Review Materials

Prepared by:
Junior Philippine Institute of
Accountants UC-Banilad Chapter
F.Y. 2019-2020
Accounting for
Adjustments
KEY TERMS AND CONCEPTS TO REMEMBER:

Transactions:
• External transactions occur between two different entities and are easy to record because there
are always source documents evidencing the transaction

• Internal transactions occur within a single entity and are more difficult to record because source
documents may not always be present

Accounting Principles
 Matching Principle
 Forms the basis of accrual accounting
 States that revenue earned and the costs incurred to produce that revenue must be recorded
in the same period

 Revenue Recognition Principle

 States that revenue must be recognized (recorded) in the period in which it is earned

 Expense Recognition Principle (same as the matching principle)

 States that expenses must be recorded in the period in which the related revenue was
recognized

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KEY TERMS AND CONCEPTS TO REMEMBER:
Accrual Basis Accounting:

 Accrual vs. Cash Basis Accounting

 Deferred Expenses (expenses paid but not yet incurred; ASSET)
 Deferred Revenues (revenues received but not yet earned; LIABILITIES)
 Accrued Expenses (expenses incurred but not yet paid; LIABILITIES)
 Accrued Revenues (revenues earned but not yet received; ASSET)

Journalizing adjusting entries

 Always have at least one income statement account (revenue or expense) and
one balance sheet account (asset or liability)

 NEVER record for cash, dividends, capital stock or retained earnings

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KEY TERMS AND CONCEPTS TO REMEMBER:

EFFECT OF OMITTING ADJUSTING ENTRY

TYPE OF WHAT ADJUSTING ON ACCOUNT ON FINANCIAL
ADJUSTING ENTRY ENTRY DOES BALANCE STATEMENT

Increase expense Understate expenses Overstates net income

Deferred Expense
Decrease asset Overstate assets Overstates total assets

Increase revenue Understate revenue Understate net income

Deferred Revenue
Decrease liability Overstate liability Overstate total liabilities

Increase expense Understate expense Overstate net income

Accrued Expense
Understate total
Increase liability Understate liability
liabilities

Increase revenue Understate revenue Understate net income

Accrued Revenue
Increase asset Understate asset Understate total asset

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KEY TERMS AND CONCEPTS TO REMEMBER:
Depreciation
 All long-lived assets are depreciated except for land
 Depreciation accounts for the decline in usefulness of a long-lived asset over its useful life
 Systematically records a portion of the cost of a long-lived asset as an expense to match against
the revenue in the accounting period
 Depreciation expense is frequently calculated using the straight-line method
 Adjusting entry for depreciation is always
Depreciation expense xxx
Accumulated depreciation xxx
 The asset account is NOT credited for the decline in value; instead the credit is recorded in a
contra-asset account, accumulated depreciation

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KEY TOPICS:

1. Adjusting entries are required to record internal transactions and to bring asset and liability
accounts to their proper balances and record expenses or revenues in the proper accounting period.
 Therefore adjusting entries always affect one income statement account (revenue or expense) and
one balance sheet account (asset or liability).
 Adjusting entries are prepared either when:
The current unadjusted balance in the account is known and the amount of the activity to be
adjusted is known
The current unadjusted balance in the account is known and the required balance after
adjustment is known.
 There are two basic types of adjusting entries: Deferrals and Accruals

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ADJUSTING ENTRIES

“
▪ Example #1
▪ Binsoy Company has a $1,000
unadjusted balance in the
Office Supplies account on
▪ December 31.
▪ Required: What is the
proper adjusting entry if
Johnson could determine
▪ a) The amount of supplies
remaining unused?
▪ b) The amount of supplies
actually used?

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ADJUSTING ENTRIES
Solution#1
a): If Binsoy Company simply counted the remaining supplies on December 31 and determined that
they had an ending balance of $450, the Office Supplies account would look like this:

The adjustment would be: $1,000 – 450 = $550, the amount used.

