Module V Adjusting Entries

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bambang, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.:IM-ACCTG1-1STSEM-2020-2021
College: College of Business Education

Campus : Bayombong Campus
DEGREE PROGRAM BSBA COURSE NO. Acctg 1

SPECIALIZATION Financial Management COURSE TITLE Financial Accounting and Reporting
YEAR LEVEL 1ST Year TIME FRAME 6 HRS WK NO. 6 IM NO. 05
I. UNIT TITLE/CHAPTER TITLE: CHAPTER V
II. LESSON TITLE : ADJUSTING ENTRIES
III. LESSON OVERVIEW
This lesson provides the students the common end-of-period adjustments. In this module,
students will learn to prepare adjusting entries
IV. DESIRED LEARNING OUTCOMES:

At the end of the lesson, the students should be able to:
1. Enumerate the common end-of-period adjustments.
2. Prepare adjusting entries.
INTRODUCTION
Adjusting process is made in order to comply with the generally accepted accounting principles regarding
revenue and expense recognition principles. Its use is necessary to make way for one report on the income
statement the proper net income or loss for the period ended, and to report on the Statement of Financial
Position the appropriate assets, liabilities and owner’s equity at the statement date.
Accounting utilizes “adjusting entries” at the end of an accounting period to split mixed accounts. Mixed
accounts are accounts that have components of asset and expense, or liability and income at the end of the
accounting period.
Adjusting entries are adjustments used to bring the assets, liabilities, revenues and expenses up-to-date at the
end of accounting period. They are usually made at the end of accounting period in order for revenues to be
recognized within the period they are earned, and for expenses to be recognized within the period they are
incurred.
ACCRUAL BASIS
Under the accrual basis, the effects of transactions and other events are recognized when they occur and not
as cash is receive or paid. This means that the accountant records revenues as they are earned and
expenses as they are incurred. In cash basis accounting, however, the accountant does not record a
transaction until cash is received or paid.
PERIODICITY CONCEPT
Accounting information is valued when it is communicated early enough to be used for economic decision-
making. To provide timely information, accountants have divided the economic life of a business into artificial
time periods. This assumption is referred to as the periodicity concept.
Accounting periods are generally a month, a quarter or a year. The most basic accounting period is one year.
Entities differ in their choice of the accounting year – fiscal, calendar, or natural. A fiscal year is a period of
any 12 consecutive months. A calendar year is an annual period ending on December 31. A natural business
year is a 12-month period that ends when business activities are at their lowest level of the annual cycle. A
period of less than a year is an interim period.
Businesses need periodic reports to assess their financial condition and performance. The periodicity concept
ensures that accounting information is reported at regular intervals. It interacts with the revenue recognition
and expense recognition principles to underlie the use of accruals. To measure profit in a fair manner, entities
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NVSU-FR-ICD-05-00 (081220) Page 1 of 15
update the income and expense accounts immediately before the end of the period.
REVENUE AND EXPENSE RECOGNITION PRINCIPLES
The process of measuring the performance of an entity requires that certain income and expense transactions
be allocated over several accounting periods. Revenue should be recognized when earned. Revenue is
recognized when it is probable that economic benefits will flow to the enterprise and these economic benefits
can be measured reliably. It shall be measured at the fair value of the consideration received or receivable. In
most cases, revenue is earned in the accounting period when the services are rendered or the goods sold are
delivered.
The expense recognition principle is the basis for recording expense. Expenses are recognized in the
income statement when it is probable that decrease in future economic benefits related to a decrease in an
asset or an increase of a liability has arisen, and that the decrease in economic benefits can be measured
reliably.
There are three broad applications of the expense recognition principle.
 Expenses are recognized in the income statement on the basis of direct association between the
cost incurred and the earnings of specific items or income. Examples of these expenses are sales
commissions and costs of goods sold.
 When economic benefits are expected to arise over several accounting periods and the association
with income can only be broadly or indirectly determined, expenses are recognized in the income
statement on the basis of systematic and rational allocation procedures. This is often necessary in
recognizing the expenses associated with the using up of assets such as property and equipment,
allocation of prepaid rent and insurance. These expenses are incurred regardless of the revenues
earned during the period.
 An expense is recognized immediately in the income statement when an expenditure produces no

