CHAPTER 8 - ADJUSTING ENTRIES
SUMMARY OF TOPICS
a) Accruals of Income and Expenses
b) Recognition of Depreciation Expense
and Bad Debts Expense
c) Deferrals of Income and Expense
(splitting of mixed accounts)
ACCRUAL concept
Economic events are recorded in the
period in which they occur rather than at
the point in time in which they affect
cash.
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.
All adjusting entries involve at least one
balance sheet account and one income
statement account
Affect the profit/loss for the period
Purpose of adjusting entries
a)To take up unrecorded income and
expense of the period.
b)To split mixed accounts into their real
and nominal elements.
c) To correct entries that are erroneously
recorded in amounts or in accounts
Adjusting entries usually involves:
a) Recognizing income that is already
earned but no yet collected
b) Expense that is already incurred but
not yet paid
c) Recognition of Depreciation Expense
d) Recognition of Bad Debts Expense
e) Adjusting expense/income depending
on the initial recording using the following
methods:
1. Liability Method
2. Income Method
3. Asset Method
4. Expense Method
ACCRUAL OF INCOME & EXPENSES
Accrual
To accrue, means to recognize income
that is already earned but not yet
collected
Expense that is already incurred but not
yet paid.
Interest Income Formula
I = Prt
Interest = Principal x Rate x Time
RECOGNITION OF DEPRECIATION
EXPENSE
Concept of Systematic and Rational
Allocation
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.
Depreciating an asset is an example of
this concept.
Depreciation
Allocation of cost of a depreciable asset
over the periods the asset is used
A portion of the cost of the used
equipment recognized as expense
Formula of Annual Depreciation under
Straight-Line Method:
COST / ESTIMATED USEFUL LIFE
Entry to record Depreciation:
Depreciation Expense (PPE)
xx
Accumulated Depreciation
xx
RECOGNITION OF BAD DEBTS
EXPENSE
Carrying amount of the receivable is
bought equal to the estimated collectible
amount
Concept of Immediate Recognition
a cost that produces no future economic
benefits or an asset that ceases to provide
future economic benefits is recognized
immediately as an expense.
Ex. Bad debts expense
Methods of Recording Bad Debts Expense
a. Allowance Method
Bad Debts Expense xx
Allowance for Bad Debts xx
b. Direct Write-off Method
Bad Debts Expense xx
Accounts Receivable
xx
Methods of Estimating Doubtful
Accounts Expense
a) Percentage of Net Sales
b) Percentage of Accounts Receivable
c) Aging of Accounts Receivable
REAL, NOMINAL, AND MIXED
ACCOUNTS
Real Accounts (Permanent accounts)
accounts that are not closed at the end of
the accounting period. These accounts
include all balance sheet accounts, except
the “Owner’s drawings” account.
Nominal Accounts (Temporary
accounts)
accounts that are closed at the end of the
accounting period. These accounts include
all income statement accounts, drawings
account, clearing accounts and suspense
accounts.
Types of Nominal Accounts
a) Clearing Account
Account used to temporarily store
amounts that will eventually be
transferred to another account
Ex. Income Summary Account
b) Suspense Account
Used to temporarily store the
discrepancies in the accounts pending
their analysis and permanent classification
Ex. Cash Shortage/Overage Account
Mixed accounts
accounts that have both real and nominal
account components. These accounts are
subject to adjustment.
1.
2.
3.
4.
METHOD RECOGNIZES:
LIABILITY
Earned (Income)
INCOME
Unearned (Liability)
ASSET
Incurred (Expense)
EXPENSE
Unused (Asset)
METHODS OF INITIAL RECORDING OF
INCOME:
a) Liability Method
advanced collections of income are initially
credited to a liability account. At the end
of the period, the earned portion is
recognized as income, while the unearned
portion remains as a liability
Entry:
Cash xx
Unearned Service Income xx
Adjustment:
Unearned Income xx
Service Income
xx
b) Income Method
advanced collections of income are initially
credited to an income account. At the end
of the period, the unearned portion is
recognized as liability, while the earned
portion remains as income
Entry:
Cash xx
Service Income xx
Adjustment:
Service Income xx
Unearned Service Income xx
METHODS OF INITIAL RECORDING OF
EXPENSES:
a) Asset Method
-prepayments are initially debited to an
asset account. At the end of the period,
the incurred portion (‘used up’ or
‘expired’) is recognized as an expense
while the unused portion remains as an
asset.
