HO – 12 – FINACR 030 1

HUA SIONG
COLLEGE OF ILOILO

FINANCIAL ACCOUNTING AND REPORTING CORRECTING and ADJUSTING ENTRIES

Accounting cycle – is a sequence of operations used to account business transactions during a

specific period.

1. Analysis of transactions.
2. Recording of the transactions in the journal. (Journalizing)
3. Posting of the journal entries to the ledger. (Classifying)
4. Preparation of the unadjusted trial balance.
5. Compilation of data needed to adjust the accounts.
6. Preparation of a worksheet and adjusted trial balance.
7. Preparation of financial statements.
8. Journalizing and posting of adjusting entries.
9. Journalizing and posting of closing entries.
10. Preparation of post-closing trial balance.
11. Journalizing and posting of reversing entries.

Preparation of Correcting Entries

Errors in the trial Balance:

If the totals of the debit and credit sides of a trial balance are not equal, an existence of error or more is
possible. The causes of errors are the following:

1. Posting an item twice.

2. Posting to wrong side of the account.
3. Omission of posting.
4. Wrong footings of the ledger.
5. Wrong transferring on the account from the ledger to the trial balance.

Procedures to locate the errors:

1. Re-add the debits and credits of the trial balance.

2. Get the difference between the totals.

a. If the difference is a digit of one, 10, 100, 1,000 etc. The error may be in the addition or
subtraction. Check the footings of the debit and credit in that case. If the error is not located,
the posting in the ledger should be verified.
b. If the difference is an even number, divide the number by two. The quotient arrived at may be
omitted in the trial balance or an account may be erroneously transferred to the wrong side of
the trial balance. For this type of trial balance, scan the postings in the general ledger. If the
amounts are found, verify the posting if correct or not.
c. If the difference is multiple of 9, the error may due to transposition or transplacement. In
transposition, the order of the figure is reversed. Example is when 57 is written as 75, or 119 as
191. In transplacement, the entire number is erroneously moved one or more spaces to the
right or to the left. Example is when 3,600 is written as 360 or 47.80 is written as 478.00.

Significance of trial balance.

The trial balance does not give us the complete proof that postings in the ledger are accurate. It simply shows
the equality of the debits and credits. It also helps detect errors. Sometimes the totals of trial balance are
equal, but then errors may be present. Among them are as follows:

1. A transaction was not recorded in the journal or a transaction was not posted in the ledger.
2. The same erroneous amount was recorded in both the debit and credit part of the transaction.
3. A transaction was recorded more than once.
4. A transaction was posted correctly as a debit or credit but to the wrong account.
HO – 12 – FINACR 030 2

Correction of Errors:

Despite of exercise of extra care in the recording of transactions in the journal and posting to the ledger, it is
inevitable that error will sometimes be made. Errors should not be erased as it may arouse suspicion of
dishonesty. The correction to be made depends on the nature of the error and the time it is discovered.

Rules:

A. If an error is discovered before the journal entry is posted to the ledger, the journal entry is simply
corrected and the corrected journal entry will be posted to the ledger.

B. If the error is discovered after it is posted to the ledger, the effect of the journal entry to the ledgers is
corrected by making another journal entry called correcting entry.

Illustration:

Make the necessary corrections or prepare correcting entries when necessary.

1. Transaction: Purchased office supplies on account, P 5,000. (Error is discovered before the journal
entry is posted to the ledger)

Entry made:

Office Equipment 5,000

Accounts payable 5,000
Purchased supplies on account

2. Purchased laundry equipment on account, P 10,000. (Error was discovered before it was posted to the
ledger):

Entry made:

Laundry Equipment 10,000

Cash 10,000

3. Paid rent for the month, P 3,000. (Error was discovered before it was posted to the ledger):

Entry made:

Rent expense 300

Cash 300

4. Paid rent expense for the month, P 3,000. (Error was discovered after it was posted to the ledger):

Entry made:

Rent expense 300

Cash 300

Correcting Entry:

Rent expense 2,700

Cash 2,700

5. Purchased office equipment for cash, P 8,000. (Error is discovered after the journal entry is posted to
the ledger)

Entry made:

Office Equipment 8,000

Accounts payable 8,000
HO – 12 – FINACR 030 3

Correcting Entry:

6. Received cash of P 10,000 from customers on account. (Error is discovered after the journal entry is
posted to the ledger):

Entry made:

Cash 10,000
Service Income 10,000

Correcting Entry:

7. Received cash of P 10,000 from customers on account. (Error is discovered before the journal entry is
posted to the ledger):

Entry made:

Cash 10,000

Service Income 10,000

8. Withdraw P 5,000 cash for personal use. (Error is discovered after the journal entry is posted to the
ledger):

Entry made:

A, drawing 500
Cash 500

Correcting Entry:

9. Purchased supplies on account, P 4,500. (Error is discovered after the journal entry is posted to the
ledger):

Entry made:

Supplies 5,400
Accounts payable 5,400

Correcting Entry:

10. Purchased supplies for cash, P 9,500. (Error is discovered after the journal entry is posted to the
ledger):

Entry made:

Supplies 8,500
Accounts payable 8,500
HO – 12 – FINACR 030 4

Correcting Entry:

11. Purchased equipment for cash, P 9,500. (Error is discovered after the journal entry is posted to the
ledger):

Entry made:

Supplies 10,500
Cash 10,500

Correcting Entry:

12. Paid Salaries P 10,500. (Error is discovered after the journal entry is posted to the ledger):

Entry made:

Supplies Expense 10,500

Cash 10,500

Correcting Entry:

13. Paid Salaries P 10,500. (Error is discovered after the journal entry is posted to the ledger):

Entry made:

Salaries expense 9,500

Cash 9,500

Correcting Entry:

14. Collected Accounts Receivable P 10,000. (Error is discovered after the journal entry is posted to the
ledger):

Entry made:

Cash 10,000
Sales 10,000

Correcting Entry:
HO – 12 – FINACR 030 5
Preparation of Adjusting Entries
Accounting period is any length of time in which the life of the business is divided. Such time may be a
monthly period, quarterly period or a year.

At the end of each accounting period, financial reports are prepared to show the results of the business
operations. Such reports which always include the income statement and balance sheet should reflect the
income realized and expenses incurred, and a fair measure of the assets, liabilities, and owner’s equity.

Normally, at the end of each accounting period, there are several accounts that needed to be adjusted.

Need for adjustment:

1. To reflect the proper amount of revenues realized and expenses incurred during the period.
2. To show a fair measure of the assets, liabilities, and owner’s equity.

Accounts that need to be adjusted:

A. Deferrals:

1. Adjustment for the expiration of prepayments of expenses. (Asset or Expense Method)

2. Adjustment for the realization of income collected in advance. (Liability or Income Method)

B. Accruals:

3. Adjustment for the accrual of expenses.

4. Adjustment for the accrual of income.

C. Others:

5. Provision for bad debts/doubtful accounts.

6. Provision for depreciation.

1. Adjustment for the expiration of prepayments of expenses.

Prepaid expenses are expenses paid in advance. At the time of payment, the account is an asset and
as it is used it becomes an expense. Examples are prepaid rent and prepaid insurance.

There are two methods of recording this type of expense:

A. Assert method - the original entry made is charged to an asset account. When the expense is paid,
cash is credited and the debit is to a prepaid expense account.

B. Expense method - the original entry made is charge to an expense account. When the expense is
paid, cash is credited and the debit is to an expense account.

Illustration:

Record the following transactions using the asset and expense method and make the necessary adjusting
entry at the end of year 2017.

2017
Mar 1 Paid insurance policy of P 12,000 for 2 years
1 Paid rent for 18 months amounting to 36,000
5 Bought supplies worth 5,000
Dec 31 Supplies on hand as of December 31, 2017, P 1,500
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Asset Method Expense Method

Date Description Dr Cr Dat Description Dr Cr

e

Prep.
Supplies Insurance Prep. Rent Supplies
Ins. expense Rent Expense expense

Exercise:

A. The following is the unadjusted trial balance of Scarlet Trading owned by Grey on December 31, 2017:

Cash 10,000
Supplies 20,000
HO – 12 – FINACR 030 7
Prepaid Insurance 36,000
Prepaid Rent 30,000
Accounts Payable 56,000
Grey, capital 40,000
Total 96,000 96,000

At December 31, 2017:

a. Supplies on hand at the end according to the count is P 3,000.
b. Prepaid insurance is for two years paid on March 31, 2017.
c. Prepaid rent is for one year paid last August 1, 2017.

