Step 5 of the accounting process involves the preparation of adjusting entries.

Adjusting
journal entries are made to update the accounts and bring them to their correct
balances.
The preparation of adjusting entries is an application of the accrual concept of
accounting and the matching principle.
The accrual concept states that income is recognized when earned regardless of when
collected and expense is recognized when incurred regardless of when paid.
The matching principle aims to align expenses with revenues. Expenses should be
recognized in the period when the revenues generated by such expenses are
recognized.
Purpose of Adjusting Entries
The main purpose of adjusting entries is to update the accounts to conform with the
accrual concept. At the end of the accounting period, some income and expenses may
have not been recorded, taken up or updated; hence, there is a need to update the
accounts.
If adjusting entries are not prepared, some income, expense, asset, and liability
accounts may not reflect their true values when reported in the financial statements. For
this reason, adjusting entries are necessary.

1.
2.
3.
4.

Types of Adjusting Entries

Generally, there are 4 types of adjusting entries. Adjusting entries are prepared for the
following:
Accrued Income income earned but not yet received
Accrued Expense expenses incurred but not yet paid
Deferred Income income received but not yet earned
Prepaid Expense expenses paid but not yet incurred

Also, adjusting entries are made for:

5. Depreciation
6. Doubtful Accounts or Bad Debts, and other allowances
Composition of an Adjusting Entry
Adjusting entries affect at least one nominal account and one real account.
A nominal account is an account whose balance is measured from period to period.
Nominal accounts include all accounts in the Income Statement, plus owner's
withdrawal. They are also called temporary accounts or income statement accounts.
Examples of nominal accounts are: Service Revenue, Salaries Expense, Rent Expense,
Utilities Expense, Mr. Gray Drawing, etc.
A real account has a balance that is measured cumulatively, rather than from period to
period. Real accounts include all accounts in the balance sheet. They are also
calledpermanent accounts or balance sheet accounts.
Real accounts include: Cash, Accounts Receivable, Rent Receivable, Accounts
Payable, Mr. Gray Capital, and others.

All adjusting entries include at least a nominal account and a real account.
Note: "Adjusting entries" refer to the 6 entries mentioned above. However, in some
branches of accounting (especially auditing), the term adjusting entries could refer to
any entry that aims to adjust incorrect account balances.
As a result, there is little distinction between "adjusting entries" and "correcting entries"
today. In the traditional sense, however, adjusting entries are those made at the end of
the period to take up accruals, deferrals, prepayments, depreciation and allowances.
Accrued income (or accrued revenue) refers to income already earned but has not yet
been collected. At the end of every period, accountants should make sure that they are
properly included as income.
When a company has performed services or sold goods to a customer, it should be
recognized as income even if the amount is still to be collected at a future date.
If no journal entry was ever made for the above, then an adjusting entry is necessary.
Pro-Forma Entry
The adjusting entry to record an accrued revenue is:
mmm
dd Receivable account*
x,xxx.xx
Income account**
x,xxx.xx
*Appropriate receivable account such as Accounts Receivable, Rent Receivable,
Interest Receivable, etc.
**Income account such as Service Revenue, Rent Income, Interest Income, etc.
Here's an Example
In our previous set of transactions, assume this additional information:
On December 31, 2014, Gray Electronic Repair Services rendered $300 worth of
services to a client. However, the amount has not yet been collected. It was agreed that
the customer will pay the amount on January 15, 2015. The transaction was never
recorded in the books of the company.
In this case, we should make an adjusting entry to recognize the income since it has
already been earned. The adjusting entry would be:
Dec

31

Accounts Receivable
Service Revenue

300.00
300.00

.
More Examples: Adjusting Entries for Accrued Income
Example 1: Company ABC leases its building space to a tenant. The tenant agreed to
pay monthly rental fees of $2,000 covering a period from the 1st to the 30th or 31st of
every month. On December 31, 2014, ABC Company did not receive the rental fee for
December yet and no record was made in the journal.
Under the accrual basis, the rent income above should already be recognized because
it has already been earned even if it has not yet been collected. The adjusting journal
entry would be:
Dec
31 Rent Receivable
2,000.00
Rent Income
2,000.00

Example 2: ABC Company lent $9,000 at 10% interest on December 1, 2014. The
amount will be collected after 1 year. At the end of December, no entry was entered in
the journal to take up the interest income.
Interest is earned through the passage of time. In the case above, the $9,000 principal
plus a $900 interest will be collected by the company after 1 year. The $900 interest
pertains to 1 year.
However, 1 month has already passed. The company is already entitled to 1/12 of the
interest, as prorated. Therefore the adjusting entry would be to recognize $75 (i.e. $900
x 1/12 ) as interest income:
Dec
31 Interest Receivable
75.00
Interest Income
75.00
The basic concept you need to remember is recognition of income. When is income
recognized? Under the accrual concept of accounting, income is recognized when
earned regardless of when collected.
If the company has already earned the right to it and no entry has been made in the
journal, then an adjusting entry to record the income and a receivable is necessary.
Accrued expenses refer to expenses that are already incurred but have not yet been
paid. At the end of period, accountants should make sure that they are properly
recorded in the books of the company.
Here's the rule. If a company incurred, used, or consumed all or part of an expense, that
expense or part of it should be properly recognized even if it has not yet been paid.
If such has not been recognized, then an adjusting entry is necessary.
Pro-Forma Entry
The pro-forma adjusting entry to record an accrued expense is:
mmm
dd Expense account*
x,xxx.xx
Liability account**
x,xxx.xx
*Appropriate expense account (such as Utilities Expense, Rent Expense, Interest
Expense, etc.)
**Appropriate liability account (Utilities Payable, Rent Payable, Interest Payable,
Accounts Payable, etc.)
For Example
For the month of December 2014, Gray Electronic Repair Services used a total of
$1,800 worth of electricity and water. The company received the bills on January 10,
2015. When should the expense be recorded, December 2014 or January 2015?
Answer in December 2014. According to the accrual concept of accounting, expenses
are recognized when incurred regardless of when paid. The amount above pertains to
utilities used in December. Therefore, if no entry was made for it in December then an
adjusting entry is necessary.
Dec
31 Utilities Expense
1,800.00
Utilities Payable
1,800.00
In the adjusting entry above, Utilities Expense is debited to recognize the expense and
Utilities Payable to record a liability since the amount is yet to be paid.
Here are some more examples.

More Examples: Adjusting Entries for Accrued Expense

Example 1: VIRON Company entered into a rental agreement to use the premises of
DON's building. The agreement states that VIRON will pay monthly rentals of $1,500.
The lease started on December 1, 2014. On December 31, the rent for the month has
not yet been paid and no record for rent expense was made.
In this case, VIRON Company already incurred (consumed/used) the expense. Even if it
has not yet been paid, it should be recorded as an expense. The necessary adjusting
entry would be:
Dec
31 Rent Expense
1,500.00
Rent Payable
1,500.00
Example 2: VIRON Company borrowed $6,000 at 12% interest on August 1, 2014. The
amount will be paid after 1 year. At the end of December, the end of the accounting
period, no entry was entered in the journal to take up the interest.
Let's analyze the above transaction.
VIRON will be paying $6,000 principal plus $720 interest after a year. The $720 interest
covers 1 year. At the end of December, a part of that is already incurred, i.e. $720 x 5/12
or $300. That pertains to interest for 5 months, from August 1 to December 31. The
adjusting entry would be:
Dec
31 Interest Expense
300.00
Interest Payable
300.00
Expenses are recognized when incurred regardless of when paid. What you need to
remember here is this: when it has been consumed or used and no entry was made to
record the expense, then there is a need for an adjusting entry.
Unearned revenue (also known as deferred revenue/income) represents
revenue already collected but not yet earned.
Hence, they are also called "advances from customers".
It is to be noted that under the accrual concept, income is recognized when
earned regardless of when collected.
And so, unearned revenue should not be included as income yet; rather, it is
recorded as a liability. This liability represents an obligation of the company
to render services or deliver goods in the future. It will be recognized as
income only when the goods or services have been delivered or rendered.
At the end of the period, unearned revenues must be checked and adjusted if
necessary. The adjusting entry for unearned revenue depends upon the
journal entry made when it was initially recorded.
There are two ways of recording unearned revenue: (1) the liability method,
and (2) the income method.