future benefits. Examples include officers’ salaries, most distribution costs or selling expenses, and
amounts paid to settle lawsuits.
THE NEED FOR ADJUSTMENTS
Accountants make adjusting entries to reflect in the accounts information on economic activities that have
occurred but have not 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 and liability accounts to correct balances for the financial
statements.
In short, adjustments are needed to ensure that the revenue recognition and expense recognition principles
are followed thus resulting to financial statements reporting the effects of all transactions at the end of the
period.
A diagram on the next page illustrates the preparation of adjusting entries.
DEFERRALS AND ACCRUALS
There are two general types of adjustments made at the end of the accounting period – deferrals and
accruals.
Deferral is the postponement of the recognition of “an expense already paid but not yet incurred, or of “a
revenue already collected but not yet earned.” This adjustment deals with an amount already recorded in a
balance sheet accounts: 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 expense 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. subscription)
Adjustment for Prepayments
Prepayments are advanced payment of business expenses or supplies to be used in a business operation.
These items may be recorded initially as prepaid assets or prepaid expenses which expires either with the
passage of time ( insurance and rent), or through use or consumption (e.g. supplies)
The expiration of prepayments occurs daily and gradually, but it would be impractical and unnecessary to
make daily recurring entries. Because of this, the recognition of expense is postponed until the financial
statements are prepared.
Prior to the preparation of the financial statements, the financial records contain an asset-expense
relationship. Hence the assets are overstated and expenses are understated or vice versa. At the date of
financial statements, accountants make the necessary adjustments to separate the expense portion from the
asset portion of the mixed accounts.
ASSET METHOD OF RECORDING PREPAYMENTS

The Asset method or Balance Sheet method of recording prepayments initially records the advance
payments as asset. Thus, at the end of the accounting period, the asset is overstated. Accordingly,
the expired portion should be recorded as expense.
ASSET METHOD OF RECORDING PREPAYMENTS

