BASIC ACCOUNTING: ADJUSTING ENTRIES

ADJUSTMENT OF ACCOUNTS
Purpose: To Arrive atthe correct amount of Net Income/Net Loss of the business and to bring the
Asset and Liability Accounts intotheir adjusted ending balances thatwill be presented on the
financial statements.
7 DIFFERENT TYPE OF ADJUSTING ENTRIES
*ACCRUAL TYPE ADJUSTMENTS *PREPAID TYPE
ADJUSTMENTS *OTHERADJUSTMENTS
1. Accrued Expenses 1.Prepaid Expenses 1.
Depreciation
2. Accrued Revenues 2.Unearned Revenues 2.Bad Debts

3.MerchandiseInventory
A. Accrual TypeAdjustments- all incurred expenses related to the current period and allearned
revenues that are not recognized on your books.
1. Accrued Expenses-expenses which have already been incurred by the business for that
specificperiod but have not yet been recorded in the books because they are not yetpaid in cash as
of the end of the accounting period.
ILLUSTRATION: Assume that XYZ Company uses a calendar year accounting period for theyear
2013. XYZ Co. pays its contractual employees at the end of the contractwhich is 3 months long. The
first set of employees( 4 employees with a salaryof P10,000/month) was hired on April 1.
6/30/13
SalariesExpense 120,000
Cash 120,000
[ 4 x10,000 x 3 months]
Let us assume that instead of availing the services of the 4employees on April 1, they started the
contract at November 1, 2013.
12/31/13
SalariesExpense 80,000
AccruedSalaries Payable 80,000
1/31/14
SalariesExpense 40,000
Accrued Salaries Payable 80,000
Cash 120,000
More Examples: (INTEREST EXPENSE/INTEREST PAYABLE) De ChavezCompany issued a 90-
day note , bearing a 12% interest for a P200,000 cash loanfrom a financing Company. The note is
dated November 1, 2013.
11/1/13 12/31/13
Cash 200,000 InterestExpense
4000
NotesPayable 200,000 AccruedInter
est Payable 4000
FORMULA: Interest= Principal x Rate x Time

Assume instead that the note is dated October 12, 2013.
12/31/13 1/11/14
InterestExpense 5,333 InterestExpense
667
AccruedInterest
Payable 5,333 NotesPayable 200,000
AccruedInterest
Payable 5333
Cash
206,000
(RENT EXPENSE/ RENT PAYABLE)
On September 31, 2013 Diamond Company rented an office spacewith the amount of P35,000 to be
used for 7 months by the Marketing Department.The rent is to be paid after the end of the rent term.
12/31/13 4/30/14
Rent
Expense 15,000 RentExpense 20,000
AccruedRent Payable 15,000 Accrued Rent Payable 15,000
Cash
35,000 [35,000 x 3/7]
2. Accrued Revenues revenues which have already been earned by the business for thatspecific
period, but have not yet beenrecorded in the books because they have not yet received in cash
as of thecut-off date.
BSGCompany allowed one of its clients to rent their condominium for 9 months . Itwas
rented August 31, 2013 with a rate of 15,000/ month. Full payment will bereceived at the end of the
rent term.
12/31/13 5/31/14
AccruedRent
Receivable 60,000 Cash 135,000
RentReceivable 60,000 Rent
Receivable 75000
AccruedR
ent Receivable 60,000
Liceralde Group of Companiesreceived a P50,000, 30 day, 10% note on December 8, 2013 from a
customer inexchange for a cash loan. The principal and interest will be then collected onthe due
date.
12/08/13 12/31/13
NotesReceivable 50,000 Accrued Interest
Receivable 319.44
Cash 50,000 InterestRevenue
319.44
[50,000 x 10% x 23/360]

01/07/13
Cash 50,416.66
InterestRevenue 97.22
NotesReceivable 50,000
AccruedInterest Revenue 319.44

PREPAID TYPE ADJUSTMENTS
1. Prepaid Expenses represents advance payment for services or forexpenses still to be
performed or incurred by the business in the future.

On March 1 2013, Alvez Companyentered into an agreement with the management of Ayala Towers
to use one oftheir rooms for 11 months for a total contract price of P50,000 paid in cash.
P55,000 for 11 months or P5,000 / month
EXPIRED UNEXPI
RED
10 months = P50,000 1month =
P5,000
(Mar 1 Dec 31,
2013) (Jan 1- Jan 31
,2014)

12/31/13
RentExpense 50,000
Prepaid Rent 50,000

On October 31, 2013 Valix Companypurchased a fire insurance policy for P30,000 on account. The
insurance is goodfor 6 months. The companys accountant prefers the expense method of recording.
10/31/13 12/31/13
InsuranceExpense 30,000 Prepaid Insurance 20,000
AccountsPayable 30,000 Insurance
Expense 20,000

Robles Company acquire officesupplies worth P60,000 for cash on September 31, 2013. On
December 31 2013, afterthe physical count, P15,000 Worth ofgoods was still on hand.

12/31/13
OfficeSupplies Expense 45,000
Supplies 45,000


UNEARNED REVENUES- these represents a liability of our business sinceCASH was collected
from customers for SERVICES that we havent rendered themyet. They are also called DEFERRED
REVENUES.

Raiborn Company received cashamounting to 70,000 on August 31.2013 for a one-year accounting
servicesfor Jansport Manufacturing Corp.


TWO METHODS: LiabilityMethod and Income Method
12/31/13 12/31/13
Unearned Revenue 23,333 Service Revenue 46,667
ServiceRevenue 23,333 UnearnedService
Revenue 46, 667





DEPRECIATION- the process ofallocating cost to expense applied only to certain group of assets.

Illustration: On June 31, 2013 EJD Computer shop purchased anew set of computers worth P250,
000 that was paid in cash. The computers were estimated to be useful for5 years having a salvage
value of 50,000 pesos.

12/31/13
DepreciationExpense 20,000
AccumulatedDepreciation -Computers 20,000

FORMULA : ORIGINALCOST SALVAGE VALUE
Useful Life