Adjusting Entries
Ask what belongs in this period
Adjusting entries update incomplete accounts at period end so earned income and incurred expense fall in the proper period. Read the reporting date first: a monthly, quarterly, or annual question can need a different amount. These course adjustments do not involve a new cash payment or receipt.
The reason is accrual accounting: cash timing does not determine when a service is earned or a benefit is consumed. Every adjustment explains both sides of the change—an income or expense for this period and the asset or liability that remains at the reporting date. A trial balance can still balance while missing these changes.
Adjustment | Debit | Credit | Amount to find |
|---|---|---|---|
Accrued expense | Expense | Expense payable | Incurred but unrecorded |
Accrued revenue | Revenue receivable | Revenue | Earned but unrecorded |
Prepaid expense, asset method | Expense | Prepaid asset | Used portion |
Unearned revenue, liability method | Unearned revenue | Revenue | Earned portion |
Depreciation | Depreciation expense | Accumulated depreciation | Current-period allocation |
Doubtful accounts | Doubtful accounts expense | Allowance for doubtful accounts | Required allowance less existing credit balance |
Ending inventory, periodic course method | Merchandise inventory | Income summary | Physical ending inventory |
Source case givens
Find each relevant adjustment, ending asset or liability, and any related profit effect before reading the worked sections.
Agrias commission
All amounts are Philippine pesos (₱). During November, Agrias has 750 consigned units at the start and receives 3,000 more units. A November 30 count finds 400 unsold units. Commission is 8 per unit sold, and none of the November commission has been collected.
Insurance
All amounts are Philippine pesos (₱). On December 1, Harmon pays 27,000 for three months of evenly provided insurance coverage. The payment was debited to Prepaid insurance. The reporting date is December 31; no insurance expense has yet been recorded.
Unused supplies
All amounts are Philippine pesos (₱). Crown has supplies costing 7,500 available before adjustment. At December 31, a physical count finds 3,000 unused. The purchases were recorded as an asset; no supplies expense has yet been recognized.
Ticket receipts
All amounts are Philippine pesos (₱). A company sells 5,000 tickets at 300 each and credits all receipts to Unearned ticket fees. Each show admits 1,000 ticket holders. By December 31 it has performed two fully attended shows; the other three shows are still to be performed.
Advertising contract
All amounts are Philippine pesos (₱). A company receives 360,000 on August 1 for an advertising contract lasting three years (36 months). Revenue is earned evenly each month, starting August 1. All receipts were credited to Unearned advertising revenue. The reporting date is December 31 of the same year.
Depreciation
All amounts are Philippine pesos (₱). Equipment costs 325,000, has a residual value of 25,000, and is available for use for three years. Use straight-line depreciation. No impairment or disposal is involved. Compare equipment available from January 1 with equipment available from April 1 through December 31; monthly allocation applies and no prior depreciation exists in either first-year scenario.
Galaxy allowance
All amounts are Philippine pesos (₱). At December 31 before adjustment, Galaxy has Accounts receivable of 941,500 and a credit balance of 1,860 in Allowance for doubtful accounts. The required ending allowance is 3.2% of the receivable balance. Use the balance-sheet allowance method.
Lucero aging
All amounts are Philippine pesos (₱). At December 31, Lucero has a credit balance of 308 in Allowance for doubtful accounts before adjustment. Apply the specified uncollectible estimate to each receivable age group:
Age group | Receivable balance | Uncollectible rate |
|---|---|---|
Current | 41,000 | 2% |
1–30 days past due | 6,000 | 4% |
31–60 days past due | 2,000 | 10% |
Over 60 days past due | 1,500 | 30% |
Periodic inventory
All amounts are Philippine pesos (₱). Use the periodic inventory system. Beginning inventory is 188,500; purchases 457,274; purchase returns 18,565; purchase discounts 4,653; freight in 1,259; ending inventory from physical count 85,150. Net sales are 796,065 and operating expenses are 100,000.
Accruals
Repair work of ₱5,000 unpaid at year end: Dr Repair expense 5,000; Cr Repair payable 5,000. Rent earned but uncollected of ₱10,000: Dr Rent receivable 10,000; Cr Rent revenue 10,000.
The repair has already benefited the business, so its cost is expense; the unpaid amount is a liability. The rental service has already been provided, so revenue is earned and the right to collect is an asset. Do not use Cash in either adjustment: no payment or collection has occurred.
Agrias has 750 consigned units plus 3,000 delivered, less 400 unsold. Units sold = 3,350. At ₱8 commission each, earned uncollected commissions = ₱26,800.
Commission is earned on units sold, not on units merely received. Subtract the unsold count before multiplying by the per-unit commission; ₱3,350 would confuse the unit count with a peso amount. Record Dr Commissions receivable / Cr Commissions revenue because the sale has earned a claim that has not yet been collected.
For note interest, use only elapsed time in the reporting period. The rates below are annual, use simple interest and a 360-day year, and assume no interest has yet been accrued or received. A ₱60,000 note at 4%, issued December 10, has 21 elapsed days through December 31 under the workbook date convention: ₱140 interest receivable. A ₱12,000 note at 6%, issued September 8, has 114 elapsed days through December 31: ₱228 accrued interest. The full 180-day note interest is ₱360.
Substitute days as a fraction of the 360-day year: 60,000 × 4% × 21/360 = 140; 12,000 × 6% × 114/360 = 228. The second case is the borrower's expense and payable; the first is the lender's income and receivable. Full-term interest includes future days, so it is not the amount accrued at December 31.
Deferrals
Harmon pays ₱27,000 for three months of insurance on December 1 using the asset method. At December 31, one month has expired: expense ₱9,000, prepaid balance ₱18,000.
