7.1 Accrual Adjustments

7.1 Accrual Adjustments

Quick Answer: Accrual adjustments record expenses already incurred or revenues already earned that have not yet been entered because cash has not been paid or collected. Debit Expense / credit Payable for accrued expenses; debit Receivable / credit Income for accrued revenues. In TESDA Bookkeeping NC III, these adjusting journal entries sit in the accounting cycle after the unadjusted trial balance, are posted to the ledger (within the TR posting range), and feed the adjusted trial balance.

Chapters 2–6 taught you to journalize source documents, post, and prove an unadjusted trial balance. That unadjusted TB is incomplete for financial reporting. Under the accrual basis (PFRS-oriented practice cited throughout TESDA TR/CBC materials), income is recognized when earned and expenses when incurred—not only when cash moves. Month-end or year-end adjusting entries close that gap before worksheets and financial statements.

This section covers the first major family of adjustments: accruals. Section 7.2 covers deferrals; Section 7.3 covers depreciation and bad debts; Section 7.4 assembles the adjusted trial balance.

Where Accruals Sit in the Accounting Cycle

Exam-meta study tips stress mastery of the full cycle because the practical project expects you to move from documents through adjustments to reports. Accruals are high-frequency written-item and practical traps: candidates forget the liability/receivable side or record cash that never moved.

Accrued Expenses (Accrued Liabilities)

An accrued expense is a cost the business has already used or incurred, but has not yet paid and has not yet recorded (or has only partly recorded).

Standard entry:

Worked Example 1 — Accrued utilities (Meralco bill outstanding)

Bayani Trading’s accounting period ends 31 December 2026. The December electricity bill for ₱8,400 arrives only on 5 January 2027. Without an adjustment, December expense is understated and liabilities are understated.

31 Dec 2026 adjusting entry:

When paid in January 2027 (next period—not an adjusting entry):

Do not debit Utilities Expense again in January if you already accrued it; that would double-count expense.

Worked Example 2 — Accrued salaries

Luzon Bookkeeping Services pays employees every Friday. Year-end falls on Wednesday, 31 December 2026. Employees earned ₱18,000 for Monday–Wednesday that will be paid with the Friday payroll on 2 January 2027.

On payday, debit Salaries Payable ₱18,000 (and Salaries Expense only for Thursday–Friday earnings), then credit Cash for the full payroll. Assessment graders look for that split thinking.

Worked Example 3 — Accrued interest on a bank loan

On 1 November 2026, Isla Café borrows ₱200,000 from BPI at 12% annual interest, principal due in one year, interest payable monthly in arrears but December interest still unpaid at year-end.

Monthly interest = ₱200,000 × 12% × 1/12 = ₱2,000.

Interest is time-based. Even without a bank notice in your folder, the TR expects you to compute the accrued portion from loan terms when the practical set provides them.

Accrued Revenues (Accrued Assets)

An accrued revenue is income already earned that has not yet been billed or collected, and not yet recorded.

Standard entry:

Worked Example 4 — Unbilled service fees

Cebu Design Studio completed a branding package for a client on 28 December 2026. Contract price ₱45,000. Invoice will be issued 3 January 2027; cash collected later.

When the invoice is issued in January, if you already accrued AR and income, do not credit Service Income again. Either reverse (if policy uses reversing entries) or bill against the receivable already on the books per firm procedure—what matters for NC III is that December income includes the ₱45,000.

Worked Example 5 — Accrued interest income

On 1 October 2026, a sole prop advances a ₱100,000 short-term note receivable at 9% annual interest. At 31 December, three months of interest have been earned but not collected.

Interest = ₱100,000 × 9% × 3/12 = ₱2,250.

Accruals vs Cash Movements — Decision Table

Financial Statement Effects

Omitting accrued utilities overstates net income and understates liabilities. Omitting accrued service income understates both net income and assets. Practical assessors notice when your income statement ignores a clear year-end accrual fact in the case narrative.

Posting Adjusting Accruals (TR Posting Link)

Adjusting entries are still general journal entries. After you journalize them:

1. Post debits and credits to the general ledger (and subsidiary ledgers if AR/AP detail is affected).
2. Foot and balance accounts again.
3. Carry updated balances into the adjusted trial balance (Section 7.4).

The Training Regulations treat posting as covering journal entries that arise in the cycle—including adjusting journal entries—not only day-to-day sales and purchases. Leaving adjustments unposted is a common cause of an adjusted TB that still equals the unadjusted TB.

Assessment Tips and Common Errors

1. Recording cash in the adjusting entry — Accruals by definition have no cash yet.
2. Using “Cash” as the credit for accrued salaries — Credit Salaries Payable, not Cash.
3. Wrong period length for interest — Use months outstanding ÷ 12 (or days ÷ 365 if specified).
4. Double counting next period — When payment/collection occurs, clear the payable/receivable.
5. Confusing accrual with deferral — If cash already happened and you are spreading cost/income, that is Section 7.2.

Mini scenario set for practice

At 31 December 2026, Davao Repair Shop reports:

• Unpaid water bill estimate ₱1,250
• Three days’ wages earned totaling ₱7,500 unpaid
• Completed repair job ₱9,800 not yet invoiced
• Bank loan interest for December ₱1,500 unpaid

Required adjusting totals: expenses accrued ₱1,250 + ₱7,500 + ₱1,500 = ₱10,250; revenues accrued ₱9,800; liabilities up ₱10,250; assets up ₱9,800.

Bridge Forward

Accruals recognize what has happened economically before cash. Deferrals (next section) allocate cash that already happened across periods. Together with depreciation and bad debts, they complete the adjusting set that turns an unadjusted trial balance into report-ready figures for HCS412303 and HCS412304.