ADJUSTING JOURNAL ENTRIES – entries required at the end of the period

to update the accounts before financial statements are prepared

Purposes
• To record any revenue earned or expense incurred that have not been
recorded prior to the end of the period
• To apportion revenues and expenses properly between accounting
periods affected

Characteristics
• Adjusting Entries are based on the concepts of accrual accounting –
states that revenues should be recognized when earned, regardless
when cash is received and expense be recognized when incurred,
regardless when cash is paid
• Every adjusting entry involves the recognition of either revenues or
expenses and a corresponding change in either assets or liabilities

Adjusting Entries and GAAP

• Revenue Realization Principle – states that revenue be recognized at
the time foods are sold or services are rendered
• Matching Principle – states that revenue earned during an accounting
period is matched with the expenses incurred in generating this
revenue

Year-end adjustments
1. Accrued Expense
2. Accrued Income
3. Prepaid Expense
4. Unearned Income
5. Depreciation
6. Doubtful Accounts
7. Merchandise Inventory

Accruals – recognizes unrecorded revenues and expenses

• Accrued Expense
• Accrued Income

1. Accrued expenses – expenses already incurred but not yet paid

Purpose
• To record unrecognized expense

Adjustment required
• Recognizes expense incurred but not yet paid
• Records liability account
Adjusting Entry

Expense
Liability (Payable)

* Liability = Payable db? So to make it easy EXPENSE-PAYABLE lagi pag

Accrued Expenses. Irerecord yung gastos na di pa nabayaran. 

2. Accrued Income – Revenues already earned but not yet collected

Purpose
• To record unrecognized revenue

Adjustment required
• Recognizes revenue earned but not yet recorded
• Records Asset (Income) account

Adjusting Entry

Asset
Income

* Asset = Receivable or Cash db? So to make it easy RECEIVABLE/CASH-

INCOME lagi pag Accrued Income. Irerecord yung income na hindi pa
narecord. 

SO SA ACCUALS, IT’S ALWAYS “EXPENSE-PAYABLE” OR

“RECEIVABLE/CASH-INCOME”. YUN TATANDAAN NIYO 

Deferrals – delays the recognition of revenues and expenses

• Prepaid Expense
• Unearned Income

3. Prepaid Expenses – expenses already paid but not yet incurred

Purpose
• To allocate a portion of the asset to expense

Nature of initial transaction

• Paid future expense in advance
ASSET METHOD: recorded the advance payment as asset
Adjustment Required
• Recognizes portion of asset used as expense
• Reduces balance of Asset Account

Journal Entry: Adjusting Entry:

Asset (Prepaid) Expense

Cash or Liability (Payable) Asset (Prepaid)

Ung nagamit na portion ng prepaid expense for the year, gagawing expense.
So babawasan yung prepaid para marecord yung nagamit na. ung nagamit
na, magiging expense. Yung amount ng expense, un yung ibabawas sa
“prepaid” (kaya naka.credit na ang prepaid na debit sa journal entry). So ang
icocompute dito is yung part ng asset na nagamit na. Yung amount ng
expense, nakadepend sa amount ng “prepaid” na nagamit na.

Example: kunwari may nirecord ka na prepaid asset na 5,000. Kung 2,000

lang nagamit mo, dapat yung balance ng prepaid rent is 3,000 by the end of
the accounting period. So ang mangyayari, babawasan mo yung prepaid
expense ng 2,000 sa AJE. Kaya, credit na yung prepaid asset.

T-account
Prepaid Expense
Debit Credit
5,000 JE
2,000 AJE
_______________________
3,000 prepaid expense for the end of the accounting
period

EXPENSE METHOD: recorded the advance payment as expense

Adjustment Required
• Recognizes portion of expense unused as asset
• Reduces balance of Expense Account

Journal Entry: Adjusting Entry:

Expense Asset (Prepaid)

Cash or Liability Expense

Sa expense method naman, baliktad. Irerecord mo yung part ng expense na

hindi pa nagamit during the year. Yung icocompute mo dito ang expense.
yung asset, nakadepend dun sa expense. Kung ano yung expense, yun na rin
yung asset.
Example: kunwari may nirecord ka na Expense na 5,000. Kung 2,000 lang
nagamit mo, dapat yung balance ng expense is 2,000. So ang mangyayari,
babawasan mo yung expense ng 3,000 sa AJE. Yung 3000 naman, malilipat
sa Prepaid Expense for next year. Gets? Kaya, credit na yung prepaid
expense.

