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Adjusting Entries

Adjusting entries are made at the end of an accounting period to allocate revenues and expenses to the proper period and ensure account balances are accurate for financial reporting. Key types of adjustments include: 1. Accruals - Recognize expenses incurred and revenues earned during the period, even if not paid/received in cash. 2. Deferrals - Allocate prepaid expenses or unearned revenues across periods to match costs with related revenues/expenses. 3. Closing entries - Transfer balances in temporary accounts like revenue and expense to owner's equity accounts to start the next period with zero balances.

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376 views5 pages

Adjusting Entries

Adjusting entries are made at the end of an accounting period to allocate revenues and expenses to the proper period and ensure account balances are accurate for financial reporting. Key types of adjustments include: 1. Accruals - Recognize expenses incurred and revenues earned during the period, even if not paid/received in cash. 2. Deferrals - Allocate prepaid expenses or unearned revenues across periods to match costs with related revenues/expenses. 3. Closing entries - Transfer balances in temporary accounts like revenue and expense to owner's equity accounts to start the next period with zero balances.

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Dyen
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ADJUSTING ENTRIES

The need for adjustments

Accountants make adjusting entries to reflect in the accounts information on economic activities
that have been occurred but have not yet been recorded. Adjusting entries assign revenues to
the period in which they are earned, and expenses to the period in which they are incurred.
These entries are needed to measure properly the profit for the period, and to bring related
asset ad liability accounts to correct balances for the financial statements.

Adjusting entries involve changing account balances at the end of the period from what is the
current balance of the account to what is the correct balance for proper.

Deferrals and Accruals

Deferral is the postponement of the recognition of “an expense already paid but not yet
incurred” or of “revenue already collected but not yet earned”. This adjustment deals with an
amount already recorded in a balance sheet account; the entry, in effect, decreases the balance
sheet account and increases an income statement account.

Deferrals would be needed in two cases:


1. Allocating assets to expenses to reflect expenses incurred during the accounting period (e.g.
prepaid insurance, supplies and depreciation).
2. Allocating revenues received in advance to revenue to reflect revenues earned during the
accounting period (e.g. subscriptions).

Accrual is the recognition of “an expense already incurred but unpaid, or “revenue earned but
not collected”. This adjustment deals with an amount unrecorded in any account; the entry, in
effect, increases both a balance sheet and an income statement account, Accruals would be
required in two cases:
1. Accruing expenses to reflect expenses incurred during the accounting period that are unpaid
and unrecorded.
2. Accruing revenues to reflect revenues earned during the accounting period that are
uncollected and unrecorded.
SUMMARY OF ADJUSTING ENTRIES

Type of Account Balances Before Account Balances After


Adjustments Adjustments Adjustments
Income
Balance Sheet Statement Account Debited Account
Account Account Credited
PREPAID
EXPENSES:
Assets Expenses Prepaid
Asset Method Overstated Understated Expenses Expenses(Asset)
Assets Expense Prepaid
Expense Method Understated Overstated expenses (Asset) Expenses
UNEARNED
REVENUES:
Liabilities Revenue Unearned
Liability Method Overstated Understated Revenue (Liab) Revenues
Liabilities Revenue Unearned
Income Method Understated Overstated Revenue Revenue (Liab)
ACCRUAL
Accrued Liabilities Expenses
Expenses Understated Understated Expenses Payable (Liab)
Accrued Assets Revenue
Revenue Understated Understated Receivable (A) Revenue

EXERCISES:

A. True or False
_____ 1.Failure to record the adjusting entry for accrued salaries results in the current year’s
profit being overstated.
_____ 2. An adjusting entry includes at least one balance sheet account (Real Account) and at
least one income statement account (nominal account).
_____ 3. All decreases in owner’s equity are a result of expenses.
_____ 4. Accounting periods should be of equal length to facilitate comparisons between
periods.
_____ 5. In recording the adjusting entry for accrued salaries, all the accounts involved are
decreased.
_____ 6. The owner’s personal withdrawals for the year cause a decrease in profit.
_____ 7. Acquiring a computer for cash is just exchanging one asset for another and will not
result in an expense even in the future periods.
_____ 8. Applying accrual accounting results in a more accurate measurement of profit for the
period than does the cash basis accounting.
_____ 9. Not all increases to cash represent revenues.
_____ 10. Adjusting entries affect cash flows in the current period.
_____ 11. Accrual accounting recognizes revenues and expenses at the point that cash
changes hands.
_____ 12. A deferral is the recognition of an expense that has arisen but has not yet been
recorded.
_____ 13. Assets become liabilities when they expire.
_____ 14. Revenue results from collection of receivable.
_____ 15. Revenue cannot be recognized unless delivery of goods has occurred or services
have been rendered.
_____ 16. Recording incurred but unpaid expenses is an example of an accrual.
_____ 17. Revenue is equal to the cash received by a company during the accounting period.
_____ 18. When services are not paid for until after they have been performed, the accrued
expense is recorded by an adjusting entry at the end of accounting period.
_____ 19. The adjusting entry to recognize earned commission revenues not previously
recorded or billed will cause total assets to increase.
_____ 20. When the reduction in prepaid expenses is not properly recorded, this causes the
asset accounts and expense accounts to be understated.
_____ 21. If the adjustments for accrued salaries is omitted, liabilities and expenses will be
understated.
_____ 22. A decrease in an expenses account is the equivalent of a decrease in owner’s equity
account.
_____ 23. The adjusting entry to recognize an expense which is unrecorded and unpaid will
cause total assets to increase.
_____ 24. The adjusting entry to allocate part of the cost of one-year fire insurance policy to
expense will cause total assets to increase.
_____ 25. Every adjusting entry must change both income statement account and a balance
sheet account.
_____ 26. The amount of accrued revenues is recorded by debiting an asset account and
crediting an income account.
_____ 27. Accrued revenue is a term used to describe revenue that has been received nut not
yet earned.
_____ 28. Accrued expenses is a term used to describe expenses that has been incurred but
not yet paid.
____ 29. The amount of accrued expenses is recorded by debiting an asset account and
crediting an income statement account.
_____ 30. The adjusting entry to recognize earned revenues which was received in advance
will cause total liabilities to decrease.