Liability Method of Recording Unearned Revenue

Under the liability method, a liability account is recorded when the amount is
collected. The common accounts used are: Unearned Revenue, Deferred
Income, Advances from Customers, etc. For this illustration, let us use
Unearned Revenue.
Suppose on January 10, 2015, ABC Company made $30,000 advanced
collections from its customers. If the liability method is used, the entry would
be:
Jan

10

Cash
30,000.00
Unearned Revenue
30,000.00
Take note that the amount has not yet been earned, thus it is proper to
record it as a liability. Now, what if at the end of the month, 20% of the
unearned revenue has been rendered? This will require an adjusting entry.
The adjusting entry will include: (1) recognition of $6,000 income, i.e. 20% of
$30,000, and (2) decrease in liability (unearned revenue) since some of it has
already been rendered. The adjusting entry would be:
Jan
31 Unearned Revenue
6,000.00
Service Income
6,000.00

We are simply separating the earned part from the unearned portion. Of the
$30,000 unearned revenue, $6,000 is recognized as income. In the entry
above, we removed $6,000 from the $30,000 liability. The balance of
unearned revenue is now at $24,000.
Income Method of Recording Unearned Revenue
Under the income method, the accountant records the entire collection under
an incomeaccount. Using the same transaction above, the initial entry for the
collection would be:
Jan
10 Cash
30,000.00
Service Income
30,000.00
If at the end of the year the company earned 20% of the entire $30,000,
then the adjusting entry would be:
Jan
31 Service Income
24,000.00
Unearned Income
24,000.00

By debiting Service Income for $24,000, we are decreasing the income

initially recorded. The balance of Service Income is now $6,000 ($30,000 24,000), which is actually the 20% portion already earned. By crediting
Unearned Income, we are recording a liability for $24,000.
Notice that the resulting balances of the accounts under the two methods
are the same (Cash: $30,000; Service Income: $6,000; and Unearned
Income: $24,000).
Another Example
On December 1, 2014, DRG Company collected from TRM Corp. a total of
$60,000 as rental fee for three months starting December 1.
Under the liability method, the initial entry would be:
Dec 1 Cash
60,000.00
Unearned Rent Income
60,000.00
On December 31, 2014, the end of the accounting period, 1/3 of the rent
received has already been earned (prorated over 3 months).

We should then record the income through this adjusting entry:

Dec 31 Unearned Rent Income
20,000.00
Rent Income
20,000.00
In effect, we are transferring $20,000, one-third of $60,000, from the
Unearned Rent Income (a liability) to Rent Income (an income account) since
that portion has already been earned.
If the company made use of the income method, the initial entry would be:
Dec 1 Cash
60,000.00
Rent Income
60,000.00
In this case, we must decrease Rent Income by $40,000 because that part
has not yet been earned. The income account shall have a balance of
$20,000. The amount removed from income shall be transferred to liability
(Unearned Rent Income). The adjusting entry would be:
Dec 31 Rent Income
40,000.00
Unearned Rent Income
40,000.00

Conclusion
If you have noticed, what we are actually doing here is making sure that the
earned part is included in income and the unearned part into liability. The
adjusting entry will always depend upon the method used when the initial
entry was made.
If you are having a hard time understanding this topic, I suggest you go over
and study the lesson again. Sometimes, it really takes a while to get the
concept. Preparing adjusting entries is one of the most challenging (but
important) topics for beginners.
Prepaid expenses (a.k.a. prepayments) represent payments made for
expenses which have not yet been incurred.
In other words, these are "advanced payments" by a company for supplies,
rent, utilities and others that are still to be consumed.
Expenses are recognized when they are incurred regardless of when paid.
Expenses are considered incurred when they are used, consumed, utilized or
has expired.
Because prepayments they are not yet incurred, they are not recorded as
expenses. Rather, they are classified as current assets.
Prepaid expenses may need to be adjusted at the end of the accounting
period. The adjusting entry for prepaid expense depends upon the journal
entry made when it was initially recorded.
There are two ways of recording prepayments: (1) the asset method, and (2)
the expense method.
Asset Method
Under the asset method, a prepaid expense account (an asset) is recorded
when the amount is paid. Prepaid expense accounts include: Office Supplies,
Prepaid Rent, Prepaid Insurance, and others.
In one of our previous illustrations (if you have been following our
comprehensive illustration for Gray Electronic Repair Services), we made this
entry to record the purchase of service supplies:
Dec
7 Service Supplies
1,500.00
Cash
1,500.00
Take note that the amount has not yet been incurred, thus it is proper to
record it as an asset.
Suppose at the end of the month, 60% of the supplies have been used. Thus,
out of the $1,500, $900 worth of supplies have been used and $600 remain
unused. The $900 must then be recognized as expense since it has already
been used.

