The T-Account will appear as follows: ASSET METHOD
Dec 31 – Rent Expense P1, 000
Rent Expense Prepaid Rent P1, 000
Dec 1 P3, 000 Dec 31 P2,
000 EXPENSE METHOD
Dec 31 – Prepaid Rent P2, 000
Rent Expense P2, 000
Prepaid Rent
Dec 31 P2, 000
Unearned Revenue 2 methods of recording Unearned Income
- Income already collected but not yet 1. Income Method – when an income account
earned is credited at the time the money is received
- Income received in advance before 2. Liability Method – when a liability account is
services are rendered. credited at the time the money is received
INCOME METHOD
Example: Dec 1 Cash P3, 000
Commission Income P3, 000
On December 1, 2016, Mr. Reyes received P3, 000
as his advance commission for the month of Adjusting at the end of the accounting period
December. Only P2, 000 has been earned
Dec 31 Commission Income
Unearned Commission Income
December 31 Interest Expense 467.67 ACCRUED INCOME
Interest Payable 467.67
- Income already earned but not yet collected
To record the unpaid expense
and recorded
- To adjust accrued income, debit receivable
P20, 000 x 14% x 60/360 = P467.67
and credit income
Examples: Example Problem
1. Interest Receivable XXX A company receive a 60 day 12% note, dated
Interest Income XXX December 1, 2016 amounting to P100, 000. Interest is
2. Commission Receivable XXX receivable upon the maturity date
Commission Income XXX
Dec 31 Interest Receivable 1, 000
Interest Income 1, 000
To record uncollected Income
P100, 000 x 12% x 30/360 = P 1, 000
Adjusting Entries – are journal entries usually
prepared at the end of the accounting period to
update the records in order to present accurate
ADJUSTING
financial reports
Accounting Period – any period in the life of the
ENTRIES business where financial reports are prepared
2 General Types of Adjustments
Why is there a need for adjusting entries? 1. Deferral – is the recognition of “an expense
already paid but not yet incurred” or “an income
Adjusting entries are needed because there are already collected but not yet earned”
other transactions which are not yet recorded 2. Accrual – is the recognition of “an expense
during accounting period. already incurred but unpaid” or “an income
earned but uncollected”
Prepaid Expense 2 methods for recording Prepaid Expense
- Expenses paid in advance which have not yet 1. Asset Method – when an asset account
been received. At the end of accounting is debited at the time of payment
period, these are adjusted to reflect asset 2. Expense Method – when an expense
portion and expired cost. account is debited at the time of payment
- Expenses already paid but not yet consume
ASSET METHOD
Entry at the time of payment
Example problem for Prepaid Expense Dec 1 – Prepaid Rent P3, 000
Cash P3, 000
On December 1, 2016, the business paid P3, 000 Payment of 3 months rental
for 3 months rental starting December 1 Adjusting at the end of accounting period
Dec 31 – Rent Expense P1, 000
Prepaid Rent P1, 000
To record expire cost
The T-Account will appear as follows: EXPENSE METHOD
Entry at the time of payment
Prepaid Rent Dec 1 – Rent Expense P3, 000
Dec 1 P3, 000 Dec 31 P1, 000 Cash P3, 000
To record payment of Rent
P2, 000 Adjusting at the end of accounting period
Dec 31 – Prepaid Rent P2, 000
Rent Expense Rent Expense P2, 000
Dec 1 P1, 000 To record Prepaid Rent
