Examples of Adjusting Journal Entries in Accounting

In our previous post titled how to make adjusting journal entries (AJE), we have discussed the common types of adjusting entries, namely, accrued revenues, accrued expenses, unearned revenues, prepaid expenses, depreciation (estimation), change in accounting estimate, and prior period errors. We also enumerated some examples of economic events that need to be adjusted to update and correct our records in the journal, ledger, trial balance, and financial statements. Since our post about recording journal entries, we have already presented examples of business transactions to facilitate our discussion. We have continued using those examples in our topics about posting entries in the general ledger and preparing a trial balance. As promised, we will continue those samples here. And to illustrate how to make adjusting entries, let us assume the following examples of accounting events and their corresponding adjusting journal entries in the books of Mr. Santos  – the same illustration we have discussed in our article on how to make entries in the general journal.

Examples of Events that need Adjusting Entries

1. The computer equipment of P100,000 is estimated to have a useful life of 5 years. It was decided that a one-month depreciation for December should be provided.

2. As of December 31, the Internet and communication incurred but not yet paid amounted to P4,000.

3. Water and power amounted to P5,000 was incurred during December but still unpaid as of December 31.

4. It was determined that the actual cost of unused computer supplies at the end of year is amounted to P45,000.

5. It was discovered that Internet services worth P66,000 provided to customers on account were erroneously recorded as P6,000. Furthermore, printing services worth P50,000 earned and received on cash were also erroneously omitted in the journal and ledger.

6. An interest of 16% per annum on P100,000 loan from the bank granted on December 12, has accrued.

7. During December, Mr. Santos actually paid P20,000 for the four months of rental fees covering December to March. Only the P5,000 rent payment for December was recorded.

8. Mr. Santos did not record the one-year insurance he paid in cash on December 1 worth P12,000 covering 12 month period from December 1, 2011 to November 30, 2012.

9. Mr. Santos has determined that he has an additional taxes and licenses payable as of December 31 amounted to P5,000, which is due on or before January 20 of the next year.

10. The 2011 income tax due and payable after personal deduction amounted to P75 (only estimated for the purpose of this example).

Adjusting Journal Entries

The following are the adjusting entries based on the above examples. Amounts in the left side represent debit entries, while amounts in the right side represent credit entries.

AJE #1
Depreciation expense                                         P 1,667
Accumulated depreciation                                                P 1,667
To record depreciation expense for the month of December (P100,000/5years/12months) 

AJE #2
Internet and communication expense       P4,000
Accrued expense                                                                   P4,000
To record Internet and communication accrued as of December 31, 2011

AJE #3
Water and power expense                                P5,000
Accrued expense                                                                    P5,000
To record water and power expense accrued as of the end of accounting period

Computer supplies expense                           P2,000
Unused computer supplies                                                 P2,000
To correct balance of unused computer supplies as of December 31, 2011 (P47,000 – 45,000 = P2,000)

Cash                                                                         P50,000
Accounts receivable                                             60,000
Internet service income                                                      P60,000
Printing service income                                                         50,000

To correct erroneous recording of Internet service income on account, reflecting the P60,000 that was erroneously omitted (P66,000 – 6,000 = 60,000) and to record omitted P50,000 printing service income on cash.

Interest expense                                                  P844
Accrued expense                                                                   P844
To accrue interest expense for 19 days – Dec 12- Dec 31 [(P100,000×16%/360)x19days=P844.44]

Prepaid rent                                                           P15,000
Cash                                                                                               P15,000
To record the unexpired rental fees paid (January to March with P5,000 each month). Remember that the P5,000 rent payment for the month of December was already recorded correctly during that month. 

Insurance expense                                              P1,000
Prepaid insurance                                                11,000
Cash                                                                                           P 12,000
To record payment of insurance and the corresponding expense for the month of December (P12,000 x 1/12 = P1,000)

Taxes and licenses                                              P5,000
Accrued expense                                                                P5,000
To accrue taxes and licenses as of December 31, 2011.

Income tax expense                                          P75
Income tax payable                                                           P75
To record 2011 income tax due and payable

Those adjusting journal entries are recorded just like regular transactions in the journal. The entries are also posted to the ledger just like any other journal entries to update and correct the ledger account balances. Here is how the adjusting journal entries affect our cash in the general ledger:

Adjusted general ledger cash

After all the ledger balances are corrected, our trial balance should be adjusted to reflect the adjustments we have made. Our next discussion will be on how to prepare an adjusting trial balance. See you in our next post. Thank you.

Disclaimer: This article is intended for informational use only. Examples on this article are only used for illustrating and facilitating the article discussion. They don’t reflect actual scenarios or reflect actual accounting records of an actual entity or business.

Victorino Abrugar is a retired CPA practitioner, a blogger, speaker, and an entrepreneur. He's the President of Optixor, Inc., a digital marketing company based in the Philippines. Follow him on Twitter at @viclogic.

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