I.

Adjusting entries
a. We need them to assign to each accounting period appropriate amounts of
revenue and expense because some business activities affect the revenue and
expenses of multiple accounting periods
b. Needed at the end of each accounting period to make certain that appropriate
amounts of revenue and expense are reported in the companys I/S
c. i.e. magazine publishers, insurance policies
d. they assign revenues when they are earned and expenses when they are
incurred/used
e. only done at the end of each accounting period (cheaper)
f. Important to report results per period for evaluation and monitoring. Adjusting
entries help the F/S accurately present the results of the period
II. Types of adjusting entries
a. Converting assets to expense
i. A cash expenditure that will benefit more than one accounting period
usually is recorded by dr. asset and cr. Cash
ii. Results from cash being paid prior to an expense being incurred
iii. Prior period cash outflows to current period expenses
iv. You defer an expense
v. From SFP to I/S
vi. Allocate a portion of the expense to each future period that benefits from it
b. Converting liabilities to revenue
i. Happens when you collect cash in advance to sell goods or perform
services in future accounting periods
ii. Results from cash being received prior to revenue being earned
iii. Prior period cash inflows to current period revenue
iv. Dr. cash cr. Unearned revenue
v. You defer a revenue
vi. Make the adjusting entry (transfer the liability to equity) when goods are
sold or when services are rendered
vii. i.e GCs, starbucks card
c. Accruing unpaid expenses
i. You can incur expenses in the current period without paying in cash now
ii. Results from expenses being incurred before cash is paid
iii. Current period expenses to future cash outflows
iv. Dr. exp cr. Pay
v. i.e. interest, salary, utilities
d. Accruing unpaid expenses
i. You can earn revenue in the current period without collecting cash now
ii. Results from revenue being earned before cash is received
iii. Current period revenue to future period cash inflows
iv. Dr. A/R cr. Revenue
e. Note: Timing difference between cash flows and the recognition of expenses and
revenues
f. Note exhibit 4-1 on p. 146
III. Characteristics of adjusting entries
 a. Every adjusting entry involves the recognition of either revenue or expense
i. R and E change equity but since equity cannot change by itself, you also
need to change an SFP account (either A or L)
ii. It always involve a SFP account (A, L, E) and an I/S account (rev, exp)
iii. Adjusting entries rarely involve cash (when do they involve cash?)
b. Entries are based on accrual accounting and not upon monthly bills or month-end
transactions
i. They dont bill you for it but it is a function of usage and time
IV. Converting assets to expense
a. If expense benefits more than one accounting period = dr. asset then just transfer
portion used to expense
b. Dr. expense cr. Asset or cr. Contra-asset
c. Do shop supplies example
i. Use t-account to illustrate journal entry
d. Do insurance polivies example
i. Take note of the date
e. Recording prepayments directly in the expense accounts
i. Asset method = what we are doing
ii. Expense method = debit prepayments directly to an expense account (i.e.
supplies expense)
1. At the end of the period, dr. supplies cr. Supplies expense for the
portion that hasnt been used
2. Use t-account to explain
3. Same results as asset method
f. Depreciation
i. Depreciable objects: retain their size and shape but eventually wear out or
become obsolete; economic usefulness diminishes over time
1. i.e. buildings, equipment
2. not land = unli useful life because it only appreciates over time
(since it is scarce)
3. each period a portion of the usefulness expires = dep expense
ii. depreciation: systematic allocation of the cost of a DA over its useful life
1. DA contribute to revenue so an expense must be matched
(matching principle)
2. Depreciation entries at the end of every accounting period to
transfer a part of the assets cost to expense
3. Only an expense!
a. Methods of determining dep
i. Straight line: equal portion of the assets cost over
estimated useful life
4. Do p. 151 dep of overnights building
a. Note: acc. Dep. Is contra asset (deduction to building
account)
i. Normal balance: credit
ii. Offset against bldg. account
b. Building acc.dep = book value
 i. BV: remaining cost of the asset to be depreciated
ii. Incidation of the Age of the asset
iii. Different from current market value
5. Do dep of tools and equip (p. 152)
a. How do you get starting balance based on acc. Dep? Useful
life?
b. Sometimes dep is imputed in asset account (some
accounting problems)
6. Note that dep is a non-cash expense (hindi kasama sa SCF)
a. Affects profit because it helps earn revenue tho
V. Converting liabilities to revenue
a. Customers may pay in advance
i. i.e. season tickets, GCs, membership contracts
b. dr. cash cr. Liab (unearned revenue)
c. company has an obligation to perform services in the future so Unearned is a liab!
i. Appears in SFP not I/S
d. Worked off rather than paid off
e. At the end of the period, transfer to revenue the portion that you earned to a
revenue account!!
i. Dr. liab cr. Rev
f. Do p. 153
g. Recording advance collections directly in revenue accounts
i. Similar to expense method:
ii. Adjusting entry: dr. rev cr. Unearned for the portion not yet earned in the
period
iii. Use t-account to explain
VI. Accruing unpaid expenses
a. Recognizes expenses that will be paid in future transactions
b. i.e. salaries, interest: they accumulate day to day but arent recorded until they are
paid
c. dr. exp cr. Liab
d. do accrual of wages expense p. 154
i. take note of the date
e. do accrual of interest expense p. 155
i. I = PRT
ii. Also explain how you count months
iii. Note: remember to accrue int at the end of the year (impt for F/S
presentations)
iv. Draw a timeline
VII. Accruing uncollected revenue
a. You can earn revenue during current accounting period but not bill the customer
until a future period
b. Earned but not recorded
c. Dr. A/R cr. Rev
d. Accrued revenue: revenue earned during the period but hasnt been recorded prior
to closing date!!
 e. Do p.156
i. Make timeline!!
ii. Divide revenue for each month
VIII. Accruing income tax expense
a. Just brush on it
b. In phil: 32 %
c. Dr.ITE cr. ITP
d. Touch on DTA DTL etc etc
IX. Adjusting entries and accounting principles
a. Adjusting entries: means by which accountants apply the recognition and
matching principles
b. Revenues: recognized when earned; expenses: recognized when used
c. Recognition principle
i. At any point before the sale you cannot be sure of the ultimate sales value
ii. When the goods are sold or services are rendered then the earning process
is complete: you can objectively measure the revenue
d. Matching principle: types
i. Direct association of costs with specific revenue transactions
1. Ideal but hard to match
2. i.e. commissions to salesmen
ii. systematic allocation of costs over the useful life of the expenditure
1. dep, insurance
X. Materiality
a. Refers to the relative importance of an item or an event
b. Material if knowledge of that item might reasonably influence the economic
decisions of users
c. Dapat cost effective pa rin!
d. Immaterial: opposite
i. Okay lang na hindi masyado maingat in handling these types of accounts
e. Concept of materiality is helpful i.e.
i. Businesses purchase many assets with low cost so instead of accruing
them, just expense them directly
ii. May be charged to expense as they are paid not accrued (cash basis) for
convenience
iii. Accrual entries may be ignored if immaterial
f. Matter of professional judgement
i. Varies with the size of the organization
ii. Usually 2-3% of profit
iii. Consider also other factors
1. Cumulative effects of multiple transactions
2. Nature of the item! (petty theft by employees)
XI. Effects of the adjusting entries
a. ALWAYS: one I/S account one SFP account
b. Look at exhibit 4-8 p. 160
c. Once these adjustments are posted to the ledger, the company can prepare the
adjusted trial balance
i. This is where the numbers for the F/S are taken!!