In preparing the adjusting entry, our goal is to transfer the used part from
the asset initially recorded into expense for us to arrive at the proper
balances shown in the illustration above.
The adjusting entry will include: (1) recognition of expense and (2) decrease
in the asset initially recorded (since some of it has already been used). The
adjusting entry would be:
Dec 31 Service Supplies Expense
900.00
Service Supplies
900.00
The "Service Supplies Expense" is an expense account while "Service
Supplies" is an asset. After making the entry, the balance of the unused
Service Supplies is now at $600 ($1,500 debit and $900 credit). Service
Supplies Expense now has a balance of $900. Now, we've achieved our goal.
Expense Method
Under the expense method, the accountant initially records the entire
payment as expense. If the expense method was used, the entry would have
been:
Dec
7 Service Supplies Expense
1,500.00
Cash
1,500.00
Take note that the entire amount was initially expensed. If 60% was used,
then the adjusting entry at the end of the month would be:
Dec 31 Service Supplies
600.00
Service Supplies Expense
600.00
This time, Service Supplies is debited for $600 (the unused portion). And
then, Service Supplies Expense is credited thus decreasing its balance.
Service Supplies Expense is now at $900 ($1,500 debit and $600 credit).
Notice that the resulting balances of the accounts under the two methods
are the same (Cash paid: $1,500; Service Supplies Expense: $900; and
Service Supplies: $600).
Another Example
GVG Company acquired a six-month insurance coverage for its properties on
September 1, 2014 for a total of $6,000.
Under the asset method, the initial entry would be:
Sep
1 Prepaid Insurance
6,000.00

Cash

6,000.00

On December 31, 2014, the end of the accounting period, part of the prepaid
insurance already has expired (hence, expense is incurred). The expired part
is the insurance from September to December. Thus, we should make the
following adjusting entry:
Dec 31 Insurance Expense
4,000.00
Prepaid Insurance
4,000.00
Of the total six-month insurance amounting to $6,000 ($1,000 per month),
the insurance for 4 months has already expired. In the entry above, we are
actually transferring $4,000 from the asset to the expense account (i.e., from
Prepaid Insurance to Insurance Expense).

If the company made use of the expense method, the initial entry would be:
Sep
1 Insurance Expense
6,000.00
Cash
6,000.00
In this case, we must decrease Insurance Expense by $2,000 because that
part has not yet been incurred (not used/not expired). Insurance Expense
shall then have a balance of $4,000. The amount removed from the expense
shall be transferred to Prepaid Insurance. The adjusting entry would be:
Dec 31 Prepaid Insurance
2,000.00
Insurance Expense
2,000.00
Conclusion
What we are actually doing here is making sure that the incurred
(used/expired) portion is included in expense and the unused part into asset.
The adjusting entry will always depend upon the method used when the
initial entry was made.
If you are having a hard time understanding this topic, I suggest you go over
and study the lesson again. Sometimes, it really takes a while to get the
concept. Preparing adjusting entries is one of the challenging (but important)
topics for beginners.

When a fixed asset is acquired by a company, it is recorded

at cost (generally, cost is equal to the purchase price of the asset). This cost
is recognized as an asset and not expense.
The cost is to be allocated as expense to the periods in which the asset is
used.This is done by recording depreciation expense.
There are two types of depreciation physical and functional depreciation.
Physical depreciation results from wear and tear due to frequent use and/or
exposure to elements like rain, sun and wind.
Functional or economic depreciation happens when an asset becomes
inadequate for its purpose or becomes obsolete. In this case, the asset
decreases in value even without any physical deterioration.
Understanding the Concept of Depreciation
There are several methods in depreciating fixed assets. The most common
and simplest is the straight-line depreciation method.
Under the straight line method, the cost of the fixed asset is
distributed evenly over the life of the asset.
For example, ABC Company acquired a delivery van for $40,000 at the
beginning of 2012. Assume that the van can be used for 5 years. The entire
amount of $40,000 shall be distributed over five years, hence a depreciation
expense of $8,000 each year.

Straight-line depreciation expense is computed using this formula:

Depreciable Cost Residual Value
Estimated Useful Life
Depreciable Cost: Historical or un-depreciated cost of the fixed asset
Residual Value or Scrap Value: Estimated value of the fixed asset at the end of
its useful life
Useful Life: Amount of time the fixed asset can be used (in months or years)
In the above example, there is no residual value. Depreciation expense is
computed as:
= $40,000 $0
5 years

= $8,000 / year
With Residual Value
What if the delivery van has an estimated residual value of $10,000? The
depreciation expense then would be computed as:
= $40,000 $10,000
5 years
= $30,000
5 years
= $6,000 / year

How to Record Depreciation Expense

Depreciation is recorded by debiting Depreciation Expense and crediting
Accumulated Depreciation. This is recorded at the end of the period (usually,
at the end of every month, quarter, or year).
The entry to record the $6,000 depreciation every year would be:
Dec 31 Depreciation Expense
6,000.00
Accumulated Depreciation
6,000.00
Depreciation Expense: An expense account; hence, it is presented in the
income statement. It is measured from period to period. In the illustration
above, the depreciation expense is $6,000 for 2012, $6,000 for 2013, $6,000
for 2014, etc.
Accumulated Depreciation: A balance sheet account that represents the
accumulated balance of depreciation. It is continually measured; hence the
accumulated depreciation balance is $6,000 at the end of 2012, $12,000 in
2013, $18,000 in 2014, $24,000 in 2015, and $30,000 in 2016.
Accumulated depreciation is a contra-asset account. It is presented in the
balance sheet as a deduction to the related fixed asset. Here's a table
illustrating the computation of the carrying value of the delivery van.
2012
2013
2014
2015
2016
$40,00 $40,00 $40,00 $40,00 $40,00
Delivery Van - Historical Cost
0
0
0
0
0
Less: Accumulated
6,000
12,000 18,000 24,000 30,000
Depreciation
Delivery Van - Carrying Value $34,00 $28,00 $22,00 $16,00 $10,00

0
0
0
0
0
Notice that at the end of the useful life of the asset, the carrying value is
equal to the residual value.
Depreciation for Acquisitions Made Within the Period
The delivery van in the example above has been acquired at the beginning of
2012, i.e. January. Therefore, it is easy to calculate for the annual straight-line
depreciation. But what if the delivery van was acquired on April 1, 2012?
In this case we cannot apply the entire annual depreciation in the year 2012
because the van has been used only for 9 months (April to December). We
need to prorate.
For 2012, the depreciation expense would be: $6,000 x 9/12 = $4,500.
Years 2013 to 2016 will have $6,000 annual depreciation expense.
In 2017, the van will be used for 3 months only (January to March) since it
has a useful life of 5 years (i.e. April 1, 2012 to March 31, 2017).
The depreciation expense for 2017 would be: $6,000 x 3/12 = $1,500, and
thus completing the accumulated depreciation of $30,000.
2012 (April to December)
$ 4,500
2013 (entire year)
6,000
2014 (entire year)
6,000
2015 (entire year)
6,000
2016 (entire year)
6,000
2017 (January to March)
1,500
Total for 5 years
$ 30,000

Companies provide services or sell goods for cash or on credit. Allowing credit
tends to encourage more sales.
However, businesses that allow credit are faced with the risk that their receivables may not
be collected.
Accounts receivable should be presented in the balance sheet at net realizable value, i.e. the
most probable amount that the company will be able to collect.
Net realizable value for accounts receivable is computed like this:

Accounts Receivable - Gross Amount

Less: Allowance for Bad Debts
Accounts Receivable - Net Realizable Value

$ 100,000
3,000
$ 97,000

Allowance for Bad Debts (also often called Allowance for Doubtful Accounts) represents the
estimated portion of the Accounts Receivable that the company will not be able to collect.

