Adjusting Entries

Definition Journal entries prepared to update the balances of certain accounts and subsequently record unrecognized accounts Prepared to split the real and nominal components of a particular account Prepared in compliance with the Time-Period Concept and the Matching Principle

Real Component – The portion of the account balance that should be reported to the Balance Sheet Nominal Component – The portion of the account balance that should be presented to the Income Statement

Time-Period Concept – The life of an entity can be divided into various periods, usually in years. Matching Principle – Expenses incurred should be matched with revenues generated in a particular period. – Only those revenues generated and expenses incurred for a particular period should be presented in the income statement.

Types of Adjustments Adjustments for – Accruals Accruals of income Accruals of expense – Deferrals Prepayment of expense Precollection of income – Depreciation – Uncollectible Accounts

Accruals As a concept of accrual basis in accounting, income should be recorded when earned and expenses should be recorded when incurred, regardless of whether cash is received or paid.

Accruals Accrued Income – Income already earned but not yet collected – An asset account which has a similar nature with Accounts Receivable Accrued Expense – Expense already incurred but not yet paid – A liability account which has a similar nature with Accounts Payable

Accruals Accrued Income Illustration #1 – On December 31, 2011, service income that is unbilled amounts to 15,000 – As of year-end, unrecorded rent revenue amounts to 10,000

Accruals Accrued Income Illustration #2 – On June 1, 2011, the business entered into a contract where it will render services for 6 months from June 2011 to May 2012 for a contract price of 60,000. The payment will be received on May What is the adjusting entry on December 31, 2011?

Accrual Accrued Income Illustration #3 – On September 30, 2011, the business loaned money in the amount of 100,000. it carries a 6% interest and due on March 31, Payment of principal and interest will be on March 31, What will be the adjusting entry on December 31, 2011?

Accrual Accrued Expense Illustration #1 – As of year-end, unpaid salaries amount to 6,000. Prepare the necessary adjusting entry. – As of December 31, 2011, unpaid electricity bill amounts to 8,000. prepare the required adjusting entry.

Accrual Accrued Expense Illustration #2 – The company pays its 50 employees 2500 each per week for a 5-day work week from Monday to Friday. Salary is paid every Friday. December 31 falls on a Tuesday. What is the adjusting entry to be made?

Accrual Accrued Expense illustration #3 – The business borrowed 250,000 from a bank on July 31, the loan carries an 8% interest. Principal and interest is payable on July 31, Prepare the adjusting entry on December 31, 2011.

Deferrals In accounting parlance, these pertains to advance payments or collections of cash. In relation to adjusting entries, it may pertain to prepaid expenses or precollected income.

Deferrals Prepaid Expense – This pertain to items already paid for but not yet used. As a concept, it is generally acceptable for an entity to recognize such as an asset. However some businesses record it initially as an expense. Therefore, a business may account for such under the: Asset method, or the Expense Method

Deferrals Prepaid Expense Illustration #1 – The company entered into a 3 year insurance contract on May 31, 2011 and paid the contract price of 36,000. Prepare the entries on May 31 and December 31 using the: Asset method Expense method

Deferrals Prepaid Expense Illustration #2 – The company leased an office space on September 30, 2011 and paid 6 months advance rent in the amount of 60,000. Prepare the entries on September 30 and December 31 using: Asset method Expense method

Deferrals Prepaid Expense Illustration #3 – The company bought supplies amounting to 15,000 on March 15, On December 31, 2011, supplies remaining amount to P6,000. Prepare the journal entries on March 15 and December 31 using: Asset method Expense method

Deferrals Precollected Income – These pertains to cash already received from customers for services to be rendered in the future. Such is generally accounted for by recognizing a liability. However, some firms record this by recognizing a revenue immediately. A business therefore accounts for such under: Liability method, or Revenue Method

Deferrals Precollected Income Illustration #1 – Flavio, a blacksmith, received 5,000 from Lizardo on June 1, 2011 for him to create 5 swords. On December 31, 2011, he was able to finish 3 swords. Prepare the journal entries on June 1 and December 31 using the: Liability method Revenue method

Deferrals Precollected Income Illustration #2 – On August 1, 2011, Ator Nee, a lawyer, received 50,000 from a client for legal services to be rendered from September 1, 2011 to January 31, Prepare the entries for August 1 and December 31 under the: Liability method Revenue method