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1. C
ADJUSTING ENTRY
C9

2. Steps in the accounting cycle:
1.Identifying and analyzing Done
2.Journalizing Done
3.Posting Done
4.Unadjusted trial balance Done
5. Adjusting entries Now!
6. to 10 Later

3. Adjusting entries
Adjusting entries are entries made prior to the
preparation of financial statements to update
certain accounts so that they reflect correct
balances as of the designated time.

4. Purpose of adjusting entries
1.To take up unrecorded income and expense of the
period.
2.To split mixed accounts into their real and nominal
elements.

5. Topics on adjusting entries are
subdivided into the following:
1.Accruals of income and expenses
2.Recognition of depreciation expense and bad
debts expense
3.Deferrals of income and expenses (splitting of
‘mixed accounts’

6. Illustration 1: Adjusting entries –
Accruals of income & expense
ABC Co. is preparing its financial
statements for the period ended
December 31, 2011. Adjustments are
needed for the following:

7. Case #1: Accrual of income – Interest income
ABC Co. received a 12%, P100,000, one-year, note receivable on April 1, 2011.
ABC uses a calendar year period. The principal and interest on the note are due
on April 1, 2012.
Concepts, given information, analyses and conclusion:
 Concepts:
a. Notes receivable give rise to interest income.
b. Interest income is earned due to passage of time.
 Given information:
a. ABC uses a calendar year period. Therefore, the current accounting
period ends on December 31, 2011
b. Interest on the note is collectible on April 1, 2012 (i.e., in the next
accounting period

8.  Analysis:
As of December 31, 2011 (end of accounting
period), interest income would have been earned
because there is already a passage of time (from
April 1 to December 31, 2011). Although interest will
only be collected in the next accounting period (i.e.,
April 2012)
 Conclusion:
Interest income shall be accrued for the 9
months covering April 1 to December 31, 2011.

9. The interest income is accrued as follows:
Formula: i = P r t
Where:
i=interest
P= principal
r=rate
t=time
i=Prt: Interest = principal x rate x time

10. • Principal (P) is the P100,000 face amount of the note.
• Rate (r) is the 12% interest rate
• Time (t) is the expired time of 9 months (i.e., April 1 to
December 31, 2011) over the total of 12 months in a year.
i = P x r x t
 Interest = (100,000 x 12% x 9/12) = 9,000

11. Step #1: Transaction analysis
Accounts
affected:
“Interest receivable” (asset) and
“Interest income” (income)
Effects on
accounts:
Interest receivable is increased.
Interest income is increased.
Debit/Credit Asset is increased through debit.
Income is increased through credit

12. Step #2: Adjusting journal entry (AJE)
The adjusting entry for the accrued interest income is as
follows:
Dec.
31,
2011
Interest receivable
Interest income
to accrue interest
income earned but not yet
collected
9,000
9,000

13. Notes:
The adjusting entry is dated at the end of the reporting period (i.e.,
December 31, 2011)
“Interest receivable” is debited because the interest is yet to be
collected in the future (i.e., on April 1, 2012)
In 2011, interest income is recognized only for the expired period
(time passed) of April 1 to December 31, 2011. Interest covering
the remaining 3 months of January 1 to March 31, 2012. will be
recognized in the next accounting period. This is an application of
the time period concept.

14. In the next accounting period, the collection of the interest is
recorded as follows:
April 1,
2012
Cash a
Interest receivable b
Interest income c
To record the
collection of interest
12,000
9,000
3,000

15. a.The cash collection pertains to the 1-year total
interest covering the months of April1, 2011 to March
31, 2012. computed as: i=Prt (100,000 x 12% x
12/12) = 12,000
b.The credit to interest receivable pertains to the
accrued interest on December 31, 2011
c.The credit to interest income pertains to the 3-month
interest income earned in the months of Jan. 1 to
Mar. 31, 2012. computed as: i=Prt (100,000 x 12% x
3/12) = 3,000

16. 1-yr. interest:
Apr. 1, 2011 to Mar. 31,
2012: (100,000 X 12%
X 12/12)= 12,000
9-mo.interest:
Apr. 1 to Dec. 31, 2011:
(100,000 X 12% X 9/12) =
9,000 recognized in 2011
3-mo. Interest:
Jan. 1 to Mar. 31, 2012:
(100,000 x 12% x 3/12) =
3,000 recognized in 2012

17. Time period and
Accrual basis of Accounting
•The application of the accrual basis causes
timing differences between the date income is
recognized and the date it is collected.
•Adjusting entries are needed to ensure that
income is recognized in the proper period when
it was earned (time period).

