CHAPTER 5

THE ADJUSTMENT
PROCESS

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Chapter 5
The Adjustment Process

Learning Objectives
1.Define adjusting entries.
2.Explain the importance of adjusting entries.
3. Identify the accounts that need to be
adjusted at the end of the accounting
period.
4. Prepare adjusting entries.

Ch5
The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)
Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjusting the Accounts

At the end of the accounting period, when the journalizing

and the posting processes have been completed and the trial balance
has been prepared, accounts are examined to determine whether
their balances reflect their true values or not.

Generally, a majority of the account balances may already be presented in

the financial statements. However, there are accounts that need to be updated or
corrected. The accounts must be adjusted to determine the correct amount at which
they may be presented in the financial statements of the business enterprise.

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 THE ADJUSTMENT PROCESS

Reporting Revenue and Expense

TWO METHODS

Deferral Basis
Accrual Basis

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Deferral Basis

1. There are costs recorded that must be apportioned between two or

more accounting
periods.

Examples are the cost of the building, prepaid insurance, and

supplies.

2. There are revenues recorded that must be apportioned between

two or more accounting
periods.

Example is commissions collected in advance for services to be

rendered in later periods.

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments –– Deferrals
Deferrals and
andAccruals
Accruals

Revenues Current Period Future Period

Deferrals Cash Received Revenue Recorded

Accruals Revenue Recorded Cash Received

Expenses
Current Period Future Period
Deferrals Cash Paid Expense Recorded

Accruals Expense Recorded Cash Paid

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Prepaid
Prepaid Expenses
Expenses

Prepaid expenses are expenses paid in advance. They are not yet
incurred but already paid.

Insurance
Insurance
There are two methods of recording
prepaid expenses: (a) the asset method, Rent
Rent
and (b) the expense method. Under the
asset method, an asset account is debited
for the advance payment of expenses. Supplies
Supplies
Under the expense method, an expense
account is used.

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments –– Insurance
Insurance
On June 1, 2019, the company paid P30,000 for a two-year
insurance premium.
Example 1– Purchase initially recorded as an asset.

Adjustment 1 – Record
Cash insurance used From June 1 -
6/1 30,000 December 31, P8,750

Prepaid Insurance
Assets
6/1 30,000 12/31 8,750

A1
Insurance Expense A1

12/31 8,750 Expenses

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments –– Insurance
Insurance
On June 1, 2019, the company paid P30,000 for a two-year
insurance premium.
Example 1– Purchase initially recorded as an expense

Adjustment 2 – Record
Cash insurance unused as of
6/1 30,000 December 31, P21,250

Prepaid Insurance
Assets
12/31 21,250

A2

A2
Insurance Expense
6/1 30,000 12/31 21,250 Expenses

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Summary
Date Description Debit Credit Description Debit Credit
2019 ASSET METHOD EXPENSE METHOD
June 1 Prepaid Insurance 30,000 Insurance Expense 30,000
Cash 30,000 Cash 30,000

Dec 31 Insurance Expense 8,750 Prepaid Insurance 21,250

Prepaid Insurance 8,750 Insurance Expense 21,250

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments –– Rent
Rent
On July 2, 2019, the company paid two months rent in
advance worth P6,000.
Example 2– Payment initially recorded as an asset.

Adjustment 3 – Record the

Cash rent expired July 31, P3,000
7/2 6,000

Prepaid Rent
Assets
7/2 6,000 7/31 3.000

A3
Rent Expense A3

7/31 3,000 Expenses

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments –– Rent
Rent
On July 2, 2019, the company paid two months rent in
advance worth P6,000.
Example 2– Payment initially recorded as an expense

Adjustment 4 – Record the

Cash unexpired rent as of July 31,
7/2 6,000 P3,000

Prepaid Rent
Assets
731 3,000

A4

A4
Rent Expense
7/2 6,000 7/31 3,000 Expenses

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Summary
Date Description Debit Credit Description Debit Credit
2019 ASSET METHOD EXPENSE METHOD
July 2 Prepaid Rent 30,000 Rent Expense 30,000
Cash 30,000 Cash 30,000

July 31 Rent Expense 8,750 Prepaid Rent 21,250

Prepaid Rent 8,750 Rent Expense 21,250

Accounting: Its Development and Basic Concept Financial Accounting & Reporting 1 (2019 Edition)
Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments –– Sewing
Sewing Supplies
Supplies
July 2, 2019, the company purchased sewing supplies
worth P5,000 and on July 5 the company purchased again sewing
supplies worth 3,000.
The inventory showed that sewing supplies costing
P3,500 are still on hand.

Example 3– Purchase initially recorded as an asset.

Cash Adjustment 5 – Record the used
7/2 5,000 sewing supplies July 31, P4,500
7/5 3,000
Sewing Supplies
Assets
7/2 5,000 7/31 4.500
7/5 3,000
A5
Sewing Supplies ExpenseA5
7/31 4,500 Expenses

Accounting: Its Development and Basic Concept Financial Accounting & Reporting 1 (2019 Edition)
Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments –– Sewing
Sewing Supplies
Supplies
July 2, 2019, the company purchased sewing supplies
worth P5,000 and on July 5 the company purchased again sewing
supplies worth 3,000.
The inventory showed that sewing supplies costing
P3,500 are still on hand.

Example 3– Purchase initially recorded as an expense

Cash Adjustment 6– Record the
7/2 5,000 unused sewing supplies July 31,
7/5 3,000 P3,500
Sewing Supplies
Assets
7/31 3.500

A6
A6
Sewing Supplies Expense
7/2 5,000 7/31 3,500 Expenses
7/5 3,000
The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)
Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Depreciation
Depreciation of
of Property,
Property, Plant
Plant and
and Equipment
Equipment
On
OnJuly
July11D’
D’Fashionista
Fashionistapurchased
purchasedsewing
sewingmachine
machineandand estimates
estimatesthat
that will
willlast
lastfor
for
ten
tenyears
years(120
(120months)
months)and
andwill
willbe
beworthless
worthlessatatthe
theend
endofofthat
thattime.
time.

