MGT 111Adjusting Entries Prepared by: Mr. Sergs F. Sancon

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 Explanation Original Entry Adjusting Entry

1. Prepaid Expenses

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

Assets MethodPrepaid Expenses xxx Cash xxx

Expense MethodExpenses xxx Cash xxx

Expenses xxx Prepaid Expenses xxx

Prepaid Expenses xxx 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 Income xxx

4. Unearned Income

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

Liability MethodCash xxx Unearned Income xxx

Income MethodCash xxx Income xxx

Unearned Income xxx Income xxx

Income xxx Unearned Income xxx

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

Depreciation Expense xxx Accumulated Depreciation xxx

6. Doubtful Accounts or Bad Debts

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

Doubtful accounts expense xxx Allowance for D/A xxx

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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 PARLORTrial Balance

December 31, 2013Debit Credit

Cash on hand 60,000Cash in bank 120,000Accounts receivable 60,000Notes receivable 20,000Parlor supplies 87,000Prepaid rent 43,000Rental deposit 50,000Equipments 120,000Accumulated depreciation - E 20,000Furnitures & Fixtures 80,000Accumulated depreciation - F & F 16,000Building improvements 96,000Accumulated depreciation - BI 19,200Accounts payable 50,000Unearned service revenue 40,000Leo Randall Capita 400,000Service Revenue 1,119,800Advertising Expense 60,000Salaries Expense 396,000Commission Expense 200,000Telephone Expense 30,000Utilities Expense 93,000Maintenance Expense 50,000Rent 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 owner’s equity statement).