Take note that this amount is an estimate. There are several methods in estimating doubtful
accounts.The estimates are often based on the company's past experiences.
To recognize doubtful accounts or bad debts, an adjusting entry must be made at the end of
the period. The adjusting entry for bad debts looks like this:

Dec

31

Bad Debts Expense

xxx.xx

Allowance for Bad Debts

xxx.xx

Bad Debts Expense a.k.a. Doubtful Accounts Expense: An expense account; hence, it is
presented in the income statement. It represents the estimated uncollectible amount for
credit sales/revenues made during the period.
Allowance for Bad Debts a.k.a. Allowance for Doubtful Accounts: A balance sheet account that
represents the total estimated amount that the company will not be able to collect from its
total Accounts Receivable.
What is the difference between Bad Debts Expense and Allowance for Bad Debts?
Bad Debts Expense is an income statement account while the latter is a balance sheet
account. Bad Debts Expense represents the uncollectible amount for credit sales made during
the period. Allowance for Bad Debts, on the other hand, is the uncollectible portion of
the entire Accounts Receivable.
You can also use Doubtful Accounts Expense and Allowance for Doubtful Accounts in lieu of Bad
Debts Expense and Allowance for Bad Debts. However, it is a good practice to use a uniform
pair. Some say that Bad Debts have a higher degree of uncollectibility that Doubtful
Accounts. In actual practice, however, the distinction is not really significant.

Here's an Example
Gray Electronic Repair Services estimates that $100.00 of its credit revenue for the period
will not be collected. The entry at the end of the period would be:

Dec

31

Bad Debts Expense

100.00

Allowance for Bad Debts

100.00

Again, you may use Doubtful Accounts. Just be sure to use a logical (and uniform) pair every
time. For example:

Dec

31

Doubtful Accounts Expense

Allowance for Doubtful Accounts

100.00
100.00

If the company's Accounts Receivable amounts to $3,400 and its Allowance for Bad Debts is
$100, then the Accounts Receivable shall be presented in the balance sheet at $3,300 the
net realizable value.

Accounts Receivable (Gross Amount)

$ 3,400

Less: Allowance for Bad Debts

100

Accounts Receivable - Net Realizable Value

$ 3,300

An adjusted trial balance is prepared after adjusting entries are made and posted to the
ledger.
This is the second trial balance prepared in the accounting cycle.
Its purpose is to test the equality between debits and credits after adjusting entries are
entered into the books of the company.
To illustrate how it works, here is a sample unadjusted trial balance:

At the end of the period, the following adjusting entries were made:
Dec

31

Accounts Receivable

300.00

Service Revenue
31

Utilities Expense

300.00
1,800.00

Utilities Payable
31

Service Supplies Expense

1,800.00
900.00

Service Supplies
31

Depreciation Expense
Accumulated Depreciation

900.00
720.00
720.00

After posting the above entries, the values of some of the items in the unadjusted trial
balance will change. Take the first adjusting entry. Accounts Receivable is debited hence is
increased by $300. Service Revenue is credited for $300.
The balance of Accounts Receivable is increased to $3,700, i.e. $3,400 unadjusted balance
plus $300 adjustment. Service Revenue will now be $9,850 from the unadjusted balance of
$9,550.
Next entry. Utilities Expense and Utilities Payable did not have any balance in the unadjusted
trial balance. After posting the above entries, they will now appear in the adjusted trial
balance.
Third. Service Supplies Expense is debited for $900. Service Supplies is credited for $900.
The Service Supplies account had a debit balance of $1,500. After incorporating the $900
credit adjustment, the balance will now be $600 (debit).
And fourth. There were no Depreciation Expense and Accumulated Depreciation in
theunadjusted trial balance. Because of the adjusting entry, they will now have a balance of
$720 in the adjusted trial balance.

Adjusted Trial Balance Example

After incorporating the adjustments above, the adjusted trial balance would look like this.
Just like in the unadjusted trial balance, total debits and total credits should be equal.

Examples of Adjusting Journal

Entries in Accounting
In our previous post titled how to make adjusting journal entries (AJE), we
have discussed the common types of adjusting entries, namely, accrued
revenues, accrued expenses, unearned revenues, prepaid expenses,
depreciation (estimation), change in accounting estimate, and prior period
errors. We also enumerated some examples of economic events that need to
be adjusted to update and correct our records in the journal, ledger, trial
balance, and financial statements. Since our post about recording journal
entries, we have already presented examples of business transactions to
facilitate our discussion. We have continued using those examples in our
topics about posting entries in the general ledger and preparing a trial
balance. As promised, we will continue those samples here. And to illustrate

how to make adjusting entries, let us assume the following examples of

accounting events and their corresponding adjusting journal entries in the
books of Mr. Santos the same illustration we have discussed in our article
on how to make entries in the general journal.

