04 - THE ADJUSTING PROCESS

Prof|nth Semester | FABM 1 Grade 11

TOPIC

SUB TOPIC

SUB SUB TOPIC

Importance of Adjusting Journal Entries

According to Tuovila (2022), adjusting journal entries

play a key role in the accounting cycle. Many
OUTLINE
businesses deliver goods at different times than the
payment of goods, either beforehand in the case of
I. Nature of the Adjusting Journal Entry
credit or afterward in the case of pre-payment.
A. Accounting Period Concept
B. Importance of Adjusting Adjusting journal entries are used to reconcile these
Journal Entries disparities in the timing of payments and expenses in
C. Understanding Adjusting such a situation. There would still be unresolved
Journal Entries transactions that have not been settled if the journal
entries were not altered.
II. Five (5) Types of Adjusting Entries
III. .Preparation of Adjusted Trial Balance
Understanding Adjusting Journal Entries

Adjusting entries are used to convert cash

transactions into the accrual accounting method. As
Nature of the Adjusting Journal Entries per the revenue recognition principle, the foundation
of accrual accounting aims to recognize revenue in
An entry in a company's general ledger called an the period it is earned rather than the period in which
adjusting journal entry is made at the end of an cash is received.
accounting period to record unrecognized income or
expenses for that period. Adjusting journal entries are For instance, a construction company starts work in
needed to appropriately account for a transaction one day but does not bill the customer until six (6)
that begins in one accounting period and ends in months later. The company must do an adjusting
another. These can also refer to financial reporting journal entry at the end of each month to recognize
that corrects an error made during the accounting revenue for 1/6 of the amount invoiced at the
period (Schmidt, 2023). six-month point.

An adjusting journal entry includes an income

Accounting Period Concept statement account (revenue or expense) and a
balance sheet account (asset or liability). It typically
This concept requires that revenues and pertains to the accounts on the balance sheet for

expenses be reported in the proper period. accumulated depreciation, prepaid expenses,

deferred revenues, accrued revenues, and accrued
expenses.

The entries follow the matching principle to match

expenses to related revenue in the same accounting
period. The financial statements are affected by the
alterations in journal entries, which are transferred to
the general ledger.

★ CUTE NI WYNNE 1
LECTURE # | COURSE – TITLE

• Then, when you get paid in November,

you move the money from accrued
Five (5) Types of Adjusting Entries receivables to cash.
Date Account Debit Credit
There are only five (5) different kinds of adjusting
entries, and their differences are easily discernible. Nov. 7,
Each type is described along with examples of 2022 Accrued receivables P65,000
scenarios and instructions for entering them.

Date Account Debit Credit

1. Accrued revenues - An accrued revenue
adjustment must be made when revenue is Cash P65,000
generated in one accounting period but is
To record payment from
not recognized later.
customer

Example scenario: In October, KNM Apparels received

an order worth P65,000 for a client and then invoiced 2. Accrued expenses - Accrued expense
them. The client paid the invoice on November 7. adjustments account for expenses you
generated in one period but paid for later.
Remember: Income is equal to revenue less One of the primary expenses that must be
expenses. adjusted at the end of the month is payroll or
paycheck. Any hours worked during the
Moving the revenue from a "holding account" month that has not yet been paid should be
(accrued receivables) to a "revenue account" included in expenses. The following is how the
(revenue) is the first step. The money moves journal entry will present it:
from revenue to cash on November 7, when
you get paid and deposit it in the bank. Example scenario: Suppose you hire a contract
worker to help you with your apparel in October. You
Example adjusting entry for Accrued agree to pay the contract worker P33,000 in advance
Revenue for a weekend of work. However, you are not invoiced
until the beginning of November.
The adjustment appears like this in your
general ledger. First, you record the Example adjusting entry for Accrued
anticipated revenue when you produce the Expense • In October, you record the money
apparel and invoice the client in October. you will need to pay the contractor as an
accrued expense, debiting your labor
expenses account.
• You keep track of money from revenue
to keep the books in balance. Month Account Debit Credit

Date Account Debit Credit

Oct. 21, Accrued expenses P33,000
2022
Oct. Accrued P65,000
27, receivables
Salary expense P33,000
2022

To record accrued
Revenue P65,000
payment for contractors

To record
accrued payment
• In November, when you pay the invoice,
from customer
you move the money from accrued
expenses to cash as a withdrawal
from your bank account.

