Adjusting the Accounts 1.

Allocating assets to expense to reflect expenses incurred

during the accounting period (e.g. prepaid insurance, supplies
The financial statements, except for the cash flow and depreciation).
statement, are prepared on the accrual basis of accounting in 2. Allocating revenues received in advance to revenue to reflect
order to meet their objectives. Under accrual basis, the effects of earned during the accounting period (e.g. subscriptions).
transactions and other events are recognized when they occur
and not as cash is received or paid. Accrual is the recognition of “an expense already incurred but
Accountant records revenues as they are earned and unpaid”, or “revenue earned but uncollected”. This adjustment
expenses as they are incurred. Financial statements prepared on deals with an amount unrecorded in any account; the entry, in
the accrual basis inform users not only of past transactions effect, increase both a balance sheet and an income statement
involving the payment and receipt of cash, but also of account. Accruals would be required into tow cases:
obligations to pay cash in the future, and of resources that 1. Accruing expenses to reflect expenses incurred during the
represent cash to be received in the future. accounting period that are unpaid and unrecorded.
In cash basis accounting, the accountant does not record a 2. Accruing revenues to reflect revenues earned during the
transaction until cash is received or paid. Generally, cash accounting period that are uncollected and unrecorded.
receipts are treated as revenues and cash payments as
expenses. Cash basis income is the difference between Adjustments for Deferrals (Step 5)
operating cash receipts and disbursements. These cash flows
necessarily exclude investments by and distributions to the Allocating Assets to Expenses
owner in the computation of income. Entities often make expenditures that benefit more that
one period. These expenditures are generally debited to an
Illustration: A client paid the Sea Wind Resort in Boracay Island asset account. At the end of each accounting period, the
P7,000 on April 8, 2017 for a one-day super deluxe estimated amount that has expired during the period or that has
accommodation on May 13, 2017. Under accrual basis of benefited the period is transferred from the asset account to an
accounting, the receipt of P7,000 will be considered as revenue expense account. Two of the more important kinds of
when the business has rendered its services on May 13. adjustments are prepaid expenses, and depreciation of property
In contrast, if cash basis is used, the hotel will recognize and equipment.
revenues on April 8. Expenses related to this revenue
transaction will be incurred on May 13. Suppose a financial Prepaid expenses
report is prepared at the end of April, under accrual basis, no Some expenses are paid in advance. These expenditures (e.g.
revenue or expenses will be reported; under cash basis, supplies, rent and insurance) are called prepaid expenses.
revenues incurred on May 13. Observe that the accrual basis Prepaid expenses are assets, not expenses. At the end of an
provided a better measure of the results of transactions. accounting period, a portion or all of these prepayments may
have expired. The portion of an asset that has expired becomes
THE NEED FOR ADJUSTEMENTS an expense. Prepaid expenses expired either with the passage
Adjustments are needed to ensure that the revenue of time or through use and consumption. The flow of costs from
recognition and expense recognition principles are followed thus the balance sheet to the income statement is illustrated below:
resulting to financial statements reporting the effects of all
transactions at the end of the period.
Adjusting entries involve changing account balances at the Cost of Income
insurance Balance Statement
end of the period from what is the current balance of the Sheet As
policies
account to what is the correct balance for proper financial insurance Revenues
and
reporting. Without adjusting entries, financial statements may supplies Assets policies Expenses
not fairly show the solvency of the entity in the balance sheet expire and
that will
and profitability in the income statement. supplies Insurance
benefit Prepaid
used Expense
future Insurance
Supplies Supplies
DEFERRALS AND ACCRUALS periods.
Expense
There are to general types of adjustments made at the end
of the accounting period - deferrals and accruals. If adjustments for prepaid expenses are not made at the
Each adjusting entry affects a balance sheet account (an end of the period, both the balance sheet and income statement
asset or a liability account) and and Income statement account will be misstated. First, the assets of the entity will be
(Income or expense account) overstated, second, the expenses of the company will be
Deferrals is the postponement of the recognition of “an understated. For this reason, owner’s equity in the balance sheet
expense already paid but no yet incurred,” or of “revenue and profit in the income statement will both be overstated.
already collected but not yet earned.” This adjustment deals
with an amount already recorded in a balance sheet account, Prepaid Rent (Adjustments a)
the entry, in effect, decreases the balance sheet account and On May 1, Wedding “R” Us paid P8,000 for two months’
increases an income statement account. rent in advance. This expenditure resulted to an asset consisting
Deferrals would be needed in two cases: of the right to occupy the offce for two months. A portion of the
asset expires and becomes an expense each day. By May 31,
one-half of the assets had expired, and should be treated as an debits.
expense. The analysis of this economic event is shown below. Entries Decrease in owner’s equity is recorded by a debit
to supplies expense. Decrease in assets is
Transaction Expiration of one month’s rent recorded by a credit to supplies.
Analysis Assets decreased. Owner’s equity decreased
Rules Decreases in assets are recorded by credits. Supplies Expense (OE: E) 3,000
Decreases in owner’s equity are recorded by Supplies (A) 3,000
debits.
Entries Decrease in owner’s equity is recorded by a debit The asset account supplies now reflect the adjusted
to rent expense. Decrease in assets is recorded by amount of P15,000 (P18,000 less P3,000). In addition, the
a credit to prepaid rent. amount of supplies expense during the accounting period is
reflected as P3,000.
Rent Expense (OE: E) 4,000
Prepaid Rent (A) 4,000 Depreciation of Property and Equipment.