T-account
“” Expense
Debit Credit
5,000 JE
3,000 AJE
_______________________
2,000 Expense for the accounting period

Sa asset method, irerecord yung part na nagamit na sa AJE. Sa

expense method naman, irerecord yung hindi pa nagamit sa AJE.

4. Unearned Revenue – revenues already received but not yet earned.

(meaning: nagbayad na yung customer, pero di mo pa nagagawa o di pa
tapos ang service. Pampagulo kasi yung description nila eh. haha)

Purpose
• To allocate a portion of the liability to revenue

Nature of initial transaction (Journal Entry)

• Collected cash from customers in advance

LIABILITY METHOD: recorded the advance receipt as liability

Adjustment Required to
• Recognize portion of the liability earned as revenue
• Reduce balance of liability account

Journal Entry: Adjusting Entry:

Cash/Receivable Unearned Revenue

Unearned Revenue Income

Sa liability method, since nakarecored siya as unearned income (meaning

utang sa part ng company) sa journal entry, sa AJE irerecord mo kung
magkano yung nagawa mo na na service (meaning yung nabawas sa utang
mo na service sa kanila). Ung income nakadepend sa amount na nagawa mo
ng service.
Example: yung nirecord mo sa unearned income is 5,000. Tapos ang nagawa
mo lang talaga is 2,000. Ung 2,000 na yun overstated liability na. So ang
irerecord mo sa adjusting entry is 2,000 para 3,000 lang matitira sa utang
mo. Gets? Kung titignan mo yung t-account niyan. Ganito

Unearned Revenue (Liability)

Debit Credit
5000 JE
2000 AJE
________________________
3000 Remaining Liability

INCOME METHOD: recorded the advance receipt as income/revenue

Adjustment Required to
• Recognize portion of income unearned as liability
• Reduce balance of revenue account

Journal Entry: Adjusting Entry:

Cash Income/Revenue
Income/Revenue Unearned Revenue

Sa income method, since nakarecord siya as income kahit na di pa naman

talaga income yun kasi di mo pa nagagwa yung service, kailangan iadjust.
Sobra kasi yung income pag hindi inadjust. So, sa AJE, kailangan bawasan
yung income. So hahanapin mo yung amount na hindi mo pa nagagawa para
ang marerecord ay yung amount na nagawa mo na.

Example: yung nirecord mo sa income is 5,000. Tapos ang nagawa mo lang

talaga is 2,000. Ung 3,000 overstated income yun. So ang irerecord mo sa
adjusting entry is 3,000 para 2,000 lang matitira. Gets? Or magulo pa rin…
hmmm.. eto mas clear. Kung titignan mo yung t-account niyan. Ganito

“something” Income
Debit Credit
5000 JE
3,000 AJE
_________________________
2000 Income for the year

So by recording yung amount na di mo pa nagagawa na service sa AJE,

makukuha mo yung tamang income ng nagawa ng service within the year.
Sa liability method, yung kukunin mo is yung amount na nagawa mo
ng service para sa AJE. Sa income method, kukunin mo yung amount
na di mo pa nagagawa para sa AJE.

5. Depreciation – Gradual decrease in value of fixed assets due to use,

inadequacy (decrease in value caused by a business expansion such that the
asset although in good condition can no longer fulfill the needs of the
business) and obsolescence (decrease in value caused by introduction of
new models or inventions)

Purpose
• To offset a reasonable portion of the asset’s cost against revenue in
each period of the asset’s useful life

Adjusting Entry
Depreciation Expense
Accumulated Depreciation

Depreciation Expense – Assigned portion of the cost of fixed asset to the

period during which it is used

Accumulated Depreciation – total accumulated amount of depreciations that

has been recorded for the fixed asset

Straight-line method – depreciation method wherein an equal portion of the

asset’s cost is allocated to depreciation expense in every period of the
asset’s estimated useful life

Note: be careful sa fractional depreciation (depreciations computed for less

than a year). Madaming ganyan sa exam. 