Cash Adjustment 7 –To record the

depreciation as of July 31,
7/1 120,000
P1,000 ( P120,000/120
Sewing Machine months)
7/1 120,000 Plant and Equipment:
Depreciation Expense- Sewing Sewing Machine P120,000
Machine Less: Accum. Depreciation 1,000
Net Book Value
7/31 1,000 P119,000

Accumulated Depreciation -
A7
Sewing Machine

7/ 31 1,000

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Payment for revenue received in advance is termed as
unearned revenue or deferred revenue, a liability
account. Upon delivery of the goods or performance of
services, the advance payment is considered earned.
Therefore, an adjusting journal entry is needed to transfer
unearned revenue account to an earned revenue account.
There are two methods of recording unearned
revenue: (a) the liability method, and (b) the
revenue method. Under the liability method, a
liability account is used to record the amount
received in advance. Under the revenue method, a
revenue account is used.
The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)
Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments -- Rent
Rent Received
Received in Advance
inMarch
Advance
1 - December 31 =
10months
On March 1, 2019, the company received P48,000 as advance payment
P48,000/24 months =
for a two-year rental of an office space. P2,000/month

therefore:
Example 5– Rent received in advance Initially recorded
2,000as
x 10 a liability
months =
20,000

Adjustment 8 – Record the

Cash earned rent as of December
3/1 48,000 31, P20,000

Unearned Rent
Income
12/31 3/1 48,000
20,000
A8
A8
Rental Income
12/31 20,000 Liability

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Adjustments
Adjustments -- Rent
Rent Received
Received in Advance
inMarch
Advance
1 - December 31,2019 =
10 months earned

On March 1, 2019, the company received P48,000 as advance

January 1, 2020payment
- March 1, 2021
= 14 months unearned
for a two-year rental of an office space.
P48,000/24 months =
P2,000/month
Example 5– Rent received in advance Initially recorded as an Income
therefore:
2,000 x 14 months = 28,000
Adjustment 9 – Record the
Cash unearned rent as of December
3/1 48,000 31, P28,000

Unearned Rent
Income
12/31 28,000

A9
A9
Rental Income
12/31 28,000 3/1 48,000 Liability

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Summary
Date Description Debit Credit Description Debit Credit
2019 LIABILITY INCOME METHOD
METHOD
Mar 1 Cash 48,000 Cash 48,000
Unearned Rent 48,000 Rental Income 48,000

Dec 31 Unearned Rent 20,000 Rental Income 28,000

Rental Income 20,000 Unearned Rent 28,000

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)
Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Interest
Interest Receivable
Receivable
On
OnDecember
December1,1,2018,
2018,the
thecompany
companyreceived
receivedaa90-day,
90-day,6%
6%note
noteininthe
theamount
amountofofP90,000.
P90,000.
The
Theadjusting
adjustingentry
entryon
onDecember
December31,
31,2018
2018would
wouldbebeas
asfollows:
follows:

(Interest = P90,000 x 6% x 30/360 = P450)

Dec 31 Interest Receiavble 450.00

Interest Income 450.00

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Accrued
Accrued Salaries
Salaries
July 2019

SUN MON TUE WED THU FRI SAT

1 2 3 4 5 6
7 8 9 10 11 12 13 5,400
14 15 16 17 18 19 20
21 22 23 24 25 26 27 6,000
28 29 30 31

Given:
P200.00/day per employee

Salaries paid biweekly

Three Employees
Working days Monday - Friday except
holiday

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Accrued
Accrued Salaries
Salaries
July 2019

SUN MON TUE WED THU FRI SAT

1 2 3 4 5 6
7 8 9 10 11 12 13 5,400
14 15 16 17 18 19 20
21 22 23 24 25 26 27 6,000
28 29 30 31

July 29, 30 and 31 = P 200 x 3 days x 3 employees = 1,800 accrued

salaries on July 31, 2019

July 31 Wages Expense 1,800

Wages Payable 1,800

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Provision
Provision for
for Doubtful
DoubtfulAccounts
Accounts

Estimating Bad Debts Using a Certain Percentage of Accounts Receivable

A. Per general ledger, Accounts Receivable has a balance of P80,000. Based

on past experience, 5% is estimated to be uncollectible.

5% x P80,000 = P4,000

Dec 31 Bad Debts Expense 4,000.00

Allowance for Bad Debts 4,000.00

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Provision
Provision for
for Doubtful
DoubtfulAccounts
Accounts

Estimating Bad Debts Using a Certain Percentage of Accounts Receivable

B. Using the same illustration, assume that per general ledger, Allowance for
Bad Debts has an existing credit balance of P1,000.

Dec 31 Bad Debts Expense 3,000.00

Allowance for Bad Debts 3,000.00

Required balance (5% x P80,000) …...... P4,000

Existing balance ….................................... 1,000
Amount of adjustment ………………… P3,000

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
 Presentation
Presentation in
in the
the Statement
Statement of
of Financial
Financial
Position
Position

Accounts Receivable ………………….. P80,000

Less: Allowance for Bad Debts ……….. 4,000
Net realizable value …................... P76,000

The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)

Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy
The Adjustment Process Financial Accounting & Reporting 1 (2019 Edition)
Prepared by: Jet R. Nillos, CPA,MBA Baldevarona, Grande, & Munar
CPU College of Business and Accountancy