After adjustments, the prepaid rent account has a balance of When an entity acquires long-lived assets such as building,
P4,000 (May 1 prepayment of P8,000 less the P4,000 expired service vehicles, computers or office furniture, it is basically
portion); the rent expense account reflects the P4,000 expense buying or prepaying for the usefulness of that asset. These
for the month. assets help generate income for the entity. Therefore, a portion
of the cost of the assets should be reported as expense in each
Prepaid Insurance (Adjustment b) accounting period. Proper accounting requires the allocation of
Wedding “R” Us acquired a one-year comprehensive the cost of the asset over its estimated useful life. The estimated
insurance coverage on the service vehicle and paid P14,400 amount allocated to any one accounting period is called
premiums. In a manner similar to prepaid rent, prepaid depreciation or depreciation expense. Three factors are
insurance offers protection that expires daily. The adjustments involved in computing depreciation expense.
is analyzed and recorded as shown below: 1. Asset cost is the amount an entity paid to acquire the
depreciable asset.
Transaction Expiration of one month’s insurance 2. Estimated salvage value is the amount taht the asset can
Analysis Assets decreased. Owner’s equity decreased probably be sold for at the end of its estimated useful life.
Rules Decreases in assets are recorded by credits. 3. Estimated useful life is the estimated number of periods that
Decreases in owner’s equity are recorded by entity can make use of the asset. Useful life is an estimate, not
debits. an exact measurement.
Entries Decrease in owner’s equity is recorded by a debit
to insurance expense. Decrease in assets is
Balacnce
recorded by a credit to prepaid insurance. Income
Sheet Statement
As the
Insurance Expense (OE: E) 1,200 Cost of a Assets asset’s Revenues
Prepaid Insurance (A) 1,200 depreciable
useful life Expenses
asset
Service expires
The prepaid insurance account has a balance of P13,200 Vehicle Depreciatio
Office n
(May 4 prepayment of P14,400 less P1,200) and insurance
Equipment
expense reflects the expired cost of P1,200 for the month. As a
matter of company policy, the period May 4 to 31, is considered
a month. Accountants estimate periodic depreciation. They have
developed a number of methods for estimating depreciation.
Supplies (Adjustment c) The simplest procedure is called the straight-line method. The
On May 8, Wedding “R” Us purchased supplies, P18,000. formula for determining the amount of depreciation expense for
During the month, the entity used supplies in the process of each period using this method is:
performing services for clients. There is no need to account for
these supplies every day since the financial statements will not Asset Cost P xxx
be prepared until the end of the month. At the end of the Less: Estimated Salvage value xxx
accounting period. Gevera makes a careful physical inventory of Depreciable Cost xxx
the supplies. The inventory count showed that supplies costing Divided by: Estimated useful life xxx
P15,000 are still on hand. This transaction is analyzed and Depreciation Expense for each time period. xxx
recorded as follows:
The asset account is not directly reduced when recording
Transaction Consumption of supplies depreciation expense. Instead, the reduction is recorded in a
Analysis Assets decreased. Owner’s equity decreased contra account called accumulated depreciation. A contra
Rules Decreases in assets are recorded by credits. account is used to record reductions in a related account and its
Decreases in owner’s equity are recorded by normal balance is opposite that of the related account. Use of
the contra account - accumulated depreciation - allows the perform services or deliver goods. The liability referred to is
disclosure of the original cost of the related asset in the balance unearned revenues.
sheet. The balance of the contra account is deducted from the For example, publishing companies usually received
cost to obtain the book value of the property and equipment. payments for magazine subscriptions in advances. These
payments must be recorded in a liability account. If the company
Service Vehicle and Office Equipment (Adjs. D and E) fails to deliver the magazines for the subscription period,
Suppose that Wedding “R” Us estimated that the service subscribers are entitled to a refund. As the company delivers
vehicle, which was bought on May 4, will last for seven years each issue of the magazine, it earns part of the advance
(eighty-four months) and with a salvage value of P84,000. The payments. This earned portion must be transferred from the
office equipment that was acquired on May 5 will have a usefule unearned subscription revenues account to the subscription
life of five years (sixty months) and will be worthless at that revenue account.
time. Substitution of the pertinent amounts into the basic
formula will yield depreciation for service vehicle and office
Balance Income
equipment for the month as P4,000 [(P420,000 - P84,000)] and Statement
Value of the Sheet
P1,000 (P60,000/60 months), respectively. These amounts goods or As the
represent the expense accounts. As a matter of company policy, services to goods or
the period May 4 to 31 is considered a month. The analysis be provided Liabilities Revenues
services are
follows: in future provided
periods. Unearned Revenue
Revenue from
Transaction Recording depreciation expense _______
Analysis Assets decreased. Owner’s equity decreased
Rules Decreases in assets are recorded by credits.
Decreases in owner’s equity are recorded by Unearned Referral Revenues (Adj. F)
debits. On May 15, Wedding “R” Us received P10,000 as an
Entries Owner’s equity is decreased by debits and advance payments for referrals made. Assume that by the end
depreciation expense-service vehicle and of the month, one of the three couples, referred has already
depreciation expense-office equipment. taken their marriage vows and as a result the amount of P4,000
Assets are decreased by credits to contra-asset pertaining to the referred event has been realized. This
accounts accumulated depreciation -service transaction is analyzed as follows:
vehicle and accumulated depreciation - office
equipment. Transaction Recognition of income where cash is received in
advance
Depreciation Expense - Service vehicle (OE: E) 4,000 Analysis Liabilities decreased. Owner’s equity decreased
Accumulated Depreciation- Service vehicle (A) 4,000 Rules Decreases in liabilities are recorded by debits.
Increase in owner’s equity are recorded by credits.
Depreciation Expense - Office Equipment (OE: E) 1,000 Entries Decrease in liabilities is recorded by a debit to
Accumulated Depreciation- Office Equipment (A) 1,000 unearned referral revenues. Increase in owner’s
equity is recorded by a credit to referral revenues.
After adjustments, the property and equipment section of
the balance sheet for Wedding “R” Us will be: Unearned Referral Revenues (L) 4,000
Referral Revenues (OE:I) 4,000
Wedding “R” Us
Partial Balance Sheet
May 31, 2012 ADJUSTMENT FOR ACCRUALS (STEP 5)

Property and Equipment (Net): Accrued Expenses

An entity often incurs expenses before paying for them.
Service Vehicle P420,000 Cash payments are usually made at regular intervals of time such
Less: Accumulated Depreciation 4,000 P416,000 as weekly, monthly, quarterly or annually. If the accounting
Office Equipment P 60,000 period ends on a date that does not coincide with the scheduled
Less: Accumulated Depreciation 1,000 59,000 cash payment date, an adjusting entry is needed to reflect the
P 475,000 expense incurred since the last payment. This adjustment helps
======== the entity avoid the impractical preparation of hourly or daily
journal entries just to accrue expenses. Salaries, interest,
Allocating Revenues Received in Advance to Revenues utilities (e.g. electricity, telecommunications and water) and
taxes are examples of expenses that are incurred before
There are times when an entity receives cash for services or payment is made.
goods even before service is rendered or goods are delivered. Accrued Salaries (Adjustment g)
When such is received in advance, the entity has an obligation to
 Entities pay their employees at regular intervals. It Analysis Liabilities decreased. Owner’s equity decreased
can be weekly, semi-monthly or monthly. Weekly payrolls Rules Decreases in liabilities are recorded by debits.
are usually made on Fridays (for a five-day workweek) or Increase in owner’s equity are recorded by credits.
Saturdays (for a six-day workweek). Wedding “R” Us pays Entries Decrease in liabilities is recorded by a debit to
salaries every two Saturdays. unearned referral revenues. Increase in owner’s
The office assistant and the account executive were equity is recorded by a credit to referral revenues.
paid salaries on May 13 and 27. At the month-end the
employees have worked for three days (May 29, 30 and 31) Unearned Referral Revenues (L) 4,000
beyond the last pay period. The employees have earned Referral Revenues (OE:I) 4,000
the salary for these days, but it is not due to be paid until
the regular payday in April. The salary for these three days Transaction Accruals or unrecorded expense
is rightfully an expense for May, and the liabilities should Analysis Liabilities Increased. Owner’s equity decreased
reflect that the entity owes the employees salaries for Rules Increases in liabilities are recorded by credits.
those days. Decrease in owner’s equity are recorded by
Each of the employees salary rate is P7,800 per month debits.
or P300 per day (7,800/26 working days). The expense to Entries Decrease in owner’s equity is recorded by a debit
be accrued is P1,800 (300 x 3days x 2 employees). This to interest expense. Increase in liabilities is
accrued expenses can be analyzed as shown: recorded by a credit to Interest payable

Transaction Accruals or unrecorded expense Interest Expense (OE:E) 3,500

Analysis Liabilities Increased. Owner’s equity decreased Interest Payable (L) 3,500
Rules Increases in liabilities are recorded by credits.
Decrease in owner’s equity are recorded by Accrued Revenues
debits. An entity may provides services during the period that are
Entries Decrease in owner’s equity is recorded by a debit neither paid by clients nor billed at the end of the period. The
to salaries expense. Increase in liabilities is value of these services represents revenue earned by the entity.
recorded by a credit to salaries payable Any revenue that has been earned but not recorded during the
accounting period calls for an adjusting entry that debits and
Salaries Expense (OE:E) 1,800 asset account and credits an income account.
Salaries Payable (L) 1,800
Accrued Consulting Revenue (Adj. I)
The liability of P1,800 is now correctly reflected in the Suppose that Wedding “R” Us agreed to arrange a rush but
salaries payable account. The actual expense incurred for simple civil wedding for a madly-in-love couple in the afternoon
salaries during the month is P15,600. of May 31. The entity intended to charge fees of P5,300 for the
services, which is earned but unbilled. This should be recorded
Accrued Interest (Adj. H) as show below:
On May 2, Gevera borrowed P210,000 from Metrobank.
She issued a promissory note that carried a 20% interest per Transaction Accruals or unrecorded revenue
annum. Both the interest and principal will be payable in one Analysis Assets Increased. Owner’s equity increased
year. The note issued to the bank accrues interest at 20% Rules Increases in asset are recorded by debits.
annually. At the end of May, Gevera owed the bank P3,500 for Increases in owner’s equity are recorded by
interest in addition to the P210,000 loan. Interest is a charge for credits.
the use of money over time. Interest expense is matched to a Entries Increase in assets is recorded by a debit to
particular period during which the benefit - the use of borrowed accounts receivable. Increase in owner’s equity as
money - is received. The interest is fixed obligation and accrues a credit to consulting revenues
regardless of the results of the entity’s operations.
Interest rates are expressed at annual rates, so if interest is Accounts Receivable (A) 5,300
being calculated for less than a year, the calculation must Consulting Revenues (OE:I) 5,300
express time as a portion of a year. Thus, the interest expense
(simple) incurred on this note during the month is determined A total of P67,700 in consulting revenues was earned by the
by the following formula: entity during the month.
Interest = Principal x Interest Rate x Length of Time The Wedding “R” Us illustration did not tackle entries
= P210,000 x 20% per year x 1/12 of a year related to uncollectible accounts. Hence, the ensuing discussion
= P210,000 x .20 x 1/12 on the accrual of uncollectible accounts is not in any way related
= P3,500 to the Weddings “R” Us illustration. This the to complete the
illustrations on adjustments for accruals.
The adjusting entry to record the interest expense incurred in
May is as follows:
Transaction Recognition of income where cash is received in Accrual for Uncollectible Accounts
advance
 Entities often allow clients to purchase goods or avail of Total liabilities is understated because of the omission of
services on credit. Some of these accounts will never be the P8,000 interest payable.
collected; hence, there is a need to reflect these as changes
against income. In practice, an expense is recognized for the On December 31, 2013, the maturity date, the note is paid