Scrap Value/Salvage Value/Residual Value – estimated amount at which the

asset can be sold or exchanged at the end of its serviceable life; an estimate
of the asset’s value at the end of its benefit period.
Net Carrying Value – difference between the cost of the fixed asset and the
accumulated depreciation

6. Bad Doubtful Accounts – loss due to worthless or bad accounts caused

by unforeseen events or errors in granting credit
(I’m not sure kung ACTBAS1 to or hindi)

Methods of Accounting for Doubtful Accounts

1. Allowance Method – recognizes estimated losses in the period in which
the credit sales are made regardless of when the specific accounts are
determined to be uncollectible
2. Direct write-off method – recognizes a loss only when specific accounts
are determined to be uncollectible

Purpose
• To record an estimated amount of uncollectible accounts resulting
from failure to collect accounts receivable in the period in which the
related sales took place.

Adjustment Required

Bad Debts Expense

Allowance for Bad Debts

Doubtful Accounts Expense – amount of receivables estimated to be doubtful

of collection
Allowance for Doubtful Accounts – a valuation account which is deducted
from the Accounts Receivable

Methods of estimating probable loss from Doubtful Accounts

a. Income Statement Approach
Bad Debts is based on percentage of Gross sales or credit sales
Bad Debts estimate = Gross Sales x percentage
Bad Debts is based on percentage of Net Sales (or Net Credit
Sales)
Bed Debts estimate = Gross Sales less Sales, Returns &
Allowances and Sales Discount x percentage

b. Balance Sheet Approach

Allowance for Bad Debts is based on percentage of Accounts
Receivable
Bad Debts estimate = Accounts Receivable x percentage
Less: Allowance for Doubtful Accounts, beg.

Allowance for Bad Debts is increased by a certain percentage of

Accounts Receivable
Bad Debts estimate = Accounts Receivable x percentage

Allowance for Bad Debts is increased to a certain percentage of

Accounts Receivable
Bad Debts estimate = Accounts Receivable x percentage
Less: Allowance for Doubtful Accounts, beg.

Aging of Accounts Receivable – thorough analysis of every Accounts

Receivable account to determine past due accounts and establish
estimates for uncollectible accounts
Bad debts estimate = Amount based on Aging Analysis
Less: Allowance for Doubtful Accounts, beg.

Net Realizable Value – difference between the Accounts Receivable

and the Allowance for Doubtful Accounts

Writing-Off Worthless Accounts – occurs when an account is definitely

known to be uncollectible

JE: Allowance for Bad Debts

Accounts Receivable
Write off

Recovery of worthless accounts – occurs when an account previously

written-off as uncollectible is later paid by the customer

JE: Accounts Receivable

Allowance for Bad Debts
Recovery

Cash
Accounts Receivable
Collection
SUMMARY:

TYPE OF REASON FOR ACCOUNTS JOURNAL ENTRY ADJUSTING ENTRY

ADJUSTMEN ADJUSTMENT BEFORE
T ADJUSTMENT
Accrued Expenses have Expenses Dr. Expense
Expense been incurred understated Cr. Payable
but not yet paid Liabilities
in cash or not understated
yet recorded
Accrued Revenues have Assets understated Dr. Receivable
Income been earned Income Cr. Income
but not yet understated
collected or
recorded
Prepaid ASSET METHOD
Expense (Prepaid Assets overstated Dr. Asset Dr. Expense
expense initially Expenses (Prepaid) Cr. Asset
recorded in understated Cr. (Prepaid)
asset accounts Cash/Payable
have been
used)

EXPENSE Assets understated Dr. Asset (Prepaid)

METHOD Expenses Dr. Expense Cr. Expense
(Prepaid overstated Cr.
expenses Cash/Payable
initially
recorded in
expense
accounts have
not been used)
Unearned LIABILITY
Income METHOD Liabilities Dr. Cash Dr. Unearned
(Unearned overstated Cr. Unearned revenue
Revenues Revenues R Cr. Income
initially understated
recorded in
liability
accounts have
been earned)
 Dr. Cash Dr. Income
INCOME Liabilities Cr. Income Cr. Unearned
METHOD understated R
(Unearned Revenues
Revenues overstated
initially
recorded in
revenue
accounts have
not been
earned)