WORKSHEET AND ADJUSTING ENTRIES

Objectives
a. To determine the different accounts subject to adjusting entries
b. To be aware of the different accounts subject to adjusting entries and the methods to
be applied to observe.

Introduction
Accounting period is any length of time in which the life of the business is divided. Scuh
time may either be a monthly period, quarterly period or a year.
At the end of each accounting period, financial reports are prepared to show the results
of the business operations. Such reports which always include the income statement
and statement of financial position (formerly balance sheet) should reflect the revenues
realized and expenses incurred and a fairly measures of the assets, liabilities and
owners equity.
The proper determination of periodic net income and the accurate presentation of
assets and liabilities would be achieved if there is a proper matching or revenues and
expenses. The proper matching can be done if accrual method of accounting is
employed.
Revenues should be recognized in the accounting period when it is earned regardless
of when it is collected. In other words, revenues should be reflected in the period to
which properly belongs, that is, the period in which it was incurred.
The process of preparing adjusting entries involves careful analysis of the accounts,
supporting documents, and other vital information to determine if entries would be
necessary to adjust the account balances. Once this analysis is completed, adjusting
entries are prepared and recorded in the journal.
Normally at the end of each accounting period, there are several accounts that need to
be adjusted.

NEED FOR ADJUSTMENT
1. To reflect the proper amounts of revenues realized and expenses incurred during
a period.
2. To show a fairly measures of the assets, liabilities and owners equity.
ACCOUNTS THAT NEED TO BE ADJUSTED
1. Adjustment for the expiration of payments of expenses
2. Adjustment for the realization of income collected in advance
3. Adjustment for the accrual of expenses
4. Adjustment for the accrual income
5. Provision for bad debts
6. Provision for depreciation
ADJUSTMENTS FOR THE EXPIRATION OF PAYMENTS OF EXPENSES
Prepaid expenses are expenses paid in advance. At the time of payment, the account is
an asset and as it is used, it becomes an expense. The adjusting entry for this account
depends on the original entries made when it was paid.
There are two methods used:
1. ASSET METHOD. Under this method, the original entry made is changed to an
asset account. If the account is debited at the time of payment is made, then the
company is using the asset method. Examples are prepaid insurance, prepaid
rent, and etc. At the end of the accounting period, portion of these assets may
be used up, and therefore are no longer assets in its entirety. The unused
portion remains to be an asset but the uses portion must be reclassified as an
expense. In other words, these accounts are called mixed accounts, since they
posses both the characteristics of an asset and the characteristics of an
expense.
The adjusting journal entry accomplishes two objectives:
a. It reduced the asset account to a correct amount.
b. It recognized the expense incurred by the business

2. EXPENSE METHOD. Under this method, expense account is charged when
payment is made. Examples are insurance expense, rent expense, and the like.
At the end of the accounting period, portion of these expenses may remain to be
unused, and therefore are not expense in its entirety. There is a need to re-
classify the unused portion from expense account to an asset account. The used
portion remains to be since they posses both the element of an expense and the
elements of an asset.

The adjusting journal entry accomplishes two objectives:
a. It reduced the expense account to a correct amount.
b. It recognized the asset owned by the business.
ADJUSTMENT FOR THE REALIZATION OF INCOME COLLECTED IN ADVANCE
OR UNEARNED INCOME
Unearned income arises when payment is received before goods are delivered or
before services is rendered. There are two methods to be used: the income method and
the liability method. Again, the method to be used depends on the original entries made.
1. INCOME METHOD. Under this method, income account is credited when cash is
received. A liability account is credited at the time the income is realized. There is
a liability because the firm has an obligation to the customer to render service in
the future. Examples are unearned service revenue, rent collected in advance,
pre-collected interest, etc.

The adjusting journal entry accomplishes two objectives:
a. It reduced the liability account to a correct amount.
b. It recognized the income earned by the business at year-end.

2. LIABILITY METHOD. Under this method, a liability account is credited upon
receipt of cash. A revenue or income account is credited at the time the income
is realized. The credit to revenue account can be justified for the reason that the
ultimate outcome of this transaction is the generation of revenue. Examples are
rent revenue, service revenue, interest revenue, and the like.
The adjusting journal entry accomplishes two objectives:
a. It reduced the income account to a correct amount.
b. It recognized the liability of the business to its customers for services yet
to be rendered.