The used month is 27,000 × 1/3 = 9,000, so debit Insurance expense and credit Prepaid insurance. The other two months still provide a future benefit and remain an asset. Expensing all 27,000 immediately would charge next period's coverage to December.
Crown has ₱7,500 of supplies. If ₱3,000 is used, expense is ₱3,000 and remaining asset is ₱4,500. If ₱3,000 is unused, expense is ₱4,500 and remaining asset is ₱3,000. Read the word used/unused carefully.
The physical unused count measures the asset left for future work. Under the asset method, expense = available − unused; the adjustment moves consumption out of Supplies and into Supplies expense, regardless of whether the original purchase was paid in cash or on account.
Ticket receipts are ₱1,500,000 for 5,000 tickets at ₱300. Two completed 1,000-seat shows earn ₱600,000, leaving ₱900,000 unearned. A ₱360,000 three-year advertising contract beginning August 1 earns five of 36 months through December: ₱50,000, leaving ₱310,000. Of that remainder, the next 12 months is ₱120,000 current and later months ₱190,000 non-current in the course classification.
Receiving an advance creates an obligation; delivering the promised service earns revenue. Tickets earn 2 × 1,000 × 300 = 600,000, and advertising earns 360,000 × 5/36 = 50,000. Debit the unearned liability and credit revenue for that earned amount; the balance still owed remains a liability, with current/non-current classification based on when the service will be delivered.
For the workbook's ₱100,000 subscriptions, distinguish 30% earned from 30% unearned. The first earns 100,000 × 30% = 30,000; the second earns 100,000 × (100% − 30%) = 70,000. The adjusting entry always uses the earned portion under the liability method.
Straight-line depreciation
Annual depreciation = (Cost − Residual value) / Useful life in years
Period depreciation = Annual depreciation × Months used / 12
Carrying amount = Cost − Accumulated depreciation
Equipment cost ₱325,000, residual ₱25,000, useful life three years: depreciable amount ₱300,000, annual expense ₱100,000. If acquired January 1, year-one carrying amount is ₱225,000. If acquired April 1, nine-month expense is ₱75,000, and first year-end carrying amount is ₱250,000. Land is not depreciated in these introductory cases.
Residual value is excluded because it is the amount expected to remain after use: (325,000 − 25,000)/3 = 100,000 per year. April through December has nine months, so 100,000 × 9/12 = 75,000; 325,000 − 75,000 = 250,000 carrying amount. Accumulated depreciation includes prior periods when present; do not subtract residual value again when calculating carrying amount.
Depreciation is systematic cost allocation. It is not a cash reserve or a claim that accounting carrying amount equals resale price.
Doubtful accounts
Find the required ending allowance first, then the adjusting expense.
Galaxy: AR ₱941,500 × 3.2% = allowance ₱30,128. Less existing credit balance ₱1,860 = adjusting expense ₱28,268. NRV = AR less ending allowance = ₱911,372.
The target allowance is the full estimated uncollectible amount; the expense is only the extra credit needed to reach it. Recording 30,128 again would add to the existing 1,860 and overstate the allowance. For NRV, use the ending allowance, not the adjustment: 941,500 − 30,128 = 911,372 expected collectible.
Lucero aging:
Age | Receivables | Rate | Required allowance |
|---|---|---|---|
Current | ₱41,000 | 2% | ₱820 |
1–30 days past due | ₱6,000 | 4% | ₱240 |
31–60 days past due | ₱2,000 | 10% | ₱200 |
Over 60 days | ₱1,500 | 30% | ₱450 |
Total | ₱50,500 | — | ₱1,710 |
Existing credit allowance ₱308 → expense ₱1,402. NRV = 50,500 − 1,710 = ₱48,790. Do not apply one age-group percentage to all AR.
Each age group has a separate collection-risk estimate, so 820 + 240 + 200 + 450 = 1,710 is the combined allowance target. The 308 already recorded contributes toward that target: 1,710 − 308 = 1,402 additional expense. Subtracting only the 1,402 expense from receivables would ignore the existing allowance and overstate expected collections.
Ending inventory
The periodic worksheet closes beginning inventory to Income summary and records ending inventory. For the workbook inventory example: beginning inventory 188,500 + net purchase cost 435,315 = goods available 623,815. Deduct ending inventory 85,150: cost of sales 538,665. With net sales 796,065, gross profit is 257,400; less other expenses 100,000 yields 157,400 net profit.
Net purchase cost = 457,274 − 18,565 returns − 4,653 discounts + 1,259 freight in = 435,315. Ending inventory is deducted because unsold goods are still an asset, not this period's cost of sales. Recording Dr Merchandise inventory / Cr Income summary for 85,150 preserves that asset and removes its cost from the amount charged against sales.
Omitted adjustments
Omitted adjustment | Main errors |
|---|---|
Accrued expense | Expense/liability too low; profit/equity too high |
Accrued revenue | Revenue/asset too low; profit/equity too low |
Used prepaid expense | Expense too low; asset/profit/equity too high |
Earned unearned revenue | Liability too high; revenue/profit/equity too low |
Depreciation or doubtful accounts | Expense too low; net assets/profit/equity too high |
Ending inventory | Inventory too low; cost of sales too high; profit/equity too low |
The changes still must reconcile through Assets = Liabilities + Equity.
Trace an omission from the missing entry rather than memorizing arrows. A missing expense debit makes expense too low, so profit is too high; that inflated profit also makes equity too high. A missing revenue credit does the reverse. The missing asset, liability or contra-asset side explains how the accounting equation still reconciles.
Sources
FDNACCT Unit 4.7_Journalizing and posting adjusting entries_Study Guide.pdf, pp. 1–5; FDNACCT_Formula Guide_Quiz #3.pdf
FDNACCT Unit 4.7_Journalizing and posting adjusting entries_Class Exercise.xls