Part 5 Adjusting the Accounts

Adjusting the Accounts
STEP 5
Michael A. Alonzo, LPT
ABM
Inter-Global College Foundation, Inc.
Fiscal and Calendar Years
• Accounting time periods are generally a
month, a quarter, or a year.
• interim periods - Monthly and quarterly time
periods.
• fiscal year - An accounting time period that is
one year in length.
– A fiscal year usually begins with the first day of a
month and ends 12 months later on the last day of
a month.
• calendar year - (January 1 to December 31)
Accrual- versus Cash-Basis
Accounting
• Accrual-basis accounting. Under the accrual basis,
companies record transactions that change a
company’s financial statements in the periods in which
the events occur. For example, using the accrual basis
to determine net income means companies recognize
revenues when they perform services (rather than
when they receive cash). It also means recognizing
expenses when incurred (rather than when paid).
• cash-basis accounting, companies record revenue
when they receive cash. They record an expense when
they pay out cash.
– Cash basis accounting is not in accordance with generally
accepted accounting principles (GAAP)
Deferrals and Accruals
• Deferral - postponement of the recognition of:
– “an expense already paid but not yet consumed”
– “a revenue already collected but not yet earned
or performed”
• Accruals – recognition of:
– “an expense incurred or consumed but unpaid”
– “a revenue earned or performed but uncollected”
Types of Adjusting Entries
Adjusting entries are classified as either deferrals or accruals.
Deferrals: Categories of adjusting entries
1. Prepaid expenses: Expenses paid in cash before they are
used or consumed.
2. Unearned revenues: Cash received before services are
performed.
Accruals:
1. Accrued revenues: Revenues for services performed but
not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred but not yet paid in
cash or recorded.
Adjusting for Deferrals
Prepaid Expense
• Kelz Advertizing Agency paid P8000 for 2
months rent in advance. By Jan. 31, half of the
asset had expired, and should be treated as an
expense.
To record:
DR. CR.
Rent Expense 4,000
Prepaid rent 4000
Prepaid Insurance
• Kelz Advertising Agency acquired a one year
insurance policy, paying P4,800 premiums. By
the end of one month part of the insurance
expired.
Insurance Expense 400
Prepaid Insurance 400
Supplies Expense
• Kelz Advertising Agency purchased art supplies,
P18,000 and office supplies, P8,000. At month’s
end count showed that art supplies costing
P13,000 and office supplies costing P6,000 are
still on hand.
Art Supplies Expense 5,000
Art Supplies 5,000
Office Supplies Expense 2,000
Office Supplies 2000
Depreciation of Property and Equipment
• Depreciation is the process of allocating the cost
of an asset to expense over its useful life.
• Contra Account – (ex. accumulated depreciation)
used to record reductions in a related account
and its normal balance is opposite of the related
account
• Book value is the difference between the cost of
any depreciable asset and its related accumulated
depreciation.
Depreciation of Property and Equipment
• The agency estimated that the art equipment,
P42,000 and office equipment P30,000 will last 5
years (60 months) and be worthless by the end of
that time. At month’s end record will show:
Depreciation Expense-Art Equipment 700
Accumulated Depreciation-Art Equipment 700
Depreciation Expense-Office Equipment 500
Accumulated Depreciation-Office Equipment 500
Unearned Revenues
• On Jan. 15 the Kelz Adv. Agency received
P10,000 as an advanced payment for art work
to be done for another agency. At the end of
the month, P4,000 of the art work was done
and accepted by the other agency.
Unearned Service Revenue 4,000
Service Revenue 4,000
DO IT!
The ledger of Hammond Company, on March 31, 2014, includes these
selected accounts before adjusting entries are prepared.
DR. CR.
Prepaid Insurance P3,600
Supplies 2,800
Equipment 250,000
Accumulated Depreciation—Equipment P50,000
Unearned Service Revenue 92,000
An analysis of the accounts shows the following.
1. Insurance expires at the rate of P100 per month.
2. Supplies on hand total P800.
3. The equipment depreciates P20,000 a month.
4. During March, services were performed for one-half
of the unearned service revenue.
Prepare the adjusting entries for the month of March.
By the end of October an analysis of the accounts shows:
1. Pioneer Advertising paid for a one-year fire insurance policy that expires each
month.
2. An inventory count at the close of business on October 31 reveals that P1,000 of
supplies are still on hand.
3. Pioneer Advertising assumes that depreciation on the equipment is P480 a year.
4. From an evaluation of the service Pioneer performed for Knox during October, the
company determines that it should recognize P400 of revenue in October.
Instructions:
1. Journalize the adjusting
entries.
2. Post the adjustments
3. Prepare an Adjusted Trial
Balance for Pioneer
Advertising Agency.
DO IT!
General Journal:
Pioneer Advertising
Agency
GENERAL LEDGER:
PIONEER
ADVERTISING
AGENCY
Adjusting for Accruals
1. Accrued revenues: Revenues for services
performed but not yet received in cash or
recorded.
2. Accrued expenses: Expenses incurred but not
yet paid in cash or recorded.
Accruals:
Accrued Salaries
• Salaries was paid on the 12th and 26th day of the month.
Each pay covered 10 days of the month. At month’s end
the secretary has worked for 3 more days. The employee
has earned the salary for these days but it is not paid
until the regular payday. The salary for these 3 days is
rightfully an expense for this month. The secretary’s
salary rate is P6,000 every two weeks or P600/day
(P6000 for 10 working days)
• To record the accrued expense we have:
Salaries Expense 1,800
Salaries Payable 1,800
Accrued Interest
• On Jan 1, Del Mundo borrowed P30,000 from Monte
Bank. He issued a promissory note that carried a 20%
interest per annum. Both interest and principal will be
payable in one year. At the end of January part of the
interest owed should be recorded.
To record interest for 1 month:
Interest Expense 500
Interest Payable 500
Interest = Principal x Interest rate x length of time
= P30,000 x 0.20 x 1/12
= P500
Accrued Revenues
In October, Pioneer Advertising performed
services worth P12,000 that were not billed to
clients on or before October 31. Because these
services are not billed, they are not recorded.
The accrual of unrecorded service revenue
increases an asset account, Accounts
Receivable. It also increases owner’s equity by
increasing a revenue account, Service Revenue.
To record:
Accounts receivable 12,000
Service revenue 12,000
Do it!
Micro Computer Services began operations on August 1,
2016. At the end of August 2016, management prepares
monthly financial statements. The following information
relates to August.
1. At August 31, the company owed its employees
P32,000 in salaries and wages that will be paid on
September 1.
2. On August 1, the company borrowed P300,000 from a
local bank on a 15-year mortgage. The annual interest
rate is 10%.
3. Revenue for services performed but unrecorded for
August totaled P44,000.
Prepare the adjusting entries needed at August 31,
2016.
Let’s get serious!
The Skyline Motel opened for business on May 1, 2014. Its trial balance
before adjustment on May 31 is as follows.
In addition to those accounts listed on the trial balance, the chart of accounts for Skyline Motel
also contains the following accounts and account numbers:
No. 142 Accumulated Depreciation—Buildings No. 619 Depreciation Expense
No. 150 Accumulated Depreciation—Equipment No. 631 Supplies Expense
No. 212 Salaries and Wages Payable No. 230 Interest Payable
No. 718 Interest Expense No. 722 Insurance Expense.
Other data:
1. Prepaid insurance is a 1-year policy starting May 1, 2014.
2. A count of supplies shows P750 of unused supplies on May
31.
3. Annual depreciation is P3,000 on the buildings and P1,500
on equipment.
4. The mortgage interest rate is 12% annually. (The mortgage was
taken out on May 1.)
