BMSH2203
THE ADJUSTING PROCESS
Nature of the Adjusting Journal Entries
An entry in a company's general ledger called an adjusting journal entry is made at the end of an
accounting period to record unrecognized income or expenses for that period. Adjusting journal entries are
needed to appropriately account for a transaction that begins in one accounting period and ends in
another. These can also refer to financial reporting that corrects an error made during the accounting
period (Schmidt, 2023).
Accounting Period Concept
This concept requires that revenues and expenses be reported in the proper period.
Figure 1: Accounting Period Concept
Source: https://www.myaccountingcourse.com/
Importance of Adjusting Journal Entries
According to Tuovila (2022), adjusting journal entries play a key role in the accounting cycle. Many
businesses deliver goods at different times than the payment of goods, either beforehand in the case of
credit or afterward in the case of pre-payment.
Adjusting journal entries are used to reconcile these disparities in the timing of payments and expenses in
such a situation. There would still be unresolved transactions that have not been settled if the journal
entries were not altered.
Understanding Adjusting Journal Entries
Adjusting entries are used to convert cash transactions into the accrual accounting method. As per the
revenue recognition principle, the foundation of accrual accounting aims to recognize revenue in the period
it is earned rather than the period in which cash is received.
For instance, a construction company starts work in one day but does not bill the customer until six (6)
months later. The company must do an adjusting journal entry at the end of each month to recognize
revenue for 1/6 of the amount invoiced at the six-month point.
04 Handout 1 *Property of STI
student.feedback@sti.edu Page 1 of 6
BMSH2203
An adjusting journal entry includes an income statement account (revenue or expense) and a balance sheet
account (asset or liability). It typically pertains to the accounts on the balance sheet for accumulated
depreciation, prepaid expenses, deferred revenues, accrued revenues, and accrued expenses.
The entries follow the matching principle to match expenses to related revenue in the same accounting
period. The financial statements are affected by the alterations in journal entries, which are transferred to
the general ledger.
Five (5) Types of Adjusting Entries
There are only five (5) different kinds of adjusting entries, and their differences are easily discernible. Each
type is described along with examples of scenarios and instructions for entering them.
1. Accrued revenues
An accrued revenue adjustment must be made when revenue is generated in one accounting period but is
not recognized later.
Example scenario: In October, KNM Apparels received an order worth P65,000 for a client and then
invoiced them. The client paid the invoice on November 7.
Remember: Income is equal to revenue less expenses.
Moving the revenue from a "holding account" (accrued receivables) to a "revenue account"
(revenue) is the first step. The money moves from revenue to cash on November 7, when you get
paid and deposit it in the bank.
Example adjusting entry for Accrued Revenue
The adjustment appears like this in your general ledger. First, you record the anticipated revenue
when you produce the apparel and invoice the client in October.
• You keep track of money from revenue to keep the books in balance.
Date Account Debit Credit
Oct. 27,
Accrued receivables P65,000
2022
Revenue P65,000
To record accrued payment from customer
• Then, when you get paid in November, you move the money from accrued receivables to
cash.
Date Account Debit Credit
Nov. 7,
Accrued receivables P65,000
2022
04 Handout 1 *Property of STI
student.feedback@sti.edu Page 2 of 6
BMSH2203
Date Account Debit Credit
Cash P65,000
To record payment from customer
2. Accrued expenses
Accrued expense adjustments account for expenses you generated in one period but paid for later. One of
the primary expenses that must be adjusted at the end of the month is payroll or paycheck. Any hours
worked during the month that has not yet been paid should be included in expenses. The following is how
the journal entry will present it:
Example scenario: Suppose you hire a contract worker to help you with your apparel in October. You
agree to pay the contract worker P33,000 in advance for a weekend of work. However, you are not
invoiced until the beginning of November.
Example adjusting entry for Accrued Expense
• In October, you record the money you will need to pay the contractor as an accrued
expense, debiting your labor expenses account.
Month Account Debit Credit
Oct. 21, 2022 Accrued expenses P33,000
Salary expense P33,000
To record accrued payment for contractors
• In November, when you pay the invoice, you move the money from accrued expenses to
cash as a withdrawal from your bank account.
Month Account Debit Credit
Nov. 1, 2022 Accrued expenses P33,000
Cash P33,000
To accrued record payment for contractors
3. Deferred revenues
Deferred revenue is when a client pays you in advance. You must ensure that the revenue is recorded in the
month you perform the service and incur the prepaid expenses, even though you are currently paid in
advance.
Example scenario: Over time, you have established a solid reputation within the apparel community.
Because of that, the annual Apparel Symposium in Germany has invited you to be one of their guest
speakers. The conference committee will pay you P25,000 in October after you confirm your
participation in the event. However, the annual event in Germany will be held in January.