The expense method or income statement method of recording prepayments initially records the
advance payment as expense in its entire amount. Thus at the end of accounting period, the expense
is overstated. Accordingly, the portion of such expense that has not yet expired should be recorded as
asset.
Illustration:
On October 31, 2016, Lea Enterprises paid in advance an insurance for P12,000 covering a period for one
year. The initial recording
Accrual is the recognition of “an expense already incurred but unpaid”, or “revenue earned but uncollected.”
This adjustment deals with an amount unrecorded in any account; the entry, in effect, decreases both a
balance sheet and an income statement account. Accruals would be required in two cases:
1. Accruing expense 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.
The Gevera Wedding Consultancy case is continued to illustrate the adjustment process. The letters A, L, OE,
OE: I and OE: E are still used to ensure a better understanding of the nature of the accounts affected.
ADJUSTMENTS FOR DEFERRALS (Step 5)
Allocating Assets to Expenses
Entities often make expenditures that benefit more than one period. These expenditures are generally debited
to an asset account. At the end of each accounting period, the estimated amount that has been expired during
the period or that has benefited the period is transferred from the asset account to an expense account. Two
of the more important kinds of adjustments are prepaid expenses, and depreciation of property and
equipment.
Prepaid Expenses
Some expenses are customarily paid in advance. These expenditures are called prepaid expenses. Prepaid
expenses are assets, not expenses. At the end of an accounting period, a portion or all of these prepayments
may have expired. The portion of an asset that has expired becomes an expense.
If adjustments for prepaid expenses are not made at the end of the period, both the balance sheet and the
income statement will be misstated. First, the assets of the entity will be overstated; second, the expenses of
the company will be understated. Besides prepaid rent, Gevera Wedding Consultancy has prepaid expenses
for supplies and insurance, both accounts need adjusting entries.
Prepaid Rent (Adjustment a). On May 1, Gevera Wedding Consultancy paid P8, 000 for two months’ rent in
advance. This expenditure resulted to an asset consisting of the right to occupy the office for two months. A
portion of the asset expires and becomes an expense each day. By May 31, one-half of the asset had expired,
and should be treated as an expense.
Entries Decrease in owner’s equity is recorded by a debit to rent expense. Decrease in assets is
recorded by a credit to prepaid rent.
Dr. Cr.
Rent Expense (OE:E) 4,000
Prepaid Rent (A) 4,000
Prepaid Insurance (Adj. b). Gevera Wedding Consultancy acquired a one-year comprehensive insurance
coverage on the service vehicle and paid P14, 400 premiums. In a manner similar to prepaid rent, prepaid
insurance offers protections that expires daily.
Entries Decrease in owner’s equity is recorded by debit to insurance expense; decrease in assets as
a credit to prepaid insurance.
Dr. Cr.
Insurance Expense (OE:E) 4,000
Prepaid Insurance (A) 4,000
Supplies (Adj. c). On May 8, Gevera Wedding Consultancy purchased supplies, P18, 000. During the month,
the entity used supplies in the process of performing services for clients. There is no need to account for these
supplies every day since the financial statements will not be prepared until the end of the month. At the end of
the accounting period, Gevera makes a careful physical count showed that supplies costing P15, 000 are still
on hand.
Entries Decrease in owner’s equity is recorded by debit to supplies expense; decrease in assets as a
credit to supplies.
Dr. Cr.
Supplies Expense (OE:E) 3,000
Supplies (A) 3,000
Depreciation of Property and Equipment
When an entity acquires long-lived assets such as buildings, service vehicles, computers or office furniture, it
is basically buying or prepaying for the usefulness of that asset. These assets help generate income for the
entity. Therefore, a portion of the cost of the assets should be reported as expense in each accounting period.
Proper accounting requires the allocation of the cost of the asset over its estimated useful life. The estimated
amount allocated to any one accounting period is called depreciation or depreciation expense. Three factors
are involved in computing depreciation expense:
1. Asset cost is the amount an entity paid to acquire the depreciable asset.
2. Estimated salvage value is the amount that the asset can probably be sold for at the end of its
estimated useful life.
3. Estimated useful life is the estimated number of periods that an entity can make use of the asset.
Useful life is an estimate, not an exact measurement.
Accountants estimate periodic depreciation. They have developed a number of methods for estimating
depreciation. The simplest procedure is called the straight-line method. The formula for determining the
amount of depreciation expense for each period using this method is:
Asset cost xx
Less: Estimated salvage value xx
Depreciable cost xx
Divided by: Estimated useful life xx
Depreciation Expense for each time period xx
The asset account is not directly reduced when recording depreciation expense. The reduction is recorded in a
contra account called accumulated depreciation. A contra account is used to record reductions in a related
account and its normal balance is opposite that of the related account. The balance of the contra account is
deducted from the cost to obtain the book value of the property and equipment.
Service Vehicle and Office Equipment (Adjs. d and e). Suppose that Gevera Wedding Consultancy
estimated that the service vehicle, which was bought on May 4, worth P420, 000 will last for seven years and
with a salvage value of P84, 000. The office equipment worth P60, 000 was acquired on May 5 will have a
useful life of five years and will be worthless at that time.
Entries Owner’s equity is decreased by debits to depreciation expense-service vehicle and
depreciation expense-office equipment. Assets are decreased by credits to contra-asset
accounts accumulated depreciation-service vehicle and accumulated depreciation-office
equipment.
Dr. Cr.
Depreciation Expense –Service Vehicle 4,000
(OE:E)
Accumulated Depreciation-Service Vehicle 4,000
(A)
Dr. Cr.
Depreciation Expense –Office Equipt. (OE:E) 1,000
Accumulated Depreciation-Office Equipt. 1,000
(A)
Allocating Revenues Received in Advance to Revenues
There are times when an entity receives cash for services or goods even before service is rendered or goods
are delivered. When such is received advance, the entity has an obligation to perform services or deliver
goods. The liability referred to is unearned revenues.
For example, publishing companies usually receive payments for magazine subscriptions in advance. These
payments must be recorded in a liability account. As the company delivers each issue of the magazine, it
earns a part of the advance payments. This earned portion must be transferred from the unearned
subscription revenues to the subscription revenues account.
Unearned Referral Revenues (Adj. f). On May 15, Gevera Wedding Consultancy received P10, 000 as an
advance payment for referrals made. Assume that by the end of the month, one of the three couples referred
has already taken their marriage vows and as a result the amount of P4, 000 pertaining to the referred event
has been realized.
Entries Decrease in liabilities is recorded by a debit to unearned referral revenues. Increase in

owner’s equity is recorded by a credit to referral revenues
Dr. Cr.
Unearned Referral Revenue (L) 4,000
Referral Revenue (OE: I) 4,000
ADJUSTMENTS FOR ACCRUALS (Step 5)
Accrued Expenses
An entity often incurs expenses before paying for them. Cash payments are usually made at regular intervals
of time such as weekly, monthly, quarterly or annually. If the accounting period ends on a date that does not
coincide with the scheduled cash payment date, an adjusting entry is needed to reflect the expense incurred
since the last payment.
Accrued Salaries (Adj. g). Gevera Wedding Consultancy pays salaries every two Saturdays. Assume that
the calendar for May appears as follows:
May
Su M T W Th F Sa
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31
The office assistant and the account executive were paid salaries on May 13 and 27. At month-end, the
employees have worked for three days (May 29-31) beyond the last pay period. The employees have earned
the salary for these days, but it is not due to be paid until the regular payday in April. The salary for these three
days is rightfully an expense for May, and the liabilities should reflect that the entity owes the employees’
salaries for those days.
Each of the employee’s salary rate is P7, 800 per month or P300 per day (P7, 800/26 working days). The
expense to be accrued is P1, 800 (P300 x 3 days x 2 employees).
Entries Decrease in owner’s equity is recorded by a debit to salaries expense. Increase in liabilities is
recorded by a credit to salaries payable.
Dr. Cr.
Salaries Expense (OE:E) 1,800
Salaries Payable (L) 1,800
Accrued Interest (Adj. h). On May 2, Gevera borrowed P210, 000 from Metrobank. She issued a promissory
note that carried a 20% interest per annum. Both the interest and principal will be payable in one year. The
note issued to the bank accrues interest at 20% annually. At the end of May, Gevera owed the bank P3, 500
(see computation below) for the interest in addition to the P210, 000 loan. Interest is a charge for the use of
money over time. Interest expense is matched to a particular period during which the benefit – the use of
borrowed money – is received.
Interest = Principal x Interest Rate x Length of Time

= P210,000 x 20% per year x 1/12 of a year
= P210,000 x .20 x 1/12
= P3,500
Entries Decrease in owner’s equity is recorded by a debit to interest expense; increase in liabilities as
credit to interest payable.
Dr. Cr.
Interest Expense (OE:E) 3,500
Interest Payable (L) 3,500
Accrued Revenues
An entity may provide services during the period that are neither paid for by clients nor billed at the end of the
period. The value of these services represents revenue earned by the entity. Any revenue that has been
earned but not recorded during the accounting period calls for an adjusting entry that debits an asset account
and credits an income account.
Accrued Consulting Revenues (Adj. i). Suppose that Gevera agreed to arrange a rush but simple civil
wedding for a madly-in-love couple in the afternoon of May 31. The entity intended to charge fees of P5, 300
for the services, which is earned but unbilled.
Entries Increase in assets is recorded by a debit to accounts receivable; increase in owner’s equity as
a credit to consulting revenues.
Dr. Cr.
Accounts Receivable (A) 5,300
Consulting Revenues (OE: I) 5,300
ACCRUAL FOR UNCOLLECTIBLE ACCOUNTS
Entities often allow clients to purchase goods or avail of services on credit. Some of these accounts will never
be collected; hence, there is a need to reflect these as charges against income. In practice, an expense is
recognized for the estimated uncollectible accounts I the current period, rather that when specific accounts
actually become uncollectible. This practice produces a better matching of income and expenses.
Estimates of uncollectible accounts may be based on credit sales for the period or on the accounts receivable
balance.
Assume that the entity made credit sales of P1, 100,000 in 2012 and prior experience indicates an expected
1% average uncollectible accounts rate based on credit sales. The contra account – Allowance for
Uncollectible Accounts has a normal credit balance and is shown in the balance sheet as a deduction from
Accounts Receivable. The allowance account need to be increased by P11, 000 (P1, 100,000 x 1%) because
accounts receivable in that amount is doubtful of collection. The adjustment will be:
Dr. Cr.
Uncollectible Accounts Expense (OE:E) 11,000
Allowance for Uncollectible Accounts (A) 11,000
Throughout the accounting period, when there is positive evidence that a specific account is definitely
uncollectible, the appropriate amount is written off against the contra account. For example, if a P1, 500
receivable were considered uncollectible, that amount would be written off as follows:
Dr. Cr.
Allowance for Uncollectible Accounts (A) 1,500
Accounts Receivable (A) 1,500
EFFECTS OF OMMITING ADJUSTMENTS
When an accountant failed to include the proper adjusting entries, the resulting financial statements will not
accurately reflect the financial position and the performance of the entity. Inaccuracies in one accounting
period can cause further inaccuracies in the statements of subsequent periods.
ANALYSIS USING T-ACCOUNTS
To recapitulate, each adjusting entry affects a balance sheet account (an asset or a liability account) and an
income statement account (an income or an expense account). Almost every revenue or expense account on
the income statement has one or more related accounts on the statement of financial position.
To illustrate, Eco-Tours, established by Gary De Vera at the start of the month, reported at month-end the
following related accounts and account balances: Supplies, P36, 600 and Supplies Expense, P15, 400.
Looking at the foregoing, De Vera wants to know how much cash was paid out to purchase supplies. Start by
placing the relevant information in a T-account. Input the beginning balance on the normal balance of the
account. In this case, Supplies is debit.
There is no beginning balance since the company just started operations this month. As a technique, the
ending balance of an account, here, Supplies for P36, 600, is placed opposite its normal balance. In adjusting
the supplies expense, the entry made was debit Supplies Expense, P15, 400 and credit Supplies, P15, 400.
Total both debit and credit sides. The cash paid out for supplies can be derived; it’s P52, 000 (P52, 000-zero),
the plug figure.
Supplies
Debit Credit
(+) (-)
-0- 15,400
Plug figure 36,600
52,000 52,000
Assume instead that the P36,600 ending balance for Supplies and the P52,000 cash paid for supplies were
given, using the T-account, supplies expense is P15,400 (P52,000-P36,600):
Supplies
Debit Credit
(+) (-)
-0- Plug Figure
52,000 36,600
52,000 52,000
To illustrate further, a company reported at month-end the following related accounts and account balances:
Prepaid Insurance, End, P67, 000; Insurance Expense, P12, 000 and Prepaid Insurance, Beginning, P48, 000.
How much cash was used to pay for insurance this period? Answer: P31, 000
Prepaid Insurance
Debit Credit
(+) (-)
48,000 12,000
Plug Figure 67,000
79,000 79,000
SUMMARY OF ADJUSTING ENTRIES
Type of Account Balances Before Adjustment Adjusting Entry
Balance Sheet Income Statement Account Account
Adjustment
Account Account Debited Credited
Prepaid
Expenses:
Expenses
Asset Method Assets Overstated Expense Prepaid Expense
Understated
Expense Assets Understated Prepaid Expense Expense
Expenses Overstated
Method
Expenses
Depreciation Assets Overstated Expense Contra Asset
Understated
Unearned
Revenues:
Liability Method Liabilities Overstated Unearned Revenues
Income Understated
Income Method Liabilities Revenue Unearned
Revenues Overstated
Understated Revenue Revenues
Accrued Liabilities Expenses
Expense Payable
Expenses Understated Understated
Accrued
Assets Understated Income Understated Receivable Revenues
Revenues
V. LESSON CONTENT
VI. LEARNING ACTIVITIES
A. PROBLEM ON DEFERRALS
On August 1, 2015, Naneth CAbuyao insured her property with Consolidated Insurance Company and
pays premium of P24,000 for a one-year policy contract covering the period from Aug. 1, 2015 to Aug. 1,
2016. The accounting period ends on December 31, 2015
Assuming Expense Method is Used:
1. What is the journal entry to record the prepayments.

2. In your adjusting entry, what account will you record, Expense or Asset?
3. What is the adjusting entry on December 31, 2015?
4. In your adjusting entry, are you increasing or decreasing the amount of your insurance Expense
account?
Assuming Asset Method is Used:
1. What is the journal entry to record the prepayments.

2. In your adjusting entry, what account will you record, Expense or Assets?
3. What is the adjusting entry on December 31, 2015?
4. In your adjusting entry, are you increasing or decreasing the amount of your Prepaid Insurance
account?
B. Prepare the adjusting entry for each of the following for the year ended December 31, 2012
1. Paid Trio Insurance Co. P33,000 one year car insurance to commence August 1, 2012. The
amount of premium was debited to Prepaid Insurance.
2. Borrowed P200,000 from Metro Bank issuing a one-year note with 12% annual interest on April
30, 2012.
3. Bought P20,000 equipment with five-year estimated life and a salvage value of P2,000.
Depreciation is computed on a straight line basis.
4. Received P51,000 cash advance from costumer for one-year services to be rendered starting
June 30,2012. The amount was credited to Unearned Services Income.
5. Purchased P7,100 supplies at the beginning of the year. Supplies remaining at the end of the year
amounted to P2,900. Used the asset method.
6. Accounts receivable has a balance of P130,000. It is estimated that P5,000 of this is uncollectible.
VII. ASSIGNMENT
Digna Dy Masapawan, a Certified Management Accountant started her own business on

October 1, 2015 after acquiring the necessary expertise from different international entities in
the field of Management Consultancy. Provided below is the Trial balance of the entity:
Digna Consultancy Services
Trial Balance
December 31, 2015
Description Debit Credit
Cash P 60,400
Notes Receivable 120,000
Accounts Receivable 149,600
Prepaid Rent 60,000
Office Supplies 45,000
Furniture 300,000
Accumulated Depreciation-Furniture P 200,000
Land 600,000
Notes Payable 200,000
Accounts Payable 30,000
Unearned Consulting Revenues 50,000
Mortgage Payable 300,000
Digna, Capital 430,000
Digna, Drawing 50,000
Consulting Revenue 540,000
Salaries Expense 288,000
Utilities Expense 62,000
Miscellaneous Expense 15,000
TOTAL P 1,750,000 P 1,750,000
Additional Information was found for adjustments for the year ended December 31, 2014.
1. The Note Receivable was dated November 1, 2014 with 8% annual interest.
2. An allowance for doubtful accounts is estimated to be 3% of Accounts Receivable.
3. Rent Expense for the year amounted to 40,000.
4. Supplies used as of December 31, 2014 is 12,000.
5. The Furnitures was bought on Oct 2, 2014 and it was estimated to have a useful life of 5 years
and zero salvage value.
6. The Notes Payable by Digna dated December 1, 2014, carries an interest of 7.5% annually.
7. It is estimated that one-fifth of the unearned revenues is still unearned.
Require: Prepare the adjusting entries for the month ended December 31, 2015.
VIII. EVALUATION
A. MULTIPLE CHOICE. Write the letter of the best answer beside the item number.
1. On Nov. 15, 2011, cash received in advance of rendering services. Assuming that the service have
been performed by Dec. 31, 2011, the adjusting entry would be debit to
a. Unearned Revenues and a credit to Cash.
b. Service Revenues and a credit to Accounts Receivable.
c. Unearned Revenues and a credit to Service Revenues.
d. Cash and a credit to Service Revenues.
2. Which of the following pairs of accounts could not be included in the same adjusting entry?
a. salaries Expense and Salaries Payable
b. Unearned Revenues and Service Revenues
c. Rent Expense an Rent Payable
d. Interest Expense and Interest Receivable
3. As the usefulness of the asset Property and Equipment expires,

a. a liability is created.
b. a related expense account is reduced.
c. an amount is transferred from one asset account to another.
d. the cost of the asset is allocated to an expense account.
4. Which of the following accounts could not be credited in an adjusting entry?

a. Interest Receivable c. Prepaid Rent
b. Service Revenues d. Office Supplies
5. The principal difference between depreciation and most other types of expenses that depreciation
a. does not require an immediate cash outlay.
b. is subject to more precise measurement.
c. can be avoided if the asset is in as good condition as when it was purchased.
d. is not deductible if it will cause a loss.
6. When a sale takes place

a. liabilities will increase.
b. one asset account will increase and another will decrease.
c. assets will be unaffected.
d. a revenue account will increase.
1. Which of the following accounts is a contra account?

a. Accumulated Depreciation-Office Equipment
b. Unearned Revenues
c. Depreciation Expense-Office Equipment
d. Office Equipment
1. Which of the following situation is an example of an accrual?

a. Recording unrecorded revenues
b. Recording depreciation
c. Recording supplies consumed
d. Recording the portion of prepaid rent that has expired
2.Which of the following is an example of an accrual?

a. Salaries incurred but not yet paid c. The purchase of office supplies
b. Payment of two years’ insurance in advance d. Tuition revenue collected in advance
3.An adjusted trial balance is prepared to

a. both test that the ledger is still in balance after the accounts have been adjusted and facilitate
preparation of the financial statements.
b. test that the ledger is still in balance after the accounts have been adjusted.
c. facilitate preparation of the financial statements.
d. facilitate preparation of the adjusting entries.
4. Which of the following accounts would normally be found on the credit side of the adjusted trial
balance?
a. Accumulated Depreciation-Equipment c. Prepaid Insurance
b. Depreciation Expense-Equipment d. Janet Mataguinas, Withdrawals
5. Failure to adjust for accrued salaries at the end of the period will result in an
a. overstatement of asset c. overstatement of profit for the period.
b. overstatement of liabilities d. understatement of profit for the period.
6. Companies usually choose a fiscal year that ends

a. during the peak of the busy season.
b. at different times each year, depending on the tax consequences.
c. during the slack season.
d. on July 31.
7. Expenses are incurred

a. to produce assets. C. to produce liabilities.
b. to generate revenue. D. only during the adjustment process.
8. The matching rule relates the least to

a. the cash basis of accounting c. systematic and rational allocation.
b. cause-and-effect relationships. D. accrual accounting
9. Which of the following is not application of accrual accounting?

a. Recording advertising revenues at the time the work is done
b. Recording telephone expense when monthly bill is received
c. Recording advertising revenues at the time the cash payment is received
d. Adjusting unearned advertising revenues to the proper balance at the end of the month
10. Which of the following accounts is an income statement account?

a. Salaries Expense c. Accounts Receivable
b. Salaries Payable d. Owner’s Capital
11. Which of the following is an example of a deferral?

a. Legal fees already earned but not yet collected
b. The accumulation of interest in a bank account
c. The purchase of a company vehicle
d. Property taxes accrued but not yet paid
12. Which of the following situations involves a deferral?

a. Recording accrued interest c. Recording unrecorded salaries
b. Recording depreciation d. Recording unrecorded revenue
13. Which of the following assets is not subject to depreciation?

a. Land c. Art equipment
b. Store fixtures d. Computers
14. The carrying value of a depreciable asset equals

a. the estimated cost to replace the asset .
b. the original cost minus accumulated depreciation.
c. the estimated amount for which the asset could be sold.
d. the original cost minus depreciation expense for the current period.
15. Which of the following transactions is the most difficult to assign to specific time periods?
a. The incurrence of salaries c. The expiration of insurance
b. The accrual of interest d. The use of equipment
16. Financial statement time periods should be of equal length

a. to comply with loan agreements
b. to make comparison meaningful.
c. and should correspond with the calendar year.
d. and should end during the peak season.
17. Which of the following transactions result in an increase in expenses?

a. Repayment of principal of bank loan c. Purchase of office equipment on credit
b. Cost of employee salaries d. Payment on accounts payable
18. Which of the following pairs of accounts would not appear in the same adjusting entry?
a. Rent expense and Rent Payable
b. Service Revenues and Accounts Receivable
c. Interest Revenues and Interest Payable
d. Service Revenues and Unearned Revenues
19. The Supplies account had a P2,800 debit balance at the end of the accounting period before
adjustment for supplies used, and an inventory of P600 worth of unused supplies was on hand. Which
of the following is the required adjusting entry?
a. Debit Supplies Expense P600 and credit Supplies P600.
b. Debit Supplies P600 and credit Supplies Expense P600.
c. Debit Supplies P2,200 and credit Supplies Expense P2,200.
d. Debit Supplies Expense P2,000 and credit Supplies P2,000.
20. If an adjusting entry were not made at the end of a period to remove the earned revenue from the
Unearned Revenues account.
a. a liabilities would be understated. C. liabilities would be overstated.
b. owner’s equity would be overstated. D. assets would be understated.
21. Which of the following transactions results in an increase in revenues?

a. Collection of cash on account c. Receipt of cash from bank loan
b. Sale of land at cost of cash d. Services rendered on credit
B. Modified Matching Type
From the list of the given possible answers, select the best answer that will refer to the given statement.
A. Accrued Expense J. Real Account

B. Prepaid Expense K. Nominal Account
C. Matching Principle L. Adjusting Entry
D. Net Realizable value M. Net Book Value
E. Periodicity Concept N. Pre-collected Income
F. Cut-Off Period O. Accrued Income
G. Direct Write-Off P. Allowance Method
H. Physical Depreciation Q. Mixed Income
I. Functional Dpereciaiton R. Depreciation
Given Data:
____ 1. The difference between the cost of fixed assets and the related Accumulated Depreciation.
____ 2. Another term for time-period assumption.
____ 3. An entry that splits the nominal and real accounts from a mixed account.
____ 4. Another term for Balance Sheet accounts.
____ 5. An expense that is already incurred but not yet paid.
____ 6. Retirement of asset because of wear and tear.
____ 7. Another term for Income Statement account.
____ 8. An account which contains both nominal and real accounts.
____ 9. The difference between accounts Receivable and the related Estimated Uncollectible Account.
____ 10. An expense that is already paid but not yet incurred.
____ 11. An income that is already earned bit not yet received or collected.
____ 12. An expired cost of fixed asset that is charged to expense.
____ 13. Combined principle of revenue and expense recognition.
____ 14. An income that is already received but not yet earned.
____ 15. Segregation of all elements or accounts belonging to a particular date only.
____ 16. Charging to uncollectible account without passing through corresponding allowance.
____ 17. When an asset can no longer produce the desired result due to growth in business.
____ 18. Method used for general-purpose reporting of financial statements.
C. ADJUSTING ENTRY
1. Prepare the adjusting entry for each of the following for the year ended December 31, 2015.
Received P63,000 cash advance from a customer for one year services to be rendered starting
June 1, 2015. The amount was credited to Unearned Service Income.
Paid one year rent in the amount of P180,000 to commence August 31, 2015. The amount of
premium was debited to Prepaid Rent.
Purchased P5,900 supplies at the beginning of the year. Supplies used for the year amounted to
P1,750. Use the asset method.
Received an 18% P120,000 note on May 1, 2015. Interest will be paid together with the principal
on maturity date.
Bought P42,000 equipment with five year estimated life and salvage value of P3,000.
Depreciation is computed on a straight line basis.
Accounts receivable has a balance of P50,000. It is estimated that 5% of this is uncollectible.
Allowance for Uncollectible accounts has a balance of P1,500.
2. CArlah Company presented the following information pertaining to accounts to be adjusted.
On July 30, Carlah CO. paid six months rent, P48,000.

Office Supplies account shows a balance of P13,000 on January 1, 2015. A count of office
supplies on December 31, 2015 showed supplies balance of P4,200.
On November 1, Carlah received P54,000 for services to be rendered for the next three months
starting November 1.
Carlah CO. acquired office equipment on January 1, 2015 for P60,000. The equipment is
expected to be used for 6 years after which it is expected to be worthless.
Estimated doubtful account for the year is P1,500.
On December 31, 2015, received utility bill for the month in the amount of P5,600. This will be
paid on January 3, 2016.
Required: Give the adjusting journal entry on December 31, 2015.
IX. REFERENCES
Ballada, S. and Ballada, W. (2015). Accounting Fundamentals. Padre Campa St.,

Sampaloc, Manila: Domdane Publishers & Made Easy Books
Ballda, W. (2015). Basic Accounting. Padre Campa St., Sampaloc, Manila: Domdane
Publishers & Made Easy Books
Beticon, J., Garcia, E., Ireneo, S., James,G.,(2013). Fundamentals of Accounting, Volume
1, (2013).
Lopez, R., (2015). Learning the Basics of ACCOUNTING (Simplified Procedural Approach-
Near to Self-teaching). Davao City, Philippines: MS LOPEZ Printing & Publishing
Macapilit, C., (2011). Worktext in Basic Accounting, Revised Edition(2011),

Sampaloc, Manila: Rex Bookstore Incorporated
Ong, Flocer Lao, (2012). Fundamentals of Accounting, Textbook for Beginners, Third
Edition. South Triangle Quezon City, Philippines: C & E Publishing, Inc.
Valencia, E. and Roxas, G. (2009). Basic Accounting Concepts, Principles, Procedures and
Applications, 3rd Edition. Baguio City, Philippines: Valencia Educational Supply
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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

College: College of Business Education

DEGREE PROGRAM BSBA COURSE NO. Acctg 1

I. UNIT TITLE/CHAPTER TITLE: CHAPTER V

II. LESSON TITLE : ADJUSTING ENTRIES

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOMES:

REVENUE AND EXPENSE RECOGNITION PRINCIPLES

 An expense is recognized immediately in the income statement when an expenditure produces no

THE NEED FOR ADJUSTMENTS

A diagram on the next page illustrates the preparation of adjusting entries.

DEFERRALS AND ACCRUALS

Adjustment for Prepayments

ASSET METHOD OF RECORDING PREPAYMENTS

ASSET METHOD OF RECORDING PREPAYMENTS

ADJUSTMENTS FOR DEFERRALS (Step 5)

Allocating Assets to Expenses

Depreciation of Property and Equipment

Allocating Revenues Received in Advance to Revenues

Entries Decrease in liabilities is recorded by a debit to unearned referral revenues. Increase in

ADJUSTMENTS FOR ACCRUALS (Step 5)

Interest = Principal x Interest Rate x Length of Time

ACCRUAL FOR UNCOLLECTIBLE ACCOUNTS

ANALYSIS USING T-ACCOUNTS

SUMMARY OF ADJUSTING ENTRIES

Type of Account Balances Before Adjustment Adjusting Entry

VI. LEARNING ACTIVITIES

Assuming Expense Method is Used:

1. What is the journal entry to record the prepayments.

Assuming Asset Method is Used:

1. What is the journal entry to record the prepayments.

Digna Dy Masapawan, a Certified Management Accountant started her own business on

3. As the usefulness of the asset Property and Equipment expires,

4. Which of the following accounts could not be credited in an adjusting entry?

6. When a sale takes place

1. Which of the following accounts is a contra account?

1. Which of the following situation is an example of an accrual?

2.Which of the following is an example of an accrual?

3.An adjusted trial balance is prepared to

6. Companies usually choose a fiscal year that ends

7. Expenses are incurred

8. The matching rule relates the least to

9. Which of the following is not application of accrual accounting?

10. Which of the following accounts is an income statement account?

11. Which of the following is an example of a deferral?

12. Which of the following situations involves a deferral?

13. Which of the following assets is not subject to depreciation?

14. The carrying value of a depreciable asset equals

16. Financial statement time periods should be of equal length

17. Which of the following transactions result in an increase in expenses?

21. Which of the following transactions results in an increase in revenues?

B. Modified Matching Type

A. Accrued Expense J. Real Account

____ 2. Another term for time-period assumption.

____ 4. Another term for Balance Sheet accounts.

____ 5. An expense that is already incurred but not yet paid.

____ 6. Retirement of asset because of wear and tear.

____ 7. Another term for Income Statement account.