Entry:
Prepaid Rent
xx
Cash
xx
Adjustment:
Rental Expense xx
Prepaid Rent xx
b) Expense Method
under this method, prepayments of
expenses are initially debited to an
expense account. At the end of the period,
the unused portion (‘not yet incurred’ or
‘unexpired’) is recognized as asset, while
the incurred portion remains as expense.
Entry:
Rental Expense
xx
Cash
xx
Adjustment:
Prepaid Rent xx
Rental Expense xx
c) Date covered by the report
CHAPTER 9 - WORKSHEET
SUMMARY OF TOPICS
a) The Worksheet
b) Financial Statements
c) Closing Entries
d) Reversing Entries
Worksheet
An analytical device used to facilitate the
gathering of data for adjustment, the
preparation of financial statements and
closing entries.
Is optional and not part of the formal
accounts records
TERMS TO REMEMBER
Cross-Footing
Procedure to compute for the adjusted
balances of accounts in the adjusted trial
balance
Involves
adding/subtracting
amounts
horizontally
Footing
Procedure to compute for the “totals” of
the columns
Involves adding/subtracting vertically
Double Rules
Two lines underneath an amount
Used to connote a total or the end of a
computation.
Worksheet: Trial Balance (1 of 4)
Complete the Trial Balance section in four
steps:
1. Enter the general ledger account
names.
a)
b)
c)
The worksheet has an Account Name
column
The worksheet also has five sections
Each section has two columns
2.
Transfer the general ledger account
balances to the Debit and Credit
columns of the Trial Balance section.
3.
Total the Debit and Credit columns to
prove that the trial balance is in
balance.
Place a double rule under each Trial
Balance column to show that the
work in that column is complete.
4.
Parts of the Heading
a) Name of the Business
b) Title of the Report
$500 credit in the Adjustments section.
($1,500 debit and $500 credit = $1,000)
Step 2: Total the Debit and Credit
columns in the Adjusted Trial Balance
section. Confirm that debits equal credits.
Straight-line depreciation (S/L)
allocates an asset’s cost in equal amounts
to each accounting period of its useful life.
S L depreciation 
Cost  salvage value
Estimated months of useful life
Worksheet: Prepare Adjustments (1
of 2)
Adjusting entries are first entered in the
Adjustments section of the worksheet
When all adjustments are entered, total
and rule the Adjustments columns.
Step 3: For accounts that appear on the
balance sheet, enter the amount in the
appropriate column of the Balance Sheet
section. For accounts that appear on the
income statement, enter the amount in
the appropriate column of the Income
Statement section.
Step 4: After all the account balances are
transferred to the financial statement
sections, total the Debit and Credit
columns.
Step 5:Subtract the smaller total from
the larger total in the Income Statement
section to find the Net Income or Net
Loss.
Step 6: If the credit total is more than
the debit total, the firm has net
income. . .
Enter the amount on the Net Income line.
(47,000 – 13,333 = 33,667)
Step 7: Total the Income Statement and
the Balance Sheet sections
FINANCIAL STATEMENTS
Are the end product of the accounting
process
The preparation of the balance sheet and
the income statement is greatly facilitated
by the worksheet
Worksheet: Complete
Step 1: Combine the figures from the
Trial Balance section and the Adjustments
section. Record the results in the Adjusted
Trial Balance columns.
The accounts that do not have
adjustments are extended from the Trial
Balance section to the Adjusted Trial
Balance section.
