ADJUSTING JOURNAL ENTRIES

- It is very important that the accountants properly measure the expenses and revenues of the business during the accounting year.

- The correct Net Income should be reflected in the Income Statement.

- To accomplish this, the accountant should be able to record all revenues earned and expenses incurred during the accounting year.

PRINCIPLES APPLIED

The concepts and principles that guide the measurement of the expenses and income are the following:

(1) Accrual Basis of Accounting (2) Accounting Period (3) Revenue and Matching Principle (4) Time Period Concept

PRINCIPLES APPLIED

(1) ACCRUAL BASIS ACCOUNTING • an accountant recognizes the impact of business event as it occurs.• when a business enters into a transaction such as performing a service, making a sale or

incurring an expense, the accountant enters the transaction into the books, whether or not cash has been received or paid.

CASH BASIC ACCOUNTING• the accountant does not record a transaction until cash is received or paid.• Cash receipts are treated as revenue and cash payments are treated as Expense

PRINCIPLES APPLIED

(2) ACCOUNTING PERIOD

• Since business entities need periodic reports on their progress, accountants divide time into small segments and prepare financial statement for specific period .

• One year is the most basic accounting period and

virtually most businesses prepare financial statement s.

PRINCIPLES APPLIED

(3) MATCHING PRINCIPLE • An expense is a decrease in Owner’s Equity that occurs in the

course of operating a business. • Matching principle requires that all expenses incurred during the

accounting year should be identified, measured and subtracted from the revenues earned during the same span of time.

NEED FOR ADJUSTING JOURNAL ENTRIES

• To measure income, business must do some additional accounting at the end of the accounting period to bring the records up to date before preparing the financial statements. This process is called Adjusting the Books.

• Adjusting the books consist of making special entries called Adjusting

Journal Entries. • To help determine that all items are properly recognized, we should

review all the balances in the general ledger accounts.

THE NEED FOR ADJUSTING JOURNAL ENTRY

• Adjusting entries are journal entries made at the end of the year for the following reasons:

(1) There may be unrecorded EARNED income(2) There may be unrecorded INCURRED expenses(3) There may have been already a consumed

portion/or expired portion of prepaid expenses OR there may be unexpired portion portion or unused portion in the recorded expenses.

NEED FOR ADJUSTING JOURNAL ENTRY

(4) There may have been already an earned portion in the recorded unearned income OR maybe an unearned portion of the recorded income

(5) There is a need to provide depreciation for depreciable fixed assets.

(6) There is a need to provide estimated doubtful accounts in relation to accounts receivable

TYPES OF ADJUSTING ENTRIES

(1) Accrued Expenses - these are expenses incurred but remains unpaid at the end of the accounting period. In effect, this is a liability account, a payable account.

(2) Accrued Income – these are income earned but remains uncollected at the end of the accounting period. In effect, this is an asset account, a receivable account.

TYPES OF ADJUSTING ENTRIES

(3) Prepaid Expenses - these prepayment of expenses or advance payment of expenses.

(4) Unearned Income – these are revenues collected in advance.

ACCRUED EXPENSES

a. Accrued Utilities Expense

Case : Unpaid and unrecorded MERALCO bill as of Dec. 31, 2010

amounted to P2,500 remains

ACCRUED EXPENSE

Adjusting Journal Entry: Dec 31 Utilities Expense 2,500 Utilities Payable 2,500 To record accrued utilities expense

Important note:* Recognize the expense incurred, and come up with a liability

account because it remains unpaid as of end of accounting period.

ACCRUED EXPENSES

b. Accrued Salaries Expense Case :

Unpaid salaries of the workers as of Dec. 31, 2010, end of the accounting period amounted to P15,000.

ACCRUED EXPENSE

Adjusting Journal Entry: Dec 31 Salaries Expense 15,000 Salaries Payable 15,000 To record accrued salaries expense

Important note:* Recognize the expense incurred, and come up with a liability

account because it remains unpaid as of end of accounting period.

ACCRUED EXPENSE

c. Accrued Interest Expense

Case: Interest expense on a 60 day , 18 % promissory

note with principal amount of P 100,000 dated Dec 1, 2010, remain unpaid and unrecorded as of end of accounting period Dec. 31, 2010

ACCRUED EXPENSE

Adjusting Journal Entry: Dec 31 Interest Expense 1,500 Interest Payable 1,500 To record accrued interest on notes issued ( interest = P 100,000 x 18% x 30/360 = P1,500)

Important note:

*Interest accrued is for 30 days ( Dec 1-31) we count following the rule – exclude the 1st day. Include the last day. *The 60 days term has affected 2 accounting period – 2010 (Dec 1-31) and 2011

( Jan 1-30). Following the expense recognition principal, we should record and recognize expense on the period they were incurred. The 2010 (Dec 1-31) interest therefore on this note has to be recognize as expense for 2010, adjusting journal entry therefore is required.

ACCRUED INCOME

a. Accrued Rent Income

Case : As of end of Dec 31, 2010, rentals for Oct, Nov, Dec from a

tenant of an idle office space amounting to P15,000. has not yet been collected and recorded.

ACCRUED INCOME

Adjusting Journal Entry: Dec 31 Rent Receivable 15,000 Rent Income 15,000 To record accrued rent income

Important note: * we have to recognize this particular rent for three months as

revenue for 2010, because they were revenues earned in 2010.

* Following the accrual principle of accounting, we recognize revenue when it is earned whether we received cash or not.

ACCRUED INCOME

b. Accrued Interest Income

Case: As of Dec 31, 2010, interest income on a 90 day, 18% note

dated Nov 15, 2010 for P 100,000 has not yet been received and recorded.

ACCRUED INCOME

Journal Entry: Dec 31 Interest Receivable 2,300 Interest Income 2,300 To record accrued interest income ( interest = P100,000 x 18%% 46/360 = P2,300)

Important note: * Interest accrued is for 45 days ( Nov 15- Dec 31), we count following the

rule – exclude the 1st day. Include the last day. * The 90 days term has affected 2 accounting period – 2010 (Nov 15-Dec 31)

and 2011 ( Jan 1- Feb. 13). Following the revenue realization principal, we should record and recognize income in the period they were earned. The 2010 (Nov 15- Dec 31) interest therefore on this note has to be recognize as revenue for 2010, adjusting journal entry is therefore required.