Dec. 31 Supplies expense 550

Office Supplies 550

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ADJUSTING ENTRIES
Solution#1
b): If Binsoy Company had required employees to fill out a form noting the supplies used each time
they were taken from the supply cabinet, the supplies used would add up as $550. The Office
Supplies account would look like this:

The adjustment would be the amount used, $550

Dec. 31 Supplies expense 550
Office Supplies 550
 Notice several things about the adjusting entry:
 The entry was the same in both situations.
 The entry was made for the amount of activity or change in the account during the period.
 The entry included one balance sheet account, Office Supplies and one income statement account,
Supplies Expense.
 The ending balance in the account WAS NOT part of the adjusting journal entry.
Rather, the adjusting entry was recorded to create the proper ending balance in the
account.
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KEY TOPICS:
2. DEFERRALS occur when cash changes hands prior to when the revenue is earned or expense is
incurred. Recording the revenue or expense is postponed or deferred until a subsequent economic
event has occurred which causes revenue to be earned or expense to be incurred.

 Deferred Revenues (also referred to as unearned revenue) are initially recorded as a liability and
adjusted at the end of the period for the portion that has been earned. This occurs when payment is
received in advance of performing the service.

 Deferred Expenses (also referred to as prepaid expenses) are initially recorded as assets and
adjusted at the end of the period for the portion that has been used up or expired.

3. ACCRUALS occur when revenue is earned or expense is incurred prior to the cash changing hands.

 Accrued Revenues – are revenues that have been earned, but have not been recorded.
Payment has not been received.

 Accrued Expenses – are expenses that have been incurred and a debt or liability is owed to a
third party; however neither the expenses nor liability have been recorded.

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EXAMPLE # 2

The following information is available as of year-end.

a. Unexpired insurance at December 31 $1,500
b. Supplies on hand at December 31 $400
c. Depreciation of building for the year $1,750
d. Depreciation of equipment for the year $5,800
e. Revenue unearned at December 31 $2,000
f. Accrued salaries and wages at December 31 $2,300
g. Fees earned but unbilled on December 31 $4,850

Required:
1. Journalize the adjusting entries , label them as accruals or deferrals.
2. Determine the adjusted balances of the accounts and prepare an adjusted trial balance

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EXAMPLE # 2

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EXAMPLE # 2

Solution:

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EXAMPLE # 2

Solution:

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KEY TOPICS:

4. ADJUSTING ENTRIES AND ERRORS

 Failure to journalize and post adjusting entries at the end of the period will cause multiple
financial statement items to be misstated.
 At least one balance sheet account and one income statement account for each entry not made or
incorrectly made.
Example #3
A Company failed to record accrued wages of $5,000 at the end of the period.
Required:
a) Determine the adjusting entry that should have been made.
b) Determine which accounts and financial statements would have been affected by the
error.
c) Determine whether the accounts and financial statements would have been
understated or overstated and the amount of the misstatement.

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EXAMPLE # 3

Solution:
The adjusting entry should have been:
Wages Expense 5,000
Wages Payable 5,000
Failing to record this entry caused the following errors:
a) Wages Expense will be understated by $5,000, so
b) Total Expenses will be understated by $5,000, so
c) Net Income will be overstated by $5,000, and when closed to RE,
d) Retained Earnings will be overstated by $5,000.
e) Wages Payable will be understated by $5,000, so
f) Total Liabilities will be understated by $5,000

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 End of Topic
Please see complementary test bank for
practice problems and theories.

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 Dear, you.
Always be in pursuit for
the one you have not yet
become. Keep going!
Love,
Your UCB-JPIA family

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Reference:
Mulyana, A. (2016). Accounting for adjusting entries key terms
and concepts to know. Retrieved on July 20, 2020 from
https://www.academia.edu/37543877/ACCOUNTING_FOR_A
DJUSTING_ENTRIES_Key_Terms_and_Concepts_to_Know
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