5. Two-thirds of the unearned rent revenue has been earned.
6. Salaries of P750 are accrued and unpaid at May 31.
A. Journalize the adjusting entries on May 31.
A.Prepare a ledger using the three-column form
of account. Enter the trial balance amounts
and post the adjusting entries. (Use J1 as the
posting reference.)
B.Prepare an adjusted trial balance on May 31.
Part 5 Adjusting the Accounts
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Part 5 Adjusting the Accounts

  • 1. Adjusting the Accounts STEP 5 Michael A. Alonzo, LPT ABM Inter-Global College Foundation, Inc.
  • 2. Fiscal and Calendar Years • Accounting time periods are generally a month, a quarter, or a year. • interim periods - Monthly and quarterly time periods. • fiscal year - An accounting time period that is one year in length. – A fiscal year usually begins with the first day of a month and ends 12 months later on the last day of a month. • calendar year - (January 1 to December 31)
  • 3. Accrual- versus Cash-Basis Accounting • Accrual-basis accounting. Under the accrual basis, companies record transactions that change a company’s financial statements in the periods in which the events occur. For example, using the accrual basis to determine net income means companies recognize revenues when they perform services (rather than when they receive cash). It also means recognizing expenses when incurred (rather than when paid). • cash-basis accounting, companies record revenue when they receive cash. They record an expense when they pay out cash. – Cash basis accounting is not in accordance with generally accepted accounting principles (GAAP)
  • 4. Deferrals and Accruals • Deferral - postponement of the recognition of: – “an expense already paid but not yet consumed” – “a revenue already collected but not yet earned or performed” • Accruals – recognition of: – “an expense incurred or consumed but unpaid” – “a revenue earned or performed but uncollected”
  • 5. Types of Adjusting Entries Adjusting entries are classified as either deferrals or accruals. Deferrals: Categories of adjusting entries 1. Prepaid expenses: Expenses paid in cash before they are used or consumed. 2. Unearned revenues: Cash received before services are performed. Accruals: 1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.
  • 7. Prepaid Expense • Kelz Advertizing Agency paid P8000 for 2 months rent in advance. By Jan. 31, half of the asset had expired, and should be treated as an expense. To record: DR. CR. Rent Expense 4,000 Prepaid rent 4000
  • 8. Prepaid Insurance • Kelz Advertising Agency acquired a one year insurance policy, paying P4,800 premiums. By the end of one month part of the insurance expired. Insurance Expense 400 Prepaid Insurance 400
  • 9. Supplies Expense • Kelz Advertising Agency purchased art supplies, P18,000 and office supplies, P8,000. At month’s end count showed that art supplies costing P13,000 and office supplies costing P6,000 are still on hand. Art Supplies Expense 5,000 Art Supplies 5,000 Office Supplies Expense 2,000 Office Supplies 2000
  • 10. Depreciation of Property and Equipment • Depreciation is the process of allocating the cost of an asset to expense over its useful life. • Contra Account – (ex. accumulated depreciation) used to record reductions in a related account and its normal balance is opposite of the related account • Book value is the difference between the cost of any depreciable asset and its related accumulated depreciation.
  • 11. Depreciation of Property and Equipment • The agency estimated that the art equipment, P42,000 and office equipment P30,000 will last 5 years (60 months) and be worthless by the end of that time. At month’s end record will show: Depreciation Expense-Art Equipment 700 Accumulated Depreciation-Art Equipment 700 Depreciation Expense-Office Equipment 500 Accumulated Depreciation-Office Equipment 500
  • 12. Unearned Revenues • On Jan. 15 the Kelz Adv. Agency received P10,000 as an advanced payment for art work to be done for another agency. At the end of the month, P4,000 of the art work was done and accepted by the other agency. Unearned Service Revenue 4,000 Service Revenue 4,000
  • 13. DO IT! The ledger of Hammond Company, on March 31, 2014, includes these selected accounts before adjusting entries are prepared. DR. CR. Prepaid Insurance P3,600 Supplies 2,800 Equipment 250,000 Accumulated Depreciation—Equipment P50,000 Unearned Service Revenue 92,000 An analysis of the accounts shows the following. 1. Insurance expires at the rate of P100 per month. 2. Supplies on hand total P800. 3. The equipment depreciates P20,000 a month. 4. During March, services were performed for one-half of the unearned service revenue. Prepare the adjusting entries for the month of March.
  • 14. By the end of October an analysis of the accounts shows: 1. Pioneer Advertising paid for a one-year fire insurance policy that expires each month. 2. An inventory count at the close of business on October 31 reveals that P1,000 of supplies are still on hand. 3. Pioneer Advertising assumes that depreciation on the equipment is P480 a year. 4. From an evaluation of the service Pioneer performed for Knox during October, the company determines that it should recognize P400 of revenue in October. Instructions: 1. Journalize the adjusting entries. 2. Post the adjustments 3. Prepare an Adjusted Trial Balance for Pioneer Advertising Agency. DO IT!
  • 18. 1. Accrued revenues: Revenues for services performed but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded. Accruals:
  • 19. Accrued Salaries • Salaries was paid on the 12th and 26th day of the month. Each pay covered 10 days of the month. At month’s end the secretary has worked for 3 more days. The employee has earned the salary for these days but it is not paid until the regular payday. The salary for these 3 days is rightfully an expense for this month. The secretary’s salary rate is P6,000 every two weeks or P600/day (P6000 for 10 working days) • To record the accrued expense we have: Salaries Expense 1,800 Salaries Payable 1,800
  • 20. Accrued Interest • On Jan 1, Del Mundo borrowed P30,000 from Monte Bank. He issued a promissory note that carried a 20% interest per annum. Both interest and principal will be payable in one year. At the end of January part of the interest owed should be recorded. To record interest for 1 month: Interest Expense 500 Interest Payable 500 Interest = Principal x Interest rate x length of time = P30,000 x 0.20 x 1/12 = P500
  • 21. Accrued Revenues In October, Pioneer Advertising performed services worth P12,000 that were not billed to clients on or before October 31. Because these services are not billed, they are not recorded. The accrual of unrecorded service revenue increases an asset account, Accounts Receivable. It also increases owner’s equity by increasing a revenue account, Service Revenue. To record: Accounts receivable 12,000 Service revenue 12,000
  • 22. Do it! Micro Computer Services began operations on August 1, 2016. At the end of August 2016, management prepares monthly financial statements. The following information relates to August. 1. At August 31, the company owed its employees P32,000 in salaries and wages that will be paid on September 1. 2. On August 1, the company borrowed P300,000 from a local bank on a 15-year mortgage. The annual interest rate is 10%. 3. Revenue for services performed but unrecorded for August totaled P44,000. Prepare the adjusting entries needed at August 31, 2016.
  • 23. Let’s get serious! The Skyline Motel opened for business on May 1, 2014. Its trial balance before adjustment on May 31 is as follows.
  • 24. In addition to those accounts listed on the trial balance, the chart of accounts for Skyline Motel also contains the following accounts and account numbers: No. 142 Accumulated Depreciation—Buildings No. 619 Depreciation Expense No. 150 Accumulated Depreciation—Equipment No. 631 Supplies Expense No. 212 Salaries and Wages Payable No. 230 Interest Payable No. 718 Interest Expense No. 722 Insurance Expense. Other data: 1. Prepaid insurance is a 1-year policy starting May 1, 2014. 2. A count of supplies shows P750 of unused supplies on May 31. 3. Annual depreciation is P3,000 on the buildings and P1,500 on equipment. 4. The mortgage interest rate is 12% annually. (The mortgage was taken out on May 1.) 5. Two-thirds of the unearned rent revenue has been earned. 6. Salaries of P750 are accrued and unpaid at May 31. A. Journalize the adjusting entries on May 31.
  • 25. A.Prepare a ledger using the three-column form of account. Enter the trial balance amounts and post the adjusting entries. (Use J1 as the posting reference.) B.Prepare an adjusted trial balance on May 31.