04 Handout 1 *Property of STI
student.feedback@sti.edu Page 3 of 6
BMSH2203
Example Adjusting Entry for Deferred Revenues
• First, record the income on the books for January as deferred revenue. You will credit it to
your deferred revenue account for now.
Date Account Debit Credit
Oct. 6, 2022 Cash P25,000
Deferred revenue P25,000
To record revenue from the conference
• Then, when you deliver your talk and earn the fee in January, move the money from
deferred revenue to consulting revenue.
Date Account Debit Credit
Jan. 1, 2023 Deferred revenue P25,000
Consulting revenue P25,000
To record revenue from the conference
4. Prepaid expenses
Deferred revenue is very similar to how prepaid expenses work. In this instance, you make a one-time
advance payment and record the expense for the applicable period.
Example scenario: You rent a new space for your apparel manufacturing business and make an
advance payment for three (3) months’ rent in October, amounting to P30,000.
• In October, you record it as prepaid rent expense, debited from an expense account.
Date Account Debit Credit
Oct. 31, 2022 Prepaid rent P30,000.
Cash P30,000.
To record the adjustment for rent expense
• Then, come November. You want to record your rent expense for the month. You will move
November’s portion of the prepaid rent from an asset to an expense.
Date Account Debit Credit
Nov. 31, 2022 Rent expense P10,000.
Prepaid Rent P10,000.
To record the adjustment for rent expense
04 Handout 1 *Property of STI
student.feedback@sti.edu Page 4 of 6
BMSH2203
5. Depreciation expenses
A single payment is made for an asset when it is depreciated, but the cost is spread out over multiple
accounting periods. Most of the time, this is done with big purchases like buildings, vehicles, or equipment.
The total accumulated depreciation amount on the balance sheet changes at the end of an accounting
period when an asset is depreciated. Additionally, depreciation is reflected as an expense on the income
statement at each payment.
Example scenario: The equipment you use in your apparel business is already used for one (1)
month. According to its useful life, the equipment is only good for five (5) years. The equipment’s
original value is P55,000 and was purchased at the end of October 2022.
Formula: Cost / Estimated useful life per month = Depreciation Value per month
Computation: P55,000 / 60 months = P916.67
Date Account Debit Credit
Oct. 31, 2022 Depreciation expense P916.67
Accumulated Depreciation P916.67
To record depreciation expense for the month
of January
Preparation of Adjusted Trial Balance
According to Pineda (2022), an adjusted trial balance is prepared after adjusting entries have been made in
all accounts. To bring the entity's financial statements into conformity with an accounting framework, such
as Generally Accepted Accounting Principles or International Financial Reporting Standards, these entries are
being added to correct errors in the initial version of the trial balance.
An adjusted trial balance is an internal report serving two purposes rather than being a part of the financial
statements (Bragg, 2023):
• To ensure that the sum of all debit balances and credit balances in all accounts is the same; and
• To be used in creating financial statements (in particular, the balance sheet and income statement;
additional information is required to construct the statement of cash flows).
The existing general ledger will be used to post the adjusting entry, while additional accounts will be used for
adjusting entries without the existing general ledger.
04 Handout 1 *Property of STI
student.feedback@sti.edu Page 5 of 6
BMSH2203
Sample of an Adjusted Trial Balance:
Figure 2: Sample of Adjusted Trial Balance
Source: https://www.myaccountingcourse.com/ adjusted-trial-balance.jpg
The adjusted trial balance verifies the equality of the total debit and credit balances before the financial
statements are prepared. If the adjusted trial balance does not balance, an error occurs.
References
Bragg, S. (2023) Adjusted trial balance example and explanation https://www.accountingtools.com/articles/what-is-an-
adjusted-trial-balance.html
Citadelle, K. (2021) Why are adjusting entries necessary? A simple, yet best advice
https://www.appvizer.com/magazine/accounting-finance/accounting/why-are-adjusting-entries-necessary
De Guzman, A. (2018) Fundamentals of Accountancy, Business, and Managent: A Textbook in Basic Accounting 1. Lori
Mar Publishing
Pineda, A. (2022) Fundamentals of Accountancy, Business, and Managent: A Textbook in Basic Accounting 1.
Mindshapers Co., Inc
Schmidt, J. (2023) Adjusting Journal Entry https://corporatefinanceinstitute.com/resources/accounting/adjusting-
journal-entry/
Tuovila, A. (2022) Adjusting Journal Entry Definition: Purpose, Types, and Example
https://www.investopedia.com/terms/a/adjusting-journal-entry.asp
Warnes, B. (2020) Adjusting Entries: A Simple Introduction. https://bench.co/blog/bookkeeping/adjusting-entries/
04 Handout 1 *Property of STI
student.feedback@sti.edu Page 6 of 6