The Supplies account has a $1,500 debit
balance in the Trial Balance section and a
PREPARE FINANCIAL STATEMENTS
FROM THE WORKSHEET
Income Statement
Profit/Loss is closed to the Owner’s Capital
Account
Because revenue and expense
transactions are not carried over in the
next accounting period.
Balance Sheet Heading:
“As of (the end of the reporting period)”
Because it only contains real accounts
which are not closed at the end of each
reporting period but rather carried over to
the next period. The balances of these
accounts
represent
cumulative
amounts.
CLOSING ENTRIES
Entries prepared at the end of the
accounting period to “zero-out” all
nominal accounts in the ledger.
Also referred to as “closing the books”
It is an application of the time period
concept.
Balance Sheet
Account Form of Balance Sheet
Report Form of Balance Sheet
Closing Entries are prepared as
follows:
1. Income Accounts are debited
Expense Accounts are credited
Income Summary is a clearing account
where the resulting balance is recorded
Closing Entry (If there is profit)
Income Account xx
Expense Accounts xx
Income Summary xx
Closing Entry (If there is loss)
Income Accounts xx
Income Summary
Expense Accounts xx
Income Statement
Columns
Balance Sheet
Columns
Total credits exceed
total debits, there is
profit.
Balancing figure is
on the debit side.
Total debits exceed
total credits, there is
loss.
Balancing figure is
on the credit side.
Total debits exceed
total credits, there is
profit.
Balancing figure is
on the credit side.
Total credits exceed
total debits, there is
loss. Balancing
figure is on the
debit side.
Income Statement Heading:
“For the year ended”
2. Balance of Income Summary is closed
to the Owner’s capital account
Closing Entry (If there is profit)
Income Summary xx
Owner’s Capital xx
Closing Entry (If there is loss)
Owner’s Capital xx
Income Summary xx
3. Any balance in the Owner’s drawings
account is closed directly to the Owner’s
Capital account
Entry:
Owner’s Capital xx
Owner’s Drawing xx
POST CLOSING TRIAL BALANCE
The columns in the worksheet can be
extended by adding columns for the
following:
a) Closing Entries
Debits and credits in the closing entries
are placed here
b) Post-Closing Trial Balance
Amounts in the adjusted trial balance are
cross-footed wit the amounts in the
Closing entries columns.
Amounts in this balance will be the
beginning balances of accounts in the next
accounting period
Only contains Real Accounts
Closed Accounts - zero balance
Open Accounts - has a balance
Columns in
Type of
Equality of
the
Accounts
debits and
Worksheet
contained in
credits
the columns
1. Unadjusted
Trial Balance
2. Adjusted
Trial Balance
3. Income
Statement
Real, nominal &
mixed accounts
Real, nominal &
mixed accounts
Nominal
Accounts only
4. Balance
Sheet
Real Accounts
only
5. Post-Closing
Trial Balance
Real Accounts
only
Debits & Credits
are equal
Debits & Credits
are equal
Difference
between debits
& credits
represents
profit/loss
Difference
between debits
& credits
represents
profit/loss
Debits & Credits
are equal
REVERSING ENTRIES
Entries usually made on the first day of
the next accounting period to reverse
certain adjusting entries in the
immediately preceding period.
It is optional, NOT required in the
preparation of the financial statements
To simplify the recording process in the
next accounting period.
Purposes of Reversing Entries
1. To facilitate the recording of cash
receipts and disbursements
2. To promote convenience in recording
the next period’s year end adjustments
for accruals
3. To promote consistency of accounting
procedure.
ADJUSTING ENTRIES THAT MAY BE
REVERSED
1. Accruals for Income and Expense
2. Prepayments initially recording using
the Expense Method.
3. Advanced collections initially recorded
using the Income Method.
Ex. : Accrual of Interest
Adjusting Entry (12/31/21)
Interest Expense
3,000
Interest Payable
3,000
Reversing Entry (1/1/22)
Interest Payable
3,000
Interest Expense
3,000
Actual Payment (1/15/22)
Interest Expense
3,000
Cash
3,000
ADDITIONAL INFORMATION
Summary of Adjusting Entries