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MGT 111

Adjusting Entries
Sergs F. Sancon

Prepared

by:

Mr.

ADJUSTING THE ACCOUNTS


The Revenue and Matching Principle
The revenue and matching principle dictates when to recognize revenue and what amount of
revenue should be recognized. In most cases, revenue is earned when the enterprise has
delivered the goods or the services. To match the revenue, the enterprise must identify and
recognize these expenses against the revenue earned during the period to arrive at the net
income.
Importance of Adjusting Entries
Adjusting entries are made at the end of the period to assign revenues to the period in which they
are earned and expenses in which they are incurred. Many accounts (see table below) needs
need adjustments to reflect the current conditions as of time of reporting in order for the
statements to be meaning full.

Accounts

1.

Prepaid
Expenses

Explanation

Original Entry

Adjusting Entry

Are
expenditures
paid for goods or
services that are not
yet
incurred
or
consumed.(e.g.
insurance,
rent,
supplies)

Assets Method
Prepaid
Expenses
xxx
Cash
xxx
Expense Method
Expenses
xxx

Expenses
xxx
Prepaid Expenses
xxx

Prepaid
xxx
Cash

xxx

Expenses
Expenses

xxx

2.

Accrued
Expenses

Items
already
recorded
as
expenses but not yet
paid.
(e.g.
salaries,
utilities, etc.)

Expenses
xxx
Accrued expenses
xxx

3.

Accrued
Income

Are revenues already


earned
but
no
payment is received
yet. (e.g. interest,
commission, etc.

Receivable
xxx

4.

Unearne
d Income

Payment is received
in advance prior to
delivery of goods or
services. (e.g. rent,
subscription, etc.)

Income
xxx

Liability Method
Cash
xxx
Unearned Income
xxx
Income Method
Cash
xxx

Unearned
xxx

Income
Income

xxx

Income
xxx

Income
xxx
5. Depreciat
ion

6. Doubtful
Accounts
or
Bad
Debts

Unearned Income
xxx

A systematic means
of allocating the cost
of long-lived assets
over its estimated
economic life.

Depreciation
xxx

Are
accounts
of
customers who do
not pay that they
promised to pay.

Doubtful accounts expense


xxx
Allowance for D/A
xxx

Depreciation

Expense
Accumulated
xxx

Page 2
Leo Randall Thompson, the owner of Day Spa Parlor, presented to you the trial balance of her
parlor to help her determine the net income for the year just ended.
DAY SPA PARLOR
Trial Balance
December 31, 2013
Debit
Cash on hand

60,000

Cash in bank

120,000

Accounts receivable

60,000

Notes receivable

20,000

Parlor supplies

87,000

Prepaid rent

43,000

Rental deposit

50,000

Equipments
Accumulated depreciation E

120,000

Furnitures & Fixtures


Accumulated depreciation F&F

80,000

Building improvements
Accumulated depreciation BI

96,000

Credit

20,000

16,000

19,200

Accounts payable

50,000

Unearned service revenue

40,000

Leo Randall Capita

400,000

Service Revenue

1,119,800

Advertising Expense

60,000

Salaries Expense

396,000

Commission Expense

200,000

Telephone Expense

30,000

Utilities Expense

93,000

Maintenance Expense

50,000

Rent Expense

100,000

Total

1,665,000

1,665,000

Additional information:
1. Leo Randall paid P43,000 on September 1, 2013 for 5 months rental of its parlor space.
2. All equipments, furniture and building improvements are depreciated at the rate of 10% per
annum.
3. The unearned service revenue amounting to P40,000 was received by the parlor on October 1,
2013 for services still to be rendered for a value client. Mr. Thompson confirmed that her
parlor already rendered services to said client amounting to P35,000.
4. Services rendered in the last three days of the year totaling P15,000 was not recorded by the
bookkeeper because no payment is made yet. The clients promised to pay their accounts in
the 1st week of January.
5. Commissions of attendants for the last three days of December amounting to P12,000 are to
be accrued.
6. Water consumption for the month of December amounting to P6,500 was not yet recorded but
the bookkeeper already scheduled the payment 1st week of January.
7. Telephone bills received on December 30, 2013 amounting to P4,800 was not yet recorded.
8. Inventory of parlor supplies showed P12,500 are unused at the end of the year.
Required:
a)

Adjusting entries required on December 31, 2013 (use a general journal)

b.

Prepare a worksheet (use a 10 column worksheet)

c.

Prepare financial statements (Income statement, balance sheet and owners equity

statement).

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