the equality of debits and credits.
• 4. Adjusting Entries – Prepared at the end of the accounting period to update the books.
• 5. Worksheet (Working Paper) – To facilitate the preparation of the Financial Statements.
– Showing the adjustments in the worksheet and then classifying all the accounts into Real accounts
(Balance Sheet accounts) and Nominal Accounts (Income Statement statement).
ACCRUAL VS CASH BASIS

• ACCRUAL BASIS
– Transactions are recorded WHETHER OR NOT CASH HAS BEEN RECEIVED OR PAID
• CASH BASIS
– Transactions are NOT RECORDED UNTIL CASH is RECEIVED or paid.
– Cash Receipts are treated as Revenues, and Cash Payments are handed as Expenses
REASONS TO ADJUST THE TRIAL
BALANCE
• To report all revenues earned during the accounting period
• To report all expenses incurred to produce the revenues during the accounting period
• To report accurately the assets on the balance sheet. Some may have been USED UP during the
accounting period
• To report accurately the liabilities on the balance sheet date. Expenses may have been incurred
but not yet paid.
TYPES OF ADJUSTING ENTRIES

A. Recognition of Unrecorded expenses or Accrued expenses – (incurred but not paid)

Dr. Expense Acct xxx
Cr. Liability Acct xxx
B. Unrecorded Revenues or Accrued Revenues - (earned but not Received)
Dr. Asset Acct (Receivable) xxx
Cr. Revenue Acct xxx
TYPES OF ADJUSTING ENTRIES

C. Allocation of Recorded Expenditures between two or more acctng periods

A. Prepaid Expenses (ex: Prepaid Insurance)
Asset Method:
DR. Expense (or the expired portion) xxx
CR. Prepaid Expense (asset) xxx
Expense Method: (ex: supplies exp)
DR. Unused supplies (asset/unused portion) xxx
CR. Supplies xxx
B. Depreciation of PPE
Depreciation Expense – PPE xxx
Accumulated Depreciation –PPE xxx
D. Allocation of Recorded Revenues between two or more acctng period
1. Unearned Revenue
Income Method: (Ex: Rent Income)
DR. Revenue (or the expired portion) xxx
CR. Unearned Rent Income (asset) xxx
Liability Method: (ex: Unearned Commission Income )
DR. Unearned Commssion (asset/unused portion) xxx
CR. Commission Income xxx
E. Valuation adjustments of certain accounts
– Estimated uncollectible A/R or Bad Debts expense
Dr. Bad Debts Expense xxx
Cr. Allowance for Doubtful Accts xxx

– Adjustment for change in Market value of Investment in Trading and Available for sale securoities
A. PAYMENT TO A CREDITOR WAS RECORDED AS A
DEBIT TO A/P FOR 1,720 AND CREDIT TO CASH FOR
P1,270
OPTION 1: • OPTION 2:
Entry made:
Accounts payable1,720
(if P1,720 is the correct amount)
Cash 1,270 Adjusting Entry:
• Reverse:
Accounts Payable 0
Cash1,270
Accounts payable 1,720 Cash 450.00

• Adjusting entry: (if P1720 is the correct amt)

Accounts payable 1,720
(if P1,270 is the correct amount)
Cash 1,720 Adjusting Entry:
Accounts Payable 450
Cash 0
ADJUSTING
ENTRIES
1. PREPAYMENTS
– Expenses paid in Advance
– Prepaid Expenses like Prepaid Rent, Prepaid Insurance, Prepaid Supplies Example:
December 1, 2018 . The Company paid 2 months rent in advance P 8,000.
Journal Entry Made:
EXPENSE METHOD ASSET METHOD
Dec. 1, 2018
Rent Expense 8,000 Prepaid Rent 8,000
Cash 8,000 Cash 8,000
Adjusting Entry:
Dec. 31,2018
Prepaid Rent 4,000 Rent Expense 4,000
Rent Expense 4,000 Prepaid Rent 4,000
2. UNEARNED INCOME
– Income Collected in Advance
EXAMPLE:
December 1,2018 The company collected 2 Months rental in advance. P 6,000

Journal Entry Made:

EXPENSE METHOD ASSET METHOD
Dec. 1, 2018
Rent Expense 8,000 Prepaid Rent 8,000
Cash 8,000 Cash 8,000
Adjusting Entry:
Dec. 31,2018
Prepaid Rent 4,000 Rent Expense 4,000
Rent Expense 4,000 Prepaid Rent 4,000
2.UNEARNED INCOME

• Income Collected in Advance

Ex:
December 1,2018 The company collected 2 Months rental in advance. P 6,000

Journal Entr