★ CUTE NI WYNNE 2
 LECTURE # | COURSE – TITLE

Month Account Debit Credit Consulting revenue P25,000

Nov. 1, 2022 Accrued expenses P33,000

Cash P33,000 To record revenue

from the
To accrued record conference
payment for contractors

4. Prepaid expenses - Deferred revenue is very

3. Deferred revenues - Deferred revenue is
similar to how prepaid expenses work. In this
when a client pays you in advance. You must
instance, you make a one-time advance
ensure that the revenue is recorded in the
payment and record the expense for the
month you perform the service and incur the
applicable period.
prepaid expenses, even though you are
currently paid in advance.
Example scenario: You rent a new space for your
apparel manufacturing business and make an
Example scenario: Over time, you have established a advance payment for three (3) months’ rent in
solid reputation within the apparel community. October, amounting to P30,000.
Because of that, the annual Apparel Symposium in
Germany has invited you to be one of their guest • In October, you record it as prepaid rent
speakers. The conference committee will pay you expense, debited from an expense account.
P25,000 in October after you confirm your Date Account Debit Credit
participation in the event. However, the annual event
Oct. 31, Prepaid rent P30,000.
in Germany will be held in January.
2022
• First, record the income on the books for
January as deferred revenue. You will Cash P30,000.

credit it to your deferred revenue

account for now. To record the
adjustment for rent
Date Account Debit Credit
expense

Oct. 6, Cash P25,000

• Then, come November. You want to record your
2022
rent expense for the month. You will move
Deferred revenue P25,000 November’s portion of the prepaid rent from
an asset to an expense.
To record revenue from the
conference
Date Account Debit Credit

• Then, when you deliver your talk and earn Nov. 31, Rent expense P10,000.
the fee in January, move the money from 2022
deferred revenue to consulting revenue.
Prepaid Rent P10,000
.

To record the
adjustment for rent
Date Account Debit Credit expense

Jan. 1, Deferred revenue P25,000

2023 5. Depreciation expenses - A single payment is
made for an asset when it is depreciated, but
the cost is spread out over multiple

★ CUTE NI WYNNE 3
LECTURE # | COURSE – TITLE

accounting periods. Most of the time, this is and credit balances in all accounts is the
done with big purchases like buildings, same; and • To be used in creating financial
vehicles, or equipment. statements (in particular, the balance sheet
and income statement; additional
The total accumulated depreciation amount information is required to construct the
on the balance sheet changes at the end of
statement of cash flows).
an accounting period when an asset is
depreciated. Additionally, depreciation is
The existing general ledger will be used to post the
reflected as an expense on the income
adjusting entry, while additional accounts will be used
statement at each payment.
for adjusting entries without the existing general
ledger.
Example scenario: The equipment you use in your
apparel business is already used for one (1) month. Sample of an Adjusted Trial Balance:
According to its useful life, the equipment is only good
for five (5) years. The equipment’s original value is
P55,000 and was purchased at the end of October
2022.

Formula: Cost / Estimated useful life per month =

Depreciation Value per month

Date Account Debit Credit

Oct. 31, Depreciation expense P916.67

2022

Accumulated P916.67
Depreciation

To record depreciation
expense for the month
of January

Computation: P55,000 / 60 months = P916.67 The adjusted trial balance verifies the equality of the
total debit and credit balances before the financial
statements are prepared. If the adjusted trial balance
Preparation of Adjusted Trial Balance does not balance, an error occurs.

According to Pineda (2022), an adjusted trial balance

is prepared after adjusting entries have been made in
all accounts. To bring the entity's financial statements
into conformity with an accounting framework, such
as Generally Accepted Accounting Principles or
International Financial Reporting Standards, these
entries are being added to correct errors in the initial
version of the trial balance.

An adjusted trial balance is an internal report serving

two purposes rather than being a part of the financial
statements (Bragg, 2023):

● To ensure that the sum of all debit balances

★ CUTE NI WYNNE 4
LECTURE # | COURSE – TITLE

STUDY WELL:) FIGHTING!

★ CUTE NI WYNNE 5
LECTURE # | COURSE – TITLE

★ CUTE NI WYNNE 6