estimated uncollectible accounts in the current period, rather together with interest. Since there was no adjusting entry made
than when specific accounts actually become uncollectible. This to accrue interest in 2012, the entire interest of P24,000
practice produces a better matching of income and expenses. (P100,000 x 16% x 18/12) was erroneously charged against 2013
Estimates of uncollectible accounts may be based on credit profit. The correct interest expense for 2013 should have been
sales for the period or on accounts receivable balance. P16,000 (100,000 x 16% x 12/12). The effect of the omissions in
Assume that an entity made credit sales of P1,100,000 in the 2013 financial statements are as follows:
2012 and prior experience indicates an expected 1% average  In the 2013 income statement, interest expense is
uncollectible accounts rate based on credit sales. The contra overstated by P8,000 and therefore, profits is understated
account - Allowance for Uncollectible Accounts has a normal by P8,000.
credit balance and is shown in the balance sheet as a deduction  The Dec. 31, 2013 balance sheet is correctly stated since
from Accounts Receivable. The allowance account need to be the note along with its interest has been settled by year-
increased by P11,000. (P1,100 x 1%) because accounts end. The effect of omission has counterbalanced by the end
receivable in that amount is doubtful of collection. The of the second accounting period.
adjustments will be:
In summary, the omission has produced two erroneous
Uncollectible Accounts Expense (OE : E) 11,000 income statement and one erroneous balance sheet. If the
Allowance for Uncollectible Accounts (A) 11,000 entity should have reported a correct profit of P500,000 in the
2012 and 2013 income statements. As a result of the omission,
Throughout the accounting period, when there is positive the proprietorship’s profit in 2012 is P508,000 and in 2013
evidence that a specific account is definitely uncollectible, the P492,000.
appropriate amount is written off against the contra account.
For example, if a P1,500 receivable were considered Summary of Adjusting Entries
uncollectible, that amount would be written off as follows: Type of Account Balances Before Adjusting Entry
Adjustment Adjustments
Balance Income Account Account
Allowance for Uncollectible Accounts (A) 1,500 Sheet Statement Debited Credited
Accounts Receivable (A) 1,500 Account
Prepaid
No entry is made to Uncollectible Accounts Expense, since the Expenses
Asset Method Assets Expenses Expense Prepaid
adjusting entry has already provided for an estimated expense Overstated Understated Expense (A)
based on previous experience for all receivables. Expense Assets Expenses Prepaid Expense
Method Understated Overstated Expense (A)
EFFECTS OF OMITTING ADJUSTMENTS Depreciation Assets Expense Expense Contra Asset
When an accountant failed to include the proper adjusting Overstated Understated
Unearned
entries, the resulting financial statements will not accurately Revenues
reflect the financial position and the performance of the entity. Liability Liabilities Income Unearned Revenue
Inaccuracies in one accounting period can cause further Method Overstated understated Revenues (L)
inaccuracies in the statements of subsequent periods. Income Liabilities Revenue Revenue Unearned
Method Understated Overstated Revenues (L)
Accrued Liabilities Expenses Expense Payable (L)
Illustration. On July 1, 2012, San Rita Manpower Services owned Expenses Understated Understated
by Bienvenida Alvaro borrowed P100,000 by signing a 18-month Accrued Assets Income Receivable Revenue
note at 16% interest per annum. The principal and interest are Revenues Understated Understated (A)
to be repaid when the note matures on Dec. 31, 2013.