Required:
Prepare the necessary adjusting entries:

B. The following is the unadjusted trial balance of Scarlet Trading owned by Grey on December 31, 2017:

Cash 10,000
Accounts Receivable 25,000
Accounts Payable 50,000
Grey, capital 43,000
Supplies Expense 25,000
Insurance Expense 18,000
Rent Expense 15,000
Total 93,000 93,000

At December 31, 2017:

a. Supplies on hand at the end according to the count is P 3,000.
b. Insurance expense is for one year paid on May 1, 2017.
c. Rent expense is for five months paid last October 31, 2017.

Required:
Prepare the necessary adjusting entries:

C. The following is the unadjusted trial balance of Scarlet Trading owned by Grey on December 31, 2017:

Cash 10,000
Accounts Receivable 25,000
Prepaid Insurance 18,000
Accounts Payable 50,000
Grey, capital 43,000
HO – 12 – FINACR 030 8
Supplies Expense 25,000
Rent Expense 15,000
Total 93,000 93,000

At December 31, 2017:

a. Supplies on hand at the end according to the count is P 5,000.

b. Prepaid insurance is for nine months paid on August 1, 2017.
c. Rent expense is for three months paid last October 31, 2017.

Required:
Prepare the necessary adjusting entries:

D. The following is the unadjusted trial balance of Scarlet Trading owned by Grey on December 31, 2017:

Cash 10,000
Accounts Receivable 25,000
Prepaid Insurance 18,000
Accounts Payable 50,000
Grey, capital 43,000
Supplies Expense 25,000
Rent Expense 15,000
Total 93,000 93,000

At December 31, 2017:

a. Supplies expense for the period is P 20,000.
b. Prepaid insurance is for six months year paid on August 1, 2017.
c. Rent expense is for five months paid last October 31, 2017.

Required:
Prepare the necessary adjusting entries:

2. Adjustment for the realization of income collected in advance or unearned

income
Unearned income arises when payment is received before goods are delivered or before services are
rendered.

There are two methods used to record this type of income:

 HO – 12 – FINACR 030 9

A. Liability method - the original entry made is charged to a liability account. When the cash is
received from a customer, cash is debited and the credit is to an unearned income account.

B. Income method - the original entry made is charged to an income account. When the cash is
received from a customer, cash is debited and the credit is to an income account.
Illustration:

Record the following transactions using the liability and income method and make the necessary adjusting
entry at the end of year 2017.

2017
Jun 1 Received from a customer advance payment for repair service applicable for one year, P 12,000
Aug 31 Received from a customer rent income for 18 months amounting to 36,000

Liability Method Income Method

Date Description Dr Cr Date Description Dr Cr

Unearned service
Service Income Rent income income Unearned rent income

Exercise:

1. The following is the unadjusted trial balance of Scarlet Trading owned by Grey on December 31, 2017:

Cash 60,000
Accounts Receivable 20,000
Accounts Payable 16,000
Unearned service income 30,000
Unearned rent income 24,000
Grey, capital 10,000
Total 80,000 80,000

On December 31, 2017:

a. Unearned service income is for six months starting September 1, 2017.

b. Unearned rent income is received in advance for one year rent starting September 31, 2017.

Required:

Prepare the necessary adjusting entries:

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2. The following is the unadjusted trial balance of Scarlet Trading owned by Grey on December 31, 2017:

Cash 70,000
Accounts Receivable 20,000
Accounts Payable 20,000
Grey, capital 10,000
Service income 20,000
Rent income 40,000
Total 90,000 90,000

At December 31, 2017:

a. Unearned service income at the end of the year is P 3,000.

b. Rent income represents cash received from a customer on October 1, 2017 for eight months
rent.

Required:

Prepare the necessary adjusting entries:

3. The following is the unadjusted trial balance of Scarlet Trading owned by Grey on December 31, 2017:

Cash 10,000
Accounts Receivable 25,000
Prepaid Advertising 18,000
Accounts Payable 18,000
Unearned service income 30,000
Grey, capital 20,000
Rent Income 20,000
Supplies Expense 20,000
Rent Expense 15,000
Total 88,000 88,000

At December 31, 2017:

a. Supplies expense for the period is P 15,000.

b. Prepaid advertising is for one year paid on August 1, 2017.
c. Rent expense is for five months paid last October 31, 2017.
d. The unearned service income refers to the cash received from a customer on September 1,
2017 for 10 months.
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e. Rent income refers to the cash received from a customer on November 1, 2017 for five
months rent.

Required:

Prepare the necessary adjusting entries:

3. Accrual of Expenses

Accrued expenses are those expenses already incurred during the period but are not yet paid or
recorded.

At the end of the accounting period, the income statement should reflect such expense and the balance
sheet should reflect the liability account. The adjusting entry to record accrual of expense is to debit an
expense account and credit the related liability account.

Illustration:

Record the adjusting entry necessary to adjust the financial statements.

1. Office employees are paid every Friday. Assume that December 31, 2017 falls on Wednesday. Rey
Repair Shop has two employees earning 300 daily.

2. Rey Repair Shop pays his six-month rent at the end of every six months. His last payment, P 6,000
was on November 1, 2017.

3. Unlimited Trading has unpaid utilities for the period amounting to P 3,000.
HO – 12 – FINACR 030 12

4. Grey Merchandising has a loan to Sure Bank with a principal amount of P 10,000 at 6% interest rate
dated September 30, 2017. Accrued interest expense is not recorded.

4. Accrual of Income

Accrued income arises when goods have been delivered or services have been rendered but not yet
collected.

In order to avoid understatement of income and asset, an adjusting entry is needed at the end of the
period.

The entry to adjust accrual of income is to debit the receivable account and credit to the related income
account.

Illustration:

1. A tenant who occupies Rey Space and Rental is two months late as of December 31, 2017. His
monthly rental is P 2,500 per month. Record the adjusting entry necessary to adjust the
financial statements of Rey Space and Rental.

2. A debtor pays his annual interest to Rey Loans and Credits every November 1 of P 2,000.
Record the adjusting entry necessary to adjust the financial statements of Rey Loans and
Credits at the end of December 31, 2017.

3. Rey Repair Service already rendered services for three months for a customer but payment was
not received. The monthly fee is P 4,000. Record the adjusting entry necessary to adjust the
financial statements of Rey Repair Service at the end of December 31, 2017.

Comprehensive Exercise:

Lito Santos put up Goodies Enterprise, a merchandising business last 2016. The following is the post-closing
trial balance of Goodies Enterprise at the end of 2016:

Cash 80,000
Inventory 30,000
Santos, capital 110,000

The following are the transactions of Goodies Enterprise for the year 2017:

1. Purchased office supplies for cash, P 15,000. Debited to Supplies Expense.

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2. Purchased merchandise from Selah on account, P 30,000.
3. Sold merchandise to Helen for cash, P 80,000.
4. Purchased merchandise from Delilah for cash, P 40,000.
5. Paid the freight for the merchandise purchased, P 3,000.
6. Sold merchandise to Micah, P 90,000 on account.
7. Returned merchandise to Selah, P 3,000.
8. Received merchandise returned by Micah, P 4,000.
9. Paid salaries of salesmen, P 20,000.
10. Received payment from Micah, less sales discount of P 2,000.
11. Paid his account to Selah the full amount less purchase discount of P 1,000.
12. Purchase merchandise on account from Caesar, P 30,000.
13. Sold merchandise on account to Myrna, P 50,000
14. Paid insurance in advance, P 15,000 for five months on October 31, 2017. Debited to Prepaid
insurance.
15. Received P 50,000 cash from customer for 10 months rent in advance on November 1, 2017. Credited
to Rent income account.

On December 31, 2017:

a. Close the inventory beginning.

b. Inventory at the end is P 20,000.
c. Supplies on hand were P 5,000.
d. Adjust the prepaid rent.
e. Adjust the rent income account.
f. Accrued salaries, P 7,000.
g. Accrued interest income, P 4,000

Required:

1. Journalize the transactions.

2. Prepare the Income Statement/Statement of Operations of Goodies Enterprise.