TYPES OF ADJUSTMENTS

1. Accruals
a. Accrued Revenues
b. Accrued Expenses
2. Deferrals
a. Unearned Revenues
b. Prepaid Expenses
3. Depreciation
4. Doubtful Accounts
EXAMPLE 1

As of July 31, 2018, the end of

the accounting period, JM
Photocopying Center
rendered ₱7,500 worth of
photocopying services that
have not been recorded. What
will be the adjusting entry?
EXAMPLE 1
Account Title Debit Credit

Accounts Receivable 7,500

Photocopying Revenue 7,500

This is an example of what type of adjustment?

Accrued revenues – are revenues that have

been earned but not yet collected
EXAMPLE 2
An employee was hired by JM
Photocopying Center on July 30, 2018
at a rate of ₱1,000 per week for five-day
work from Monday to Friday, and that
the payday for his employee is every
Friday. Assuming July 31, 2018 is the
end of the accounting period of JM
Photocopying Center and that July 31,
2018 is a Tuesday. What will be the
adjusting entry to record the salary of
the said employee?
EXAMPLE 2
Account Title Debit Credit

Salaries Expense 400

Salaries Payable 400

This is an example of what type of adjustment?

Accrued expenses – are expenses that have

been incurred but not yet paid
SEATWORK
1. Andres Cruz issues an interest-bearing
promissory note to JM Photocopying
Center amounting to ₱5,500 which
should be paid 60 days after July 16,
2018. Interest rate is 12% per anum.
The use of 360 days is in adherence to
the banker’s rule. What should be the
adjusting journal entry on July 31,
2018 assuming JM Photocopying
Center prepares their financial
statements monthly?
ANSWER

Account Title Debit Credit

Interest Receivable 27.50

Interest Revenue 27.50

This is an example of Accrued Revenue

SEATWORK
2. Coco Guitar Company (CGC)
borrowed ₱160,000 from the bank
signing a 9%, three-month note on
September 1, 2017. Principal and
interest are payable to the bank on
December 1. CGC prepares monthly
financial statements. What should
be the adjusting journal entry on
September 30, 2017?
ANSWERS
Account Title Debit Credit

Interest Expense 1,200.00

Interest Payable 1,200.00

This is an example of Accrued Expense

SEATWORK

3. Evangelista Law Firm pays its

staff employees each Friday for
a five-day total workweek. The
payroll is ₱60,000 per week. If
the end of the accounting period
occurs on a Wednesday, the
adjusting entry to record
salaries payable would be?
ANSWERS
Account Title Debit Credit

Salaries Expense 36,000.00

Salaries Payable 36,000.00

This is an example of Accrued Expense

What does defer
mean?
Defer – to put off an
event or action to a
later time; postpone
EXAMPLE 3
On July 20, 2018, JM Photocopying
Center received ₱3,000 from a client for
photocopying service which is expected
to be completely rendered on August 5,
2018. On July 31, 2018, 40% of the
service had already been completed
and thus had already been earned.
What should be the journal entry on
July 20? What should be the adjusting
journal entry on July 31?
EXAMPLE 3
July 20

Account Title Debit Credit

Cash 3,000.00

Unearned Revenue 3,000.00

July 31

Account Title Debit Credit

Unearned Revenue 1,200.00

Photocopying Revenue 1,200.00

EXAMPLE 4
On July 27, 2018 JM Photocopying
Center paid a two-month rent for
₱10,000. This transaction was
recorded as a prepayment. As of July
31, 2018, one-month rent has
already passed and thus had already
been incurred. What was the entry
on July 27? What should be the
adjusting journal entry on July 31?
EXAMPLE 4
July 27

Account Title Debit Credit

Prepaid Rent 10,000.00

Cash 10,000.00

July 31

Account Title Debit Credit

Rent Expense 5,000.00

Prepaid Rent 5,000.00

DEPRECIATION
 Is the systematic and rational
allocation of the depreciable cost of an
asset over its useful life and
represents the future economic benefit
that has been used in the period
 Only applies to tangible non-current
assets or to property, plant and
equipment, except land
Depreciation Exp = Cost – Residual Value
Est. Useful Life
EXAMPLE 5
On July 2, 2018 JM
Photocopying Center purchased
a photocopying equipment
worth ₱30,000. The
₱
salvage
value and useful life are
estimated at ₱3,000 and 5
years, respectively. What
should be the Depreciation
Expense and the adjusting
journal entry on July 31, 2018?
EXAMPLE 5

Account Title Debit Credit

Depreciation Expense 450.00

Accumulated Depreciation - 450.00

Photocopying Equipment
DOUBTFUL ACCOUNTS

Is an expense that refers to

the portion of accounts
receivable that is in doubt of
being collected
Multiply accounts receivable
by a certain percentage
EXAMPLE 6

As of July 31, 2018 JM

Photocopying Center’s Accounts
Receivable balance is ₱7,500.
The accountant determined
that 2% of the Accounts
Receivable is determined to be
doubtful of being collected as of
that date. What will be your
adjusting journal entry?
EXAMPLE 6

Account Title Debit Credit

Doubtful Accounts Expense 150.00

Allowance for Doubtful 150.00

Accounts
DEFINITION OF TERMS
Types of Accounts:
1. Real Accounts – are those accounts reported in
the balance sheet – assets liabilities and
owner’s equity of a business
2. Nominal Accounts – are those accounts reported
in the income statement – revenues and
expenses of a business for a period of time
SEATWORK
Prepare the adjusting journal entries at year-end
2018 for the following independent situations
(assume calendar year)
1. On March 1, 2018, Finland Tutorials received
₱60,000 representing an advance payment for
services to be rendered on November 2018. This
was booked using a real account. At year-end
70% of the expected service was rendered.
2. On June 15, 2018, Russia Beauty Shop paid
₱18,000 to Secure Insurance Company for three-
year insurance policy. This was taken up in the
book using real account.
SEATWORK
3. Mexico Skin Care bought a piece of salon
equipment for ₱75,000.00 on January 15, 2018.
It has estimated useful life of five years. Scrap
value has been determined to be 10% of the
acquisition cost.
STEPS IN THE ACCOUNTING CYCLE OF A
SERVICE BUSINESS
1. Analyzing business transactions
2. Journalizing the business transactions
3. Posting journal entries to the ledger
4. Preparing trial balance
5. Journalizing and posting adjusting journal
entries
6. Preparing adjusted trial balance
7. Preparing financial statements
8. Journalizing and posting closing journal entries
9. Preparing post-closing trial balance
10. Journalizing and posting reversing journal
entries
 WORK SHEET

 A work sheet is a multiple-column form

that may be used in the adjustment
process and in preparing financial
statements.
 It is a working tool or a supplementary
device for the accountant and not a
permanent accounting record.
 Use of a work sheet should make
the preparation of adjusting entries
and financial statements easier.
 ILLUSTRATION 4-1
WORK SHEET
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit

4. Extend adjusted
1. Prepare
2. Enter 3. Enter balance to appropriate
trial balance
adjustment adjusted columns.
on the
data. balances 5. Calculate income/loss
worksheet.
and complete the
worksheet.