As at Dec. 31, 2102, the entity has incurred interest

expense of P8,000 (P100,000 x 16% x 6/12). The accountant did
not record the adjustment for the accrued interest. The entry
should have been a debit to Interest Expense and a credit to ALTERNATIVE METHODS OF RECORDING DEFERRALS
Interest Payable for P8,000.
A Prepaid expense is initially recorded in a prepaid asset
The effects of the omission in the 2012 financial statements are account. Likewise, revenue received in advance is initially
as follows: recorded in a liability account. - unearned revenues. In the case
 In the 2012 income statement, interest expense is of a prepaid expense, an adjusting entry is made at the end of
understated by P8,000 and, therefore, profit is overstated the period to transfer the portion of the expired asset to an
by P8,000. expense account. Similarly, an adjusting entry is made to
 In the Dec. 31, 2012 balance sheet, owner’s equity is transfer earned revenues from the liability account to an income
overstatedbyP8,000 because of the overstatement in profit. account.
 Entities may initially account for deferrals using income and Initial entry is recorded as:
expense accounts.
1. A liability
Prepaid Expenses 2012
On Oct. 1, 2012, Calaguas Company acquired a 3-year July 1 Cash 48,000
insurance policy for P36,000 paid in advance. Calaguas may Unearned Rent Revenue (L) 48,000
record this transaction depending on which of the two
accounting policies it follows. The P36,000 payment may initially 2. A Revenue
be recorded either as an asset or as an expense. 2012
July 1 Cash 48,000
Initial entry is recorded as: Rent Revenue (OE : I) 48,000

1. An Asset At the end of the year, an adjusting entry is needed to establish

2012 the proper balances in the rent revenue and unearned rent
Oct.10 Prepaid Insurance (A) 36,000 revenue accounts. On Dec. 31, 2012, six month’s rent has been
Cash 36,000 earned or rent revenue is equal to P12,000 (P48,000/24 months
x 6 months). Unearned rent revenues equivalent to P36,000
(P48,000 - `12,000) remain. The appropriate adjustment
depends on how the initial transaction was recorded.
2. An Expense Adjusting entry required if initial entry is recorded as:
2012
Oct.10 Insurance Expense (OE:E) 36,000 3. A liability
Cash 36,000 2012
Dec.31 Unearned Rent Revenues (L) 12,000
At the end of the year, an adjusting entry is needed to establish Rent Revenues (OE:I) 12,000
the proper balances in the prepaid insurance expense accout.
On Dec. 31, 20`1, three months’ insurance has been consumed, 4. A revenue
or insurance expense is equal to P3,000 (P36,000/36 months x 3 2012
months). Prepaid insurance equivalent to P33,000 (P36,000 - Dec.31 Rent Revenues (OE:I) 36,000
P3,000) remain. The appropriate adjustment depends on how Unearned Rent Revenues (L) 36,000
the initial transaction was recorded.
The effect of the adjusting entries on the ledger accounts after
Adjusting entry required if initial entry is recorded as: posting is the same regardless of the initial credits as shown
below:
1. An asset
2012 As a Liability As an Income
Dec.31 Insurance Expense (OE:E) 3,000 Dec. 31 balances: Dec. 31, balances:
Prepaid Insurance (A) 3,000 Unearned Rent Revenue 36,000 Cr Unearned Rent Revenue 36,000 Cr
Rent Revenues 12,000 Cr Rent Revenues 12,000 Cr
2. An expense
2012
Dec.31 Prepaid Insurance (A) 33,000 Problem 1
Insurance Expense (OE : E) 33,000 Preparing Adjusting Entries from Unadjusted and Adjusted Trial
Balance
The effect of the adjusting entries on the ledger accounts after
posting is the same regardless of the initial debits as shown The following is a partial listing of the unadjusted and adjusted
below: trial balance for Lenore Loqueloque, the Property Manager.
Unadjusted Trial Adjusted Trial Balance
Balance
As an Asset As an Expense
Dec. 31 balance Dec. 31, balance Dr Cr Dr Cr
Prepaid Insurance P30,000 13,800
Prepaid insurance 33,000 debit Prepaid Insurance 33,000 debit
Insurance Expense 3,000 debit Insurance Expense 3,000 debit Office Supplies 12,600 5,400
Interest Receivable 2,100
Unearned Revenues Building 1,560,000 1,560,000
Accumulated 240,000 280,00
On July 1, 2012, Marasigan Company received a P48,000 check Depreciation
0
for 2 years’s rent paid in advance. On this date, Marasigan may Advances from 24,000 16,000
record a credit in that amount either as unearned rental revenue Tenants
Rent Payable 40,000
or rental revenue, depending on its accounting policy.
Salaries Payable 18,000
Insurance Expense 16,200 Case 1. Starr Company began the year with P3,000 balance in
Supplies Expense 7,200 the office Supplies account. During the year, P8,500 worth of
Depreciation 40,000 additional office supplies were purchased. A physical count of
Expense office supplies on hand at the end of the year revealed that
Salaries Expense 200,000 218,000 P6,400 worth of office supplies had been used during the year.
Rent Expense 120,000 160,000 No adjusting entry has been made until year end.
Interest Revenues 2,100
Rent Revenues 8,000 Case 2. Eaton Company has a calendar year-end accounting
period. On July 1, the company purchased office equipment for
Required: From the information given, reconstruct the adjusting P30,000. It is estimated that the office equipment will
entries. depreciate P500 each month. No adjusting entry has been made
until year en.

