The Accounting Cycle

´ Step 1 : Identifying and analyzing the events to be recorded

´ Step 2 : Recording the transactions in the journal
´ Step 3 : Posting Journal Entries to the Ledger
´ Step 4 : Preparing the trial balance
´ Step 5 : Preparing the worksheet and adjusting entries
´ Step 6 : Preparing the Financial Statements
´ Step 7 : Journalizing and posting of adjusting journal entries
´ Step 8 : Journalizing and posting of closing journal entries
´ Step 9 : Preparing the post-closing trial balance
´ Step 10 : Journalizing and posting of reversing journal entries
What are Adjusting Entries?
• Adjusting entries are journal entries that are made in
the accounting journals at the end of an accounting period
after the preparation of the trial balance.
• The main objective underlying the adjusting entries is that
certain revenues and expenses are required to be matched
with the accounting period in which they occurred.
• In the case of accrual basis accounting, it is necessary to adjust
journal entries since the transfer of cash does not always take
place at the time of purchasing an item, availing services or
incurring an expense. Consequently, the journal entries are
adjusted at the end of an accounting period.
• After the adjusting entries have been made in the accounting
journals, they are captured in the general ledger in the same
way as any other accounting journal entry.
How to record Adjusting Entries?
The following are some of the steps necessary for recording
adjusting entries:
1. Firstly the two or more accounts are to be identified which will
be impacted due to the transaction under consideration
As per thumb rule, one of the accounts will be from the
balance sheet account, e.g.: Prepaid insurance account
On the other hand, the other account will be from the income
statement account, e.g.: Insurance expense account.
2. Next, one must compete precisely and arrive at the exact
amount for the transaction under consideration for the
adjusting entry
3. Next, both the accounts and the required adjustment have to
be entered in the general journal
4. Finally, one must be able to identify and then assign which
account has to be debited and which one has to be credited
PREPAYMENTS- are expenses already paid but not yet incurred
or used.
Journal entry upon payment
Date Account Titles and Explanations P.R. Debit Credit
2020
Prepaid Expenses xxx
Cash xxx
* bought prepaid expense

Adjusting journal entry at the end of accounting period

Date Account Titles and Explanations P.R. Debit Credit

2020
Expenses xxx
Prepaid Expenses xxx

* record the expired expense

Note: The amount of the adjusting journal entry represent the expired or used
portion of the prepayment
Illustrative Problem- PREPAYMENT
On April 30, 2020, Company X paid 36,000 worth of insurance premium for 2
years. Give the adjusting journal entry on June 30, 2020.
• Journal entry upon payment on April 30, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
April 30 Prepaid Insurance 36,000
Cash 36,000
* paid two years insurance

• Adjusting Journal Entry at the end of the accounting period June 30,
2020
Date Account Titles and Explanations P.R. Debit Credit
2020
June 30 Insurance Expense 3,000
Prepaid Insurance 3,000
* to record the expired insurance
Illustrative Problem- PREPAYMENT
On September 1, 2020 Company X paid a one-year advance rent for 30,000.
Give the adjusting journal entry on December 31, 2020.
• Journal entry upon payment on April 30, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
September 1 Prepaid Rent 30,000
Cash 30,000
* paid rent for one year

• Adjusting Journal Entry at the end of the accounting period December

31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
Dec 31 Rent Expense 10,000
Prepaid Rent 10,000
* to record expired rent
Illustrative Problem- PREPAYMENT
Supplies account showed a balance of 4,000. Supplies used during the year
amount to 2,300. Give the adjusting journal entries on December. 31, 2020.
• Adjusting Journal entry on December 31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Supplies Expense 2,300
Supplies 2,300
* to record supplies used for the year

Supplies account on January 1, 2020, showed a balance of 8,000. On

December 31, 2020, supplies on hand amounted to 3,500.
• Adjusting Journal entry on December 31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
Dec 31 Supplies Expense 4,500
Supplies 4,500
* to record supplies used for the year
Deferrals- is income already received but not yet
recorded.
- Journal entry upon receipt of cash
Date Account Titles and Explanations P.R. Debit Credit
2020
Cash xxx
Unearned Revenue/Income xxx
*received cash for services to be rendered

- Adjusting journal entry at the end of accounting period

Date Account Titles and Explanations P.R. Debit Credit

2020
Unearned Revenue xxx
Revenue/Income xxx

* record the expired expense

Note: The amount of the adjusting journal entry represent the earned portion
of the amount initially received.
Illustrative Problem- DEFFERALS
On August 1, Dr. Yu received 90,000 for dental fees to be rendered in the next
6 months. Give the adjusting entry at the end of September.
• Journal entry upon payment on August 1, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
August 1 Cash 90,000
Unearned Dental Fees 90,000
* receipt advance payment

• Adjusting Journal Entry at the end of the accounting period September

30, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
Sept. 30 Unearned Dental Fees 30,000
Dental Fees 30,000
* to record dental fees earned
Illustrative Problem- DEFFERALS
On December 1, 2020, Davis Co. received 48,000 amount of advanced rental
for 6 months. Give the adjusting entry at the end of December 31, 2020.
• Journal entry upon payment on December 1, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 1 Cash 48,000
Unearned Rent Income 48,000
* paireceipt advance payment

• Adjusting Journal Entry at the end of the accounting period December

31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Unearned Rent Income 8,000
Rent Income 8,000
* to record Rent income earned
Accrued Expenses – are expenses already incurred
or used, but not yet paid

- Adjusting Journal Entry at the end of accounting

period.

Date Account Titles and Explanations P.R. Debit Credit

2020
Expenses xxx
Expenses Payable xxx
* to record unpaid expenses
Illustrative Problem- Accrued Expenses
The company received a Maynilad bill in the amount of 9,800 on December
26, 2020. The company intends to pay it on January 8, 2021.
• Adjusting Journal entry at the end of accounting period
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Utilities Expense 9,800
Utilities Payable 9,800
* to record unpaid utilities

Unpaid salaries at the end of December 31, 2020 amounted to 18,800.

• Adjusting Journal Entry on December 31, 2020
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Salaries Expense 18,800
Salaries Payable 18,800
* To record unpaid salaries
Accrued Income – are income already earned, but
not yet received.

- Adjusting Journal Entry at the end of accounting

period.Date Account Titles and Explanations P.R. Debit Credit
2020
Income Receivable xxx
Income xxx
* to record income earned
Illustrative Problem- Accrued Income
A one-year, 6% note receivable in the amount of 200,000 was received on
January 1, 2020. The interest and the principal are payable on maturity date.
Give the adjusting entry on June 30,2020.

• Adjusting Journal entry on June 30, 2020.

Date Account Titles and Explanations P.R. Debit Credit

2020
June 30, Interest Receivable 6,000
Interest Income 6,000
* to record interest income earned

Formula
Interest = Principal x Rate x Time
= 200,000 x 6% x ½ year
= 6,000
Bad Debts/ doubtful accounts – are losses due to uncollectible
accounts.
Date Account Titles and Explanations P.R. Debit Credit
2020
Bad Debt Expense xxx
Allowance for Bad Debts xxx
* to record estimated uncollectible accounts

Date Account Titles and Explanations P.R. Debit Credit

2020
Doubtful Account Expense xxx
Allowance for Doubtful Account xxx
* to record estimated uncollectible accounts

Date Account Titles and Explanations P.R. Debit Credit

2020
Uncollectible Accounts xxx
Allowance for Uncollectible Accounts xxx
* to record estimated uncollectible accounts
Illustrative Problem- Bad Debts…
Accounts Receivable shows a balance of 100,000. It is estimated that 8% of this is
uncollectible. Give the adjusting entry on Dec. 31, 2020 for the provision of the estimated
uncollectible accounts.
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Bad debt expense 8,000
Allowance for bad debts 8,000
* to record estimated uncollectible acc.

