Adjusting Journal Entries

Accrued Expenses
Expenses already incurred but not yet paid by the company Ex. Dencio Co employs 6 clerks at a weekly salary of P1,250 each. It is the policy of the firm to pay the employees every Friday. December 31, fell on a Wednesday. A week is made up of 5 working days (Saturday and Sunday are rest days). Required: 1. Make the adjusting journal entry as at Dec. 31 to accrue the salaries incurred. 2. Assume that instead of Dec. 31 falling on Wed, it fell on Monday. How much will accrued salaries be?

Entry Format for accrued expenses

Dr. (Salaries) expense Cr. (Salaries) payable xxx xxx

Additional example
The company issued a note payable to a supplier as payment of purchases in the amount of P500,000 on December 16, 2010. The note has a term of 60 days with 12% interest. Required: Adjusting journal entry as at December 31, 2010.

Additional example
The following are unpaid bills not recorded as December 31, 2010: Unpaid bills for electricity P20,000 Unpaid bills for water P5,000 Required: Adjusting journal entry as of December 31, 2010

Seat work
Payroll is weekly for the Fast Delivery Service amounting to P500 per day for six days payable every Saturday. (Sunday is rest day). The last payroll day for the year fell on Monday, December 29, 2010. December 30 to January 1 are non-working days. Required: Adjusting entry to accrue salaries as of December 31, 2010. If the unadjusted trial balance showed salaries expense of P30,500. How much will be presented in the 2010 income statement?

Accrued Income
Income already earned but not yet collected by the company. Example:P20,000 worth of service income were rendered but not yet collected on an emergency services on December 31, 2010. Required: Adjusting journal entry as at December 31, 2010.

Entry format for Accrued Income

Dr. (Interest) receivable Cr. (Interest) income xxx xxx

Additional example
A note was received from a customer on November 16, 2010 in the amount of P350,000 for 90 days at 18% interest. Required: Adjusting Journal Entry as at December 31, 2010.

Another example
P20,000 worth of professional services were rendered, but not yet collected. This transaction pertains to emergency services on December 31. Required: Adjusting Journal Entry on December 31, 2010

Prepaid expenses
Expenses already paid but not yet used or consumed or utilized. Asset Method (AJE)
Dr. (Expired or Used) expenses Cr. Prepaid expenses xxx xxx

Expense Method (AJE)

Dr. Prepaid expenses (Unexpired Or Unused portion) Cr. Expenses xxx xxx

Example
On September 30, 2010, Orange Com paid P180,000 for one year rental covering the period from October 1, 2010 to September 30, 2011. The payment was originally recorded as an expense account. Adjusting journal entry on December 31, 2010.

Another example
The Prepaid Insurance account had a debit balance in December 31 of P36,000 representing premium for a 12-month fire insurance policy effective September 1, 2010. Required: Adjusting journal entry on December 31, 2010.

Additional example
Supplies costing P8,000 bought during the period was debited to the account Supplies expense of which P6,500 was consumed during the period. Required: AJE on December 31, 2010

Example
Store supplies recorded in the Store Supplies account during the year P12,400. As of December 31, store supplies unused is P4,800. Required: AJE on December 31, 2010

Deferred Income/Unearned Income

Cash was received in advance, but the service was not yet done, or the goods were not yet delivered. Pro-forma entry: Liability method:
Dr. (Earned amount) liability account xxx Cr. (Earned amount) income account xxx

Income method:
Dr. (Unearned) income account Cr. (Unearned) liability account xxx xxx

Example
On August 1, 2010, Ritz Com, collected 8 months rent revenue of P142,000 in advance. The Company debited cash and credited Deferred rent. Required: AJE on December 31, 2010.

Example of Deferred Income

Commissions income account showed a credit balance of P26,000 per general ledger as of yearend. Of this only 40% has been actually earned during the year. Required: AJE as of December 31, 2010.

Example of unearned income

Unearned rent income was credited for P48,000 on November 1, representing 6 months rent collected in advance. Required: AJE on December 31, 2010

Example
Rent income was credited for P18,000 representing 3 months rent received from a lessee on October 15, 2010. Required: AJE on December 31, 2010

Example of Deferred Income

The company received service revenue of P40,000 in advance on September 1, 2010. 80% of this amount has been earned as of December 31, 2010. Required: AJE as of December 31, 2010.

Additional Example
Car World Magazine Company received P78,000 from various subscribers representing a one-year subscription for twelve monthly issues on its magazine. The initial issue was mailed during August. Make the entry to record collection using the income method on August 1, 2010. Make the adjusting journal entry to record liability for magazine issues not yet mailed as of December 31, 2010. Post to T-accounts the subscription income and the unearned subscription income. How much was the subscription income in the December 31 income statement? How much was the unearned subscription in the December 31 balance sheet?

Depreciation
Definition: it is the systematic allocation of the cost of depreciable assets over its estimated useful (service) life. Formula: Annual depreciation = (costresidual value)/ estimated life (years) Format of AJE:
(Dr) Depreciation expense (Cr) Accumulated depreciation Pxxx Pxxx

Example
John company acquired an equipment costing P550,000 on July 1, 2010. The equipment is being depreciated using the straight line method. It is estimated to have a useful life of 5 years and a residual value of P50,000. AJE on: December 31, 2010 December 31, 2011

Example of depreciation
Jack Company acquired a new equipment for P1,500,000 on December 1, 2010. It is estