L6: Adjustments (Part 3)

SUBJECT- DESCRIPTIVE TITLE

SUBJECT - CODE

PREPARED BY:
[INSTRUCTOR’S NAME]

Module No. 1 SCHOOL NAME

 LEARNING OBJECTIVES

⚫ Revisiting the Adjustment Process

⚫ Review of all adjusting entries
⚫ Posting of Adjusting journal entries to the General
Ledger
⚫ Preparation of Adjusted Trial Balance

Module No. 1 Title of Your Presentation

 Step 5 - Adjustment Process

The process of adjustments consist of:

1.Analyzing accounts that needs adjustments

2.Recording of adjusting journal entries in the General Journal
3.Posting of affected accounts in the General Ledger or Updating of
related ledger accounts
4.Preparation of Adjusted trial balance. This accounts will be the basis in
the preparation of the Financial Statements
 Review of the Adjusting Journal Entries

(1) Prepayments - Asset method

Adjusting journal entries at the end of the period:

(a) For Supplies:

Supplies expense XX
Supplies XX

(b) For Prepaid rent expense

Rent expense XX
Prepaid rent expenseXX

Amount to be recognized:

How much is the expense to be recorded at the end of the period?

 Review of the Adjusting Journal Entries

(1) Prepayments - Expense method

Adjusting journal entries at the end of the period:

(a) For Supplies:

Supplies XX
Supplies expense XX

(b) For Prepaid rent expense

Prepaid rent XX
Rent expense XX

Amount to be recognized:

How much is the asset to be recorded at the end of the period?

 Review of the Adjusting Journal Entries

(2) Doubtful accounts

Adjusting journal entry at the end of the period:

Doubtful accounts XX
Allowance for doubtful accounts XX

Amount to be recognized:

(1) Based on accounts receivable (% x AR)

(a) total required allowance for doubtful accounts

(b) if the allow. for doubtful account has a beginning balance, the amount to be adjusted is equal to
the difference of the required allowance and the beginning balance.

2. Based on credit service revenue/ sales (% x Credit service revenue)

The result after multiplying the default risk rate with credit service revenue is immediately recognized
as doubtful accounts regardless if the allowance for doubtful accounts has any beginning balance.
 Review of the Adjusting Journal Entries

(3) Deferred revenues – Liability method

Adjusting journal entry at the end of the period:

Unearned service revenue XX

Service revenue XX

Amount to be recognized:

How much is the income (revenue) to be recorded at the end of the period?
 Review of the Adjusting Journal Entries

(3) Deferred revenues – Income method

Adjusting journal entry at the end of the period:

Service revenue XX
Unearned service revenue XX

Amount to be recognized:

How much is the liability to be recorded at the end of the period?

 Review of the Adjusting Journal Entries

(4) Depreciation

Adjusting journal entry at the end of the period:

Depreciation expense XX
Accumulated depreciation XX

Amount to be recognized:

Annual depreciation = (Cost of depreciable asset – Salvage value) / Useful life in years

The amount to be recognized will depend on the depreciation period (accounting period, number of months,
number of days).

Other than the depreciation period, it is very important to know the date of acquisition of the depreciable asset.
 Review of the Adjusting Journal Entries

(5) Accrued income

Adjusting journal entry at the end of the period:

Interest receivable XX
Interest income XX

Amount to be recognized:

Interest = Principal x time x annual rate

The amount to be recognized depends on the accounting period (monthly, quarterly, yearly).

It is also important to determine the date of the issuance of the promissory note and the
expected collection date to assess how long will the company recognize accrued income and
how the company will classify the asset (whether current or noncurrent)

Module No. 1 Title of Your Presentation

 Review of the Adjusting Journal Entries

(5) Accrued expense

Adjusting journal entry at the end of the period:

Interest expense XX
Interest payable XX

Amount to be recognized:

Interest = Principal x time x annual rate

The amount to be recognized depends on the accounting period (monthly, quarterly, yearly).

It is also important to determine the date of the issuance of the promissory note and the expected payment date to
assess how long will the company recognize accrued expense and how the company will classify the liability (whether
current or noncurrent)
Illustration of the Accounting Process: Bull Kit Vulcanizing Shop

At the end of the month, the company

has the following necessary adjustments
before preparing financial statements:

(a) P1,400 of accounts receivable are

doubtful of collection

(b) Remaining supplies is worth

P12,000 only.

(c) Monthly depreciation of equipment

is P500.
 Step 5: Adjustments for the end of the period

(a) Recording of adjusting journal entries to the General journal

(b) Posting of adjusting journal entries to the General Ledger
(c) Preparation of the Adjusted Trial Balance
Step 5 – Adjustments:
(a) Recording of adjusting journal entries to the General journal

At the end of the month, the company General Journal Page No. 001
has the following necessary adjustments
before preparing financial statements: Date Account titles F Debit Credit

Jan. 2020        

(a) P1,400 of accounts receivable are 31 Doubtful accounts 1,400  

doubtful of collection   Allowance for doubtful accounts   1,400

         

31 Supplies expense 8,000  

(b) Remaining supplies is worth P12,000   Supplies   8,000

only.          

31 Depreciation expense 500  

  Accumulated depreciation   500

(c) Monthly depreciation of equipment is
P500.
Step 5 – Adjustments:
(b) Posting of adjusting journal entries to the General Ledger

(E) - DOUBTFUL ACCOUNTS 118 (A)- SUPPLIES 6

Ref Ref
Date Explanation . Debit Credit Balance Date Explanation . Debit Credit Balance
1/31/2020 Monthly adjustments J1 1,400    1,400 1/7/2020 Purchased in cash J1 20,000    20,000
1/31/2020 Balance       1,400 1/31/2020 Balance       20,000
1/31/2020 Monthly adjustments J1   8,000  12,000
1/31/2020 Adjusted Balance       12,000
Contra (A) - ALLOWANCE FOR DOUBTFUL
ACCOUNTS 5
Ref
(E) - DEPRECIATION EXPENSE 119
Date Explanation . Debit Credit Balance Ref
1/31/2020 Monthly adjustments J1   1,400  1,400 Date Explanation . Debit Credit Balance
1/31/2020 Balance       1,400 1/31/2020 Monthly adjustments J1 500    500
1/31/2020 Balance       500

(E) - SUPPLIES EXPENSE 114 Contra (A) - ACCUMULATED DEPRECIATION 34

Ref Ref
Date Explanation . Debit Credit Balance Date Explanation . Debit Credit Balance
1/31/2020 Monthly adjustments J1 8,000    8,000
1/31/2020 Monthly adjustments J1 500  500
1/31/2020 Balance       8,000
1/31/2020 Balance       500
Step 5 – Adjustments:
(c) Preparation of the Adjusted Trial Balance
Bull Kit Vulcanizing Shop
Bull Kit Vulcanizing Shop Adjusted Trial Balance
Unadjusted Trial Balance For the month ended January 31, 20202
For the month ended January 31, 20202
Account Titles Debit Credit
Account Titles Debit Credit
Cash P67,000
(A) Cash P67,000 Accounts receivable 7,000
(A) Accounts receivable 7,000 Allowance for doubtful accounts P1,400
(A) Supplies 20,000 Supplies 12,000
(A) Equipment 25,000 Equipment 25,000
(L) Accounts payable P15,000 Accumulated depreciation 500
(L) Unearned service revenue 8,000 Accounts payable 15,000
(P) Higantes, Capital 80,000 Unearned service revenue 8,000
(P) Higantes, Drawings 3,500 Higantes, Capital 80,000
(I) Service Revenue 37,000 Higantes, Drawings 3,500
(E) Salaries expense 5,000 Service Revenue 37,000
(E) Permits and Licenses 3,000 Salaries expense 5,000
(E) Utilities expense 2,000 Permits and Licenses 3,000
(E) Rent expense 7,500 Utilities expense 2,000
Rent expense 7,500
Balance P140,000 P140,000 Doubtful accounts 1,400
Supplies expense 8,000
Depreciation expense 500

Balance P141,900 P141,900

 SUMMARY

Module No. 1 Title of Your Presentation