Examples of Events that need Adjusting

Entries
1. The computer equipment of P100,000 is estimated to have a useful life of 5
years. It was decided that a one-month depreciation for December should be
provided.
2. As of December 31, the Internet and communication incurred but not yet
paid amounted to P4,000.
3. Water and power amounted to P5,000 was incurred during December but
still unpaid as of December 31.
4. It was determined that the actual cost of unused computer supplies at the
end of year is amounted to P45,000.
5. It was discovered that Internet services worth P66,000 provided to
customers on account were erroneously recorded as P6,000. Furthermore,
printing services worth P50,000 earned and received on cash were also
erroneously omitted in the journal and ledger.
6. An interest of 16% per annum on P100,000 loan from the bank granted on
December 12, has accrued.
7. During December, Mr. Santos actually paid P20,000 for the four months of
rental fees covering December to March. Only the P5,000 rent payment for
December was recorded.

8. Mr. Santos did not record the one-year insurance he paid in cash on
December 1 worth P12,000 covering 12 month period from December 1, 2011
to November 30, 2012.
9. Mr. Santos has determined that he has an additional taxes and licenses
payable as of December 31 amounted to P5,000, which is due on or before
January 20 of the next year.
10. The 2011 income tax due and payable after personal deduction amounted
to P75 (only estimated for the purpose of this example).

Adjusting Journal Entries

The following are the adjusting entries based on the above examples.
Amounts in the left side represent debit entries, while amounts in the right side
represent credit entries.
AJE #1
Depreciation expense

P 1,667

Accumulated depreciation

P 1,667

To record depreciation expense for the month of December

(P100,000/5years/12months)
AJE #2
Internet and communication expense

P4,000

Accrued expense

P4,000

To record Internet and communication accrued as of December 31, 2011

AJE #3
Water and power expense
Accrued expense

P5,000
P5,000

To record water and power expense accrued as of the end of accounting

period

AJE#4
Computer supplies expense

P2,000

Unused computer supplies

P2,000

To correct balance of unused computer supplies as of December 31, 2011

(P47,000 45,000 = P2,000)
AJE#5
Cash
Accounts receivable

P50,000
60,000

Internet service income

P60,000

Printing service income

50,000

To correct erroneous recording of Internet service income on account,

reflecting the P60,000 that was erroneously omitted (P66,000 6,000 =
60,000) and to record omitted P50,000 printing service income on cash.
AJE#6
Interest expense

P844

Accrued expense

P844

To accrue interest expense for 19 days Dec 12- Dec 31

[(P100,00016%/360)x19days=P844.44]
AJE#7
Prepaid rent

P15,000

Cash

P15,000

To record the unexpired rental fees paid (January to March with P5,000 each
month). Remember that the P5,000 rent payment for the month of December
was already recorded correctly during that month.
AJE#8
Insurance expense

P1,000

Prepaid insurance

11,000

Cash

P 12,000

To record payment of insurance and the corresponding expense for the month
of December (P12,000 x 1/12 = P1,000)
AJE#9
Taxes and licenses

P5,000

Accrued expense

P5,000

To accrue taxes and licenses as of December 31, 2011.

AJE#10
Income tax expense
Income tax payable

P75
P75

To record 2011 income tax due and payable

Those adjusting journal entries are recorded just like regular transactions in
the journal. The entries are also posted to the ledger just like any other journal
entries to update and correct the ledger account balances. Here is how the
adjusting journal entries affect our cash in the general ledger:

After all the ledger balances are corrected, our trial balance should be
adjusted to reflect the adjustments we have made. Our next discussion will be
on how to prepare an adjusting trial balance. See you in our next post. Thank
you.
Disclaimer: This article is intended for informational use only. Examples on
this article are only used for illustrating and facilitating the article discussion.
They dont reflect actual scenarios or reflect actual accounting records of an
actual entity or business.