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Principles of Accounting (MGT109-1)
Module 4
ADJUSTING THE ACCOUNTS

Time-Period Assumption
The time period (or periodicity) assumption assumes that the economic life of a business can be
divided into artificial time periods
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The accounting time period of one
year in length is usually known as a fiscal year
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Under cash basis accounting, revenue is recorded only when cash is received and expenses are
recorded only when paid
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Revenue Recognition Principle
The revenue recognition principle states that revenue should be recognized in the accounting period
in which it is earned
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Adjusting Entries
Adjusting entries are made in order for:
a
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b
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Adjusting entries are required every time financial statements are prepared
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Prepayments
Prepaid expenses are expenses paid in cash and recorded as assets before they are used or
consumed
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An
asset-expense account relationship exists with prepaid expenses
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The adjusting entry results in a debit to an expense
account and a credit to an asset account
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To illustrate a prepaid adjusting entry, assume on October 1, Kubitz Company pays P2,400 cash to
Sandy Insurance Co
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The adjusting entry at October
31 is:
Insurance Expense (P2,400 X 1/12)
Prepaid Insurance

200
200

Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational
and systematic manner
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Depreciation is
an estimate rather than a factual measurement of the cost that has expired
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In recording depreciation, Depreciation Expense is
debited and a contra asset account, Accumulated Depreciation, is credited
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The difference between the cost of the
asset and its related accumulated depreciation is referred to as the book value of the asset
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purchases a machine for P6,000
cash on January 1, 2012
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Unearned
revenues are subsequently earned by rendering service to a customer
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Prior to adjustment, liabilities are overstated and
revenues are understated
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Examples of unearned revenues include rent, magazine subscriptions, and customer
deposits for future service
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receives P3,000
cash from a renter in payment of monthly rent for the period October through December
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Accrued revenues may
accumulate with the passing of time as in the case of interest and rent, or through services performed but
not billed or collected
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Prior to
adjustment, both assets and revenues are understated
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To illustrate an accrued revenue adjusting entry, assume in October, Mayer, a dentist, performs P800 of
services for patients who are not billed until November
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Accrued expenses result from
the same causes as accrued revenues and include interest, rent, taxes, and salaries
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Prior to adjustment, both liabilities and expenses
are understated
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To illustrate an accrued expense adjusting entry, assume Schwenk Company incurs salaries of P4,000
during the last week of October that will be paid in November
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Adjusted Trial Balance
After all adjusting entries have been journalized and posted an adjusted trial balance is prepared
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The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total
credit balances in the ledger after all adjustments have been made
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Principles of Accounting (MGT109-1)
Exercises
1
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Fees accrued but unbilled at August 31 are P9,560
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The supplies account balance on August 31 is P3,150
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c
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d
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e
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Instructions: Journalize the adjusting entries required at August 31, 2012
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Selected account balances before adjustment for Oval Realty at April 30, 2012, the end of the current
year, are shown at the top of the next page
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Supplies on hand at April 30, P600
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Depreciation of equipment during year, P1,000
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Rent expired during year, P6,000
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Wages accrued but not paid at April 30, P1,900
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Unearned fees at April 30, P3, 750
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Unbilled fees at April 30, P4, 500
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3
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, an outfitter store for fishing treks, prepared the following unadjusted trial
balance at the end of its first year of operations:
Wind River Outfitters Co
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Supplies on hand on February 28 were P750
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Fees earned but unbilled on February 28 were P2,900
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Depreciation of equipment was estimated to be P5,400 for the year
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Unpaid wages accrued on February 28 were P800
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The balance in unearned fees represented the February 1 receipt in advance for services to be
provided
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Instructions: Journalize the adjusting entries necessary on February 28
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Jacksonville Financial Services Co
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Jacksonville Financial Services Co
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Jacksonville Financial Services Co
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Depreciation of building for the year, P2,100
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Depreciation of equipment for the year, P3,000
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Accrued salaries and wages at December 31, P800
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Unexpired insurance at December 31, P1,500
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Fees earned but unbilled on December 31, P2,150
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Supplies on hand at December 31, P600
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Rent unearned at December 31, P1,500
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Add additional accounts as needed
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