B. Matching Type
Below are terms pertinent to adjusting entries. Mat each definition with its related term.

a. Accrued expenses; b. Deferred expense; c. Accrued revenue; d. Deferred revenue


_____ 1. Revenue not yet earned ; collected in advance.
_____ 2. Office supplies on hand; used next accounting period.
_____ 3. Rent revenue collected; not yet earned.
_____ 4. Rent not yet collected; already earned.
_____ 5. An expense incurred, not yet paid or recorded.
_____ 6. Revenue earned; not yet collected.
_____ 7. An expense not yet incurred; paid in advance.
_____ 8. Property taxes incurred, not yet paid.
C. Mari G Forwarders borrowed P600,000 from BPI on September 1, 2018. The note carried an
8% annual rate of interest and was set to mature on Feb 28, 2019. Interest and Principal were
paid in cash on the maturity date.
Required:
1. What was the amount of interest expense paid in cash in 2018?
2. What was the amount of interest expense recognized on the 2018 income statement?
3. What was the amount of total liabilities shown on the 2018 balance sheet?
4. What was the amount of cash that was paid to the bank on February 28, 2019 for principal
and interest?
5. What was the amount of interest expense shown on the 2019 income statement?
6. Prepare Journal Entries/Adjusting Entries for 2018 and 2019.
D. Cam G, an angel investor, decided to invest P1,200,000 excess cash in a certificate of
deposit on April 1, 2017. The certificate of deposit carried an 8% annual rate of interest and a
one year term to maturity. Interest will be withdrawn monthly (disregard tax effects)
Required:
1. What amount of income will be recognized for the year ending December 31, 2017?
2. What is the effect of the adjusting entry on the accounting equation?
3. What amount of cash will be collected for interest revenue in 2017?
4. What is the amount of interest receivable as of December 31, 2017?
5. What amount of cash will be collected for interest revenue in 2018?
6. What amount of interest revenue will be recognized in 2018?
7. What is the amount of interest receivable as of December 31, 2018?
E. The following are some of the transactions made by Pau Company during 2018:
April 1 Acquired cleaning supplies in the amount of P260,000. A count of the
supplies on December 31, 2018 amounted to P110,000.
August 1 Received P360,000 from Cebu Manpower for cleaning janitorial uniforms
over the next 3 years.
November 1 Paid P240,000 for annual rent.
Required:
1. Assume that Pau records these transactions using the following accounts, record the
adjusting entries on December 31, 2018:
Office supplies
Prepaid rent
Unearned cleaning revenues
2. Now, assume that Pau records these transactions using the following accounts, what will be
the adjusting entries on December 31, 2018?
Office supplies expense
Rent expense
Cleaning revenues
F. Using T-accounts, record the adjusting entries for each of the situations listed below: The last
day of the accounting period is December 31.
a. Three-days’ salaries are unpaid as at December 31. Salaries are P75,000 for a five-
day work week.
b. On August 1, a P18,000 premium was paid on a one-year insurance policy. The
amount of the premium was debited to Prepaid insurance.
c. Before adjustments, the Supplies account has a balance of P35,400. The count of
supplies on hand amounted to P22,300.
G. Prepare the adjusting entry for Mari Company under each of the following for the year ending
December 31, 2018:
a. Paid P24,000 for a 1-year fire insurance policy to commence on Sept 1. The amount of
premium was debited to Prepaid Insurance.
b. Borrowed P100,000 by issuing a 1-year note with 7% annual interest to Century Savings
Bank on Oct 1, 2018.
c. Received an P18,000 cash advance for a contract to provide services in the future. The
contract required a 1-year commitment, starting April1.
d. Purchased P6,400 of supplies on account. At year’s end, P750 of supplies remained on hand.
e. Invested P90,000 cash in a certificate of deposit that paid 4% annual interest. The certificate
was acquired on May 1 and carried a 1-year term to maturity.
f. Paid P78,000 cash in advance on Sept 1 for a 1-year lease on office space.

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