ACCRUAL OF EXPENSES
Accrued expenses are those expenses already incurred during the period but are not
yet paid. At the end of the accounting period, the income statement should reflect a
liability account. The adjusting entries to record accrual of expenses are debit the
expense account and credit the liability account.
Accrued means an item grow or increase with the passage of time. Examples are the
daily electrical and water consumption, the daily interest earned on a time deposit
account, or the daily salaries earned by employees. All of these items grow or
accumulates with the passage of time. It is not practical, and may not be possible, to
make an entry in the books each day electricity is consumed, each day of the interest is
earned, or each day employees rendered their services. This is too cumbersome and
too costly. Nevertheless accrued items should be included in the companys records by
way of preparing adjusting journal entries.

ADJUSTMENT FOR ACCRUED EXPENSES
An adjustment for accrued expenses would be necessary if expenses already incurred
in the current period are not yet recorded since it is not yet paid. Accrued expenses are
expenses already incurred but not yet paid, and therefore, not yet reflected in the books.
It is a common practice that a business may record expenses on its book either at the
time an invoice (or any supporting documents) is received from a supplier or at the
expenses is paid. For example, utility expense like electricity is usually recorded when
the electric companys bill is received; interest on money borrowed is usually paid and
recorded upon payment of the principal; employees wages expense is usually recorded
at the time when the employees are paid their wages.
ADJUSTMENT FOR ACCRUAL OF INCOME
Accrued income arises when goods have been delivered or services have been
rendered but no amount payment have been collected or if there is payment, such
collection is not yet recorded. In order to avoid understatement of income and asset, an
adjusting entry is needed at the end of the period. The entry to adjust accrual of income
is to debit the asset account and credit the income account.
Two common examples of accrued income/revenues are interest earned on time
deposit accounts and rent earned for which cash has not yet been received. When
accrued income/revenues occur, these should be accounted for in the books so that
they will be included and reported on the financial statements.

PROVISION FOR BAD DEBTS (Doubtful accounts or uncollectible accounts)
Usually most business firms extend credits to attract more customers and to sell more
goods. However, not all credits extended are good or collectible for a reason or another.
A certain percentage of these collectibles are not collected. For this reason, the
business should provide for such losses for non-collection of credits. This loss from
uncollectible accounts is called bad debts. Bad debts are nominal account which must
be shown in the income statement at the end of the accounting period.
An account receivable that is doubtful of collection is known as bad accounts or bad
debts. An uncollectible account is the other term for bad debts. The expense caused by
uncollectible accounts is called bad debts expense or and would be classified as part of
business operating expenses. Other descriptive account title may also be used such as
doubtful account expense or uncollectible account expense.
PROVISION FOR DEPRECIATION
Assets which are relatively permanent in nature are fixed assets. They are used by the
business in its operation and are not intended for sale. The value of these assets,
except land, decreases as time passes by due to the following reasons:
1. Wear and tear from operations
2. Inadequacy and obsolescence
An asset is said to be inadequate for the business if there is business expansion and
the asset can no longer fulfill the needs of the business.
It is said to be obsolete in the introduction of new models or inventions and the business
desires to replace the old asset with a new one.
The cost of the fixed asset is allocated to the number of its useful life. Depreciation is
the portion of the cost of the asset which is already used or consumed.
DEPRECIATION
Depreciation is the systematical allocation of the cost of depreciable asset over its
useful life. The amount allocated in each period is called depreciation expense, which
will be shown as part of the business operating expense.
Depreciation is an expense account. Accumulated depreciation is a contra asset
account. A contra asset account is an account the balance of which is deducted from
a related asset to show the proper amount of such asset. The asset account is not
credited to preserve the historical cost of the asset. Instead, a contra asset account is
credited because depreciation is merely an estimate and to preserve the original cost of
the asset.
Three factors that must be considered in determining depreciation:
1. Acquisition cost it is the amount paid or liability incurred during the time the
depreciable asset is bought.
2. Srap value also known as salvage value or scrap value, is simply the estimated
value of the depreciable assets at the end of its useful life
3. Estimated useful life is the estimated length of time usually stated in number
of years during which the asset will be commercially useful to the business
Straight-line method. This method allocated an equal amount of depreciation, which is
charged to expense for each year the asset becomes beneficial to the business. The
formula in determining the annual depreciation is as follows:
Depreciation = Cost - Scrap Value
Estimated Useful Life



Ballada, Win and Ballada, Susan. Basic Accounting. 17
th
Edition. Domdane Publishers and
Made Easy Books. Manila. 2012
Chua, Manuel Jr. C.M, et.al. Fundamentals of Accounting Principles Theory and Applications.
National Book Store. Manila. 2005