18. Case #2: Accrual of income-Rent Income
ABC Co. rents out its building to a tenant for a monthly rent of P50,000. As
of December 31, 2019, the tenant has not yet paid the rent for the month of
December.
Concept:
 Income is recognized when earned rather than when collected – accrual
basis
Given information:
 The tenant has already used the building in December but has not yet paid
the rent.
Conclusion
 Rent income for the month of December shall be accrued on December
31, 2019

19. Step #1 : Transaction analysis
Accounts
affected:
“Rent receivable” (asset) and
“Rent income” (income)
Effects on
accounts:
Rent receivable is increased.
Rent income is increased.
 Debit/Credit Asset is increased through debit.
Income is increased through
credit

20. Step #2: Adjusting journal entry (AJE)
• The adjusting entry is as follows:
Dec. 31, 2019 Rent receivable 50,000
Rent Income 50,000
To accrue rent income
• When the rent is collected in the next accounting period, it will
be recorded as follows:
Jan. 2020 Cash 50,000
Rent Receivable 50,000
To record the collection of the Dec.
2019 rent

21. Case #3: Accrual of expenses-Interest
expense
ABC Co. issued a 12%, P100,000, one-year, note payable on October 1,
2011. the principal and interest are due on October 1, 2012.
 Concepts:
a. Notes payable give rise to interest expense.
b. Interest expense is incurred due to passage of time.
 Given information:
a. Interest on the note is payable on October 1, 2012 (i.e. in the next
accounting period)
b. The current accounting period ends on December 31, 2011

22.  Analysis:
As of December 31, 2011 (end of accounting period),
interest expense is incurred because there is already a
passage of time (October 1 to December 31, 2011).
Although interest will only be paid in the next accounting
period (i.e. October 1, 2012
 Conclusion :
Interest expense shall be accrued for the 3 months
covering October 1 to December 31, 2011.

23. The interest expense is accrued as
follows:
FORMULA:
i = P r t
Principal (P) = P100,000 face amount
Rate ( r )= 12%
Time (t) = expired time of 3 month (i.e., October 1 to Dec. 31,
2011 over 12 months in a year.
* Interest = (100,000 x 12% x 3/12) = 3,000

24. Step #1: Transaction analysis
 Accounts
affected:
“Interest expense” (expense) and
“Interest Payable” (liability)
 Effects on
accounts:
Interest expense is increased. Interest
payable is increased.
 Debit/
Credit
Expense is increased through debit.
Liability is increased through credit.

25. Step #2: Adjusting journal entry (AJE)
The adjusting entry for the accrued interest
expense is as follows:
Dec. 31, Interest Expense 3,000
2011 Interest payable 3,000
to accrue interest expense
incurred but not yet paid

26. Notes:
•“Interest payable” is credited because the interest is
yet to be paid in the future
•In 2011, interest expense is recognized only for the
expired period (time passed) – from October 1 to
December 31, 2011. Interest covering the remaining
9 months of January 1 to October 31, 2012 will be
recognized in the next accounting period.

27. In the next accounting period, the payment of the
interest is recorded as follows:
Oct. 1, Interest payable 3,000
2012 Interest expense9,000
Cash 12,000
to record the payment of
interest

28. a.The debit to interest payable pertains to the accrued interest
on December 31, 2011 (see adjusting entry above).
b.The debit to interest expense pertains to the 9 months
interest expense incurred in the months of Jan 1 to Oct 1,
2012. This is computed as follows:
I = Prt (100,000 x 12% x 9/12) = 9,000
c. The cash payment pertains to the total 1-year interest
covering the months of Oct. 1, 2011 to Sept. 30, 2012. This
is computed as follows: I = Prt (100,000 x 12% x 12/12)
=12,000

29. 1-yr. interest:
Oct. 1, 2011 to Sept.
30, 2012: (100,000 X
12% X 12/12)= 12,000
3-mo.interest:
Oct 1 to Dec. 31, 2011:
(100,000 X 12% X 3/12) =
3,000 recognized in 2011
9-mo. Interest:
Jan. 1 to Sept. 30, 2012:
(100,000 x 12% x 9/12) =
9,000 recognized in 2012