Case 3. Ward Realty is in the business of renting several

apartment buildings and prepares monthly financial statements.
It has been determined that 3 tenants in P700 per month
apartments and one tenant in the P1,000 per month apartment
had not paid their August rent as August 31st.

Problem 2. Preparation of Adjusting Entries Problem 4. Accrual on Interest Expense

WEALTH Company prepares monthly financial statements. Florenda Quino Forwarders borrowed P600,000 from the bank
Below are listed some selected accounts and their balances in on Sept 1, 2102. The note carried an 8% annual rate of interest
the September 30 trial balance before any adjustments have and was set to mature on Feb. 28, 2013. Interest and principal
been made for the month of September. were paid in cash on the maturity date.
Required:
WEALTH COMPANY 1. What was the amount of interest expense paid in cash in
Trial Balance 2012.
September 30, 2016 2. What was the amount of interest expense recognized on the
2012 income statement?
Dr Cr 3. What was the amount of total liabilities shown on the 2012
Office Supplies P2,700 balance sheet.
Prepaid Insurance 4,200 4. What was the total amount of cash that was paid to the bak
Office Equipment 16,200 on Feb. 28, 2013 for principal and interest?
Accumulated Depreciation - Office P1,000 5. What was the amount of interest expense shown on th 2013
Equipment income statement?
Unearned Revenue 1,200
(Note: Debit column does not equal credit column because this Problem 5. Accrual of Interest Revenue
is a partial listing of selected account balances)
Reynaldo San Mateo, an angel investor, decided to invest
An analysis of the account balances by the company’s P1,200,000 excess cash in a certificate of deposit on April 1,
accountant provided the following additional information: 2011. The certificate carried an 8% annual rate of interest and a
1. A physical count of office supplies revealed P1,000 on hand on 1-year term of maturity. Interest will be will be withdrawn
September 30. monthly (disregard tax effects).
2. A two-year life insurance policy was purchased on June 1 for Required:
P4,800. 1. What amount of income will be recognized for the year
3. Office equipment depreciated P6,000 per year ending Dec. 31, 2011?
4. The amount of rent receivable in advance that remains 2. What is the effect of the adjusting entry on the accounting
unearned at September 30 is P500. equation?
3. What amount of cash will be collected for interest revenue in
Instructions: Using the above additional information, prepare 2011?
the adjusting entries that should be made by Wealth Company 4. What is the amount of interest receivable as of Dec. 31, 2011?
on September 30. 5. What amount of cash will be collected for interest revenue?
6. What amount of interest revenue will be recognized in 2012?
Problem 3. Preparation of Adjusting Entries 7. What is the amount of interest receivable as of Dec. 31, 2012?