Accounts Receivable shows a balance of 100,000. It is estimated that 8% of this is

uncollectible. Allowance for Bad Debts per general ledger has a balance of 1,000. Give the
adjusting entry on Dec. 31, 2020 for the provision of the estimated uncollectible accounts
Date Account Titles and Explanations P.R. Debit Credit
2020
December 31 Bad debt expense 7,000
Allowance for bad debts 7,000
* to record estimated uncollectible acc.
DEPRECIATION EXPENSE
is the allocation of plant asset cost over its estimated useful life.
This is the expense allotted for the wear and tear of property,
plant and equipment due to passage of time.

The following are the three factors considered in computing the

depreciation expense.

• Cost – is the purchase price/original price

• Salvage Value - is the estimated value of the assets at the end
of its useful life
• Estimated Useful Life – as the name connotes, is not an exact
measurement but merely an estimation of the number of years
an asset can be useful to the enity.
The formula for computing the annual depreciation is as follows:

Cost xxx
Less : Salvage value xxx
Depreciable Cost xxx
Divided by: Estimated Useful Life xxx
Annual Depreciation xxx
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Illustrative Problem- Depreciation Expense
A building with an estimated useful life of 30 years finished on June 1, 2020. The
cost of the building is 4.8 million pesos with an estimated savage value of
300,000.
• Adjusting Journal entry on Dec 31, 2020.
Date Account Titles and Explanations P.R. Debit Credit
2020
Dec. 31, Depreciation Expense 87,500
Accumulated Depreciation- 87,500
Building
* to record depreciation expense
Formula
Cost 4,800,000
Less; Savage Value 300,000
150,000/12 x 7 – 87,500
Depreciable Cost 4,500,000
Divided by: EUL 30 years
Annual Depreciation P 150,000
EXERCISE 1- DEC 31, reporting period.
1. Rent paid last July amounted to 21,000, of which 14,000 has
already expired.

2. Supplies purchased during the year amounted t o 2,900 of which

2,000 has been used during the year.

3. Unearned interest has a balance of 4,800 of which 1,900 has

already been earned during the year.

4. Unpaid Salaries of its cleaners as of December 31, is 8,000

5. Uncollectible accounts at year-end is estimated to. Be 7,890

6. Depreciation expense for its equipment 12,000.

EXERCISE 2- DEC 31, reporting period.

1. Last Septemberr 15, Bey Cleaners decided decided to sign the

company for an eight-month advertising contract for a full-blast
advertising of all its products. The company received 780,000 for
the contract.
2. Last August 30, the company subscribed to a business
magazines paying 3,240 for a three-year subscription to start in
September.
3. Supplies account at the beginning of the year showed a
balance of 10,800. No purchases were made during the year
amounted to 7,100.
4. A machine costing 950,000 with a salvage value of 50,000 and
an estimated useful life of 15 years.
5. Utilities bill amounting to 3,486 was received on
December 27. The company intends to pay it on January 5
the following year.
6. Last May 1, the company decided to rent garage as
parking space of its company vehicles. Nine Months rent
was paid in advance in the amount of 81,000.
7. Last June 15, the company lent AngC0, 90,000 at 10%
per annum.
8. Last Nov 1, the third floor of the company building was
leased to Poseidon Enterprises. Bey Cleaners received
184,000 representing 5-month lease contract.
9. Doubtful Accounts at the end of the year are
estimated to be 4% of Accounts Receivable
which has balance of 9,700 per general ledger
before the adjustment.

10. The Company Constructed its own building

which total cost amounting to 22,000,000. The
building has an estimated useful life of 25 years
and a salvage value of 1,000,000. The building
was completed last April 30 and depreciation
started after its completion.