30. Case #4: Accrual of expense-Utilities expense
The cost of electricity used for the month of December 2011 I s P4,000. The
electricity bill was received and paid in January 2012.
Concept, given information, and conclusion:
 Concept:
Expense is recognized when incurred (‘used’) rather than when
paid – accrual basis of accounting.
 Given information:
The electricity bill, although paid in January 2012, pertains to the
cost of electricity used in December 2011
 Conclusion: Utilities expense shall be accrued in December 2011

31. Step #1: Transaction analysis
 Accounts
affected:
“Utilities expense” (expense) and
“Utilities Payable” (liability)
 Effects on
accounts:
Utilities expense is increased. Utilities
payable is increased.
 Debit/
Credit
Expense is increased through debit.
Liability is increased through credit.

32. Step #2: Adjusting journal entry (AJE)
The adjusting entry for the accrued interest income is as
follows:
Dec.
31,
2011
Utilities expense
Utilities payable
to accrue unpaid
utilities
4,000
4,000

33. In the next accounting period the payment of the electricity
bill is recorded as follows:
Jan.
2012
Utilities payable
Cash
to record the payment
of the Dec. 2011 electricity bill
4,000
4,000

34. Case #5: Accrual of expense-Salaries expense
Employees earned total salaries of P100,000 in December 2011. However,
the salaries were paid only in January 2012.
Accounts Affected: Salaries expense in increased, salaries payable is
increased.
Effects on accounts: Salaries expense is increased. Salaries
payable is increased.
Adjusting entry:
Dec. 31, 2011 Salaries expense 100,000
Salaries Payable 100,000
to accrue salaries expense

35. The concept of Systematic and rational
allocation
•Under this concept, costs that provide
economic benefits over several accounting
periods but cannot be directly associated with
the earning of revenues are recognized as
expenses over the periods where the economic
benefits are consumed.

36. Illustration 2: Adjusting entries –
Depreciation and Bad Debts
Case #1: Depreciation expense
On January 1, 2011, a business acquired equipment for
P20,000. The business expects to use the equipment over
the next 4 years.
Jan. 1, 2011 Equipment 20,000
Cash 20,000
to record the acquisition of
equipment

37. Cost P20,000
Divide by: Useful life 4
-----------
Annual depreciation expense P5,000
A P5,000 depreciation expense will be recorded at the
end of each of the next four years. (i.e. every December 31)
as adjusting entry.

38. Adjusting entry-Depreciation
Dec. 31, 2011 Depreciation Expense 5,000
Accumulated Depreciation 5,000
The carrying amount of the equipment as of December 31, 2011 is
determined as follows:
Equipment P20,000
Accumulated depreciation (5,000)
-----------
Equipment – Net P15,000
======

39. Case #2: Bad Debts
A business has total accounts receivable of P2,000 on December 31,
2011 before any adjustments. Of the total amount, it was estimated
that P500 is doubtful of collection.
Adjusting entry:
Dec. 31, 2011 Bad Debts expense 500
Allowance for bad debts 500
to record the bad debts expense for
the period

40. Carrying amount of the receivable is brought equal to the
estimated collectible amount of P1,500.
Accounts receivable P 2,000
Allowance for bad debts ( 500)
-----------
Accounts receivable-net P1,500
=====

41. 1. Entity A issued a 12%, P200,000, one-year,
note payable on March 1, 2011. Entity A uses a
calendar year period. The principal and interest
on the note are due on March, 2012. What is
the adjusting entry on December 31, 2011?

42. 2. A business renting out properties receives
one-year advanced rent of P480,000 from one of
its tenants on May 1, 2011. The advance rent
covers the months of may 1, 2011 to April 30,
2012.

43. 3. Entity A issued a 12%, P350,000, one-year,
note payable on May 1, 2011. Entity A uses a
calendar year period. The principal and interest
on the note are due on may 1, 2012. 1. What is
the adjusting entry on December 31, 2011.
2. What is the entry on May 1, 2012

44. 4. Entity A received an 8%, P100,000, one-year, note
receivable on September 1, 2011. Entity A uses a
calendar year period. The principal and interest on
the note are due on September 1, 2012.
a. What is the adjusting entry on December 31,
2011
b. What is the entry on September 1, 2012 (round
off to two decimal places)

45. 5. On January 1, 2011 entity A acquired
a machine for P100,000. The machine
is expeted to be used over the next 5
years. What is the adjusting entry on
December 31, 2011 to take up
depreciation expense?

46. •End of slide