Instruction: Prepare the required end-of-period adjusting entries Problem 6. Adjusting Entries and Accounting Policy
for each independent case listed below:
The following are some of the transactions made by Timoleon E. Purchased P6,400 of supplies on account. At year’s end, P750
Lianza Cleaners during 2012. of supplies remained on hand.
F. Invested P90,000 cash in a certificate of deposit that paid 4%
Apr 1. Acquired cleaning supplies in the amount of P260,000. annual interest.
The count of the supplies on Dec. 31, 2012 amounted to G. Paid 78, 000 cash in advance on Sept. 1 for a 1-year lease on
P110,000. office space.

Aug 1. Received P360,000 form Cebu Company for cleaning Problem 9. Preparing Adjusting Entries at Year-End
janitorial uniforms over the next 3 years.
On June 30, 2012, the end of fiscal year, the following
Nov. 1 Paid P240,000 for annual rent. information is available to Dennis Sandoval Company’s
accountants for making adjusting entries:
Required:
1. Assume that Lianza records these transactions using the A. Among the liabilities of the company is P2,400,000 mortgage
following accounts recorded the adjusting entries on Dec. 31, payable, On June 30, the accrued interest on this mortgage
2012. amounted to P120,000.
Office Supplies Unearned Cleaning Revenues B. Assume that on, July 2, a Friday, the company, which is on a
Prepaid Rent five-day workweek and pays employees weekly paid its regular
2. Now, assume that Lianza records these transactions using the salaried employees P192,000.
following accounts. What will be the adjusting entries on Dec. C. On June 29, the company completed negotiations and signed
31, 2012? a contract to provide services to a new client and an annual rate
Office Supplies Expense of P36,000.
Rent Expense D. The supplies account showed a beginning balance of P16,150
Cleaning Revenues and purchases during the year of P37,660. The year-end
inventory revealed supplies on hand of P11,860.
Problem 7. Preparing Adjusting Entries E. The Prepaid Insurance account showed the following entries
on June 30:
Prepare the adjusting entry for Roberto Gonzales Company Beginning Balance P15,300
under each of the following situations: January 1 29,000
A. The Office Supplies account showed a beginning debit balance May 1 33,660
of P6,000 and purchases of P10,000. The ending debit
balance was P4,000. The binning balance represents the unexpired portion of a one-
B. Depreciation for the office building is estimated to be P76,000 year policy purchased in April of the previous year. The January
C. A one-year insurance policy was purchased for P60,000. The 1 entry represented a new one-year policy, and the May 1 entry
company has been covered for the last four months. is the additional coverage of a three-year policy.
D. Accrued interest on notes payable amounted to P15,000.
E. The company received a P144,000 advance payment during F. The following table contains the cost and annual depreciation
the year on services to be performed. By year-end, two- for building and equipment, all of which were purchased before
thirds of the services had been performed. the current year:
F. Payroll for the five-day workweek, to be paid on Friday, is Account Cost Annual Depreciation
P140,000. The last day of the period is a Wednesday. Buildings P1,850,000 P73,000
G. Services totaling P7,800 had been performed by not yet billed Equipment 2,180,000 218,000
or recorded.
G. On June 1, the company completed negotiations with another
Problem 8. Preparing Adjusting Entries at Year End client and accepted an advance of P210,000 for services to be
performed in the next year. The 210,000 was credited to
Prepare the adjusting entry for Christine Gamba Company under Unearned Service Revenues.
each of the following for the year ending Dec. 31, 2012: H. The company calculated that as at June 30 it had earned
A. Paid P24,000 for a 1 year fire insurance policy to commence P35,000 on a P75,000 contract that will be completed and billed
on Sept 1. The amount of premium was debited to in August.
Prepaid Insurance.
B. Borrowed P100,000 by issuing a 1-year note with 7% annual Required: Prepare the adjusting entries.
interest to Century Savings Bank on Oct. 1, 2012.
C. Paid P160,000 cash to purchase a delivery van (surplus) on
Jan. 1. The van was expected to have a 3-year life and
P10,000 salvage value. Depreciation is computed on a
straight line basis.
D. Received an P18,000 cash advance for a contract to price
services in the future. The contract required a 1-year
commitment, starting April 1.