Chapter 8

Flores, Paul Joshua P.

Lining, Miguel Martin
Sapunto, Bernadette
Let’s get started
Be ready! Pay attention!

Paul Joshua P. Flores

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Accounting Cycle

Done! IDENTIFYING AND ANALYZING Done! UNADJUSTED TRIAL BALANCE

Topic
Done! JOURNALIZING ADJUSTING ENTRIES
Today!

Done! POSTING Soon! STEPS 6-10

Keep in touch to the next reporters.

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Objectives

Enumerate the common end-of-period adjustments.

Prepare adjusting entries.
To be Certified Public Accountants by 2022.

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HELLO! WE ARE…

We 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.
 To take up To split To usher you
Unrecorded income Mixed accounts into And become
and expense of the their real and nominal successful
period. elements Accountants
Subdivided into the
following
Accruals of income and expenses.
Recognition of depreciation and bad
debt expense
Deferrals of income and expenses
(Splitting of mixed accounts
Accruals of

Accrual means to recognize an:

a. Income that is already earned but not yet collected; or
b. Expense that is already incurred but not yet paid
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Of the following:

FIRST SECOND ABOVE ALL

All adjusting entries All adjusting entries

involve at least one affect the profit or GOD IS IN
balance sheet loss for the period.
account and one CONTROL
income statement
account.

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ABC Co. is preparing its financial statements fro the period ended December 31,
20x1. Adjustments are needed for the following:

ABC Co. received a 12%, PhP100,000, one-

year, note receivable on April 1, 20x1. ABC
uses a calendar year period. The principal and
interest on the note are due on April 1, 20x2.
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As of December 31, 20x1 (end of accounting period), interest

income should have been earned because there is already a
passage of time (from April 1 to December 31, 20x1), although
interest will only be collected in the next accounting period.

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Interest income shall be accrued for the 9 months covering

April 1 to December 31, 20x1

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 Formula i= Prt
Where:
Steps
i= interest P= principal
r= rate t= time
Read as
Interest equals principal times rate
times time
Substitute
Interest= (100,000x 12%x 9/12)
Interest= 9,000
Adjusting Journal
Entry
Interest Receivable 9,000
Interest Income 9,000
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COLLECTION OF INTEREST IS RECORDED AS FOLLOWS

Cash 12,000
Interest Receivable 9,000
Interest Income 3,000

Adjusting entries are needed to ensure

that income is recognized in the proper
period when it was earned.

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5
ABC Co. rents out its building to a tenant for a monthly rent of
50,000. As of December 31, 20x1, the tenant has not yet paid the
rent for the month of December.

CONCEPT GIVEN INFO CONCLUSION ENTRY

The tenant has Rent income for Rent Receivable 50,000
ACCRUAL
already used the the month of Rent Income 50,000
BASIS OF
building in After collection:
December shall
ACCOUNTING December but has
be accrued on Cash 50,000
not yet paid the rent.
December 31, Rent Receivable 50,000

20x1.

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Depreciation Expense
Under the concept of systematic and rational allocation,
costs that provide economic benefits over several
accounting period but cannot be directly associated
with earning of revenues.
For instance:
Depreciating an asset over a 10-year period with the same
amount of depreciation expense each year is systematic and
rational. Depreciating the asset on the basis of the number of
parts it produces is also systematic and rational. However,
determining the annual depreciation expense based on each
year's profits is not systematic and rational.
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8
On January 1, 20x1, a business acquired equipment for 20,000. The
business expects to use the equipment over the next 4 years.

Initial recording CORE IDEA

As the equipment is used, a portion of
Equipment 20,000
the cost is recognized as expense on
Cash 20,000 a piecemeal basis (little by little). This
IDEA portion is called depreciation.

Computation Adjusting Journal Entry

Cost 20,000 Depreciation Expense 5,000

Divide by: Useful life 4 Accumulated Depreciation 5,000

Annual depreciation expense 5,000

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A BUSINESS HAS TOTAL ACCOUNTS RECEIVABLES of 2,000 on December 31, 20x1
before any adjustments. Of the total amount, it was estimated that 500
is doubtful collection

Accounts Affected Effect on accounts Debit/ Credit Adjusting Entry

Bad Debts Expense Expense is debited and Bad debts expense 500
Bad Debts Expense
and Allowance for Bad contra asset is credited. Allowance for bad debts 500
and Allowance for
Debts both increased.
Bad Debts
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0
A cost or asset that do not have future economic benefits are immediately recognized as
expense.
The following are three expense recognition principles:
MATCHING SYSTEMATIC AND Immediate Recognition
Costs that are directly RATIONAL ALLOCATION
Costs or assets that
related with earning of Costs that are not directly
associated with the earning of
do not provide
revenue are
revenue are recognized as economic benefits
recognized as expenses over the periods the are immediately
expenses in the same economic benefit are
consumed.
recognized as
period.
expense.

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Real Accounts
Accounts that are not closed at
the end of the accounting
period. These include all
Balance Sheet Accounts,
except the Owner’s Drawings.
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Nominal Accounts Mixed Accounts
Accounts which are closed at the Accounts that are
end of the accounting period. It
includes all income statement
subjected to adjustment.
accounts, drawings account, It includes prepayments
clearing accounts and suspense and deferrals.
accounts.
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2

LIABILITY METHOD INCOME METHOD

Cash receipts from items of income are Cash receipts from items of income are
initially credited to a liability account. The initially credited to an income account.
unearned remained as liability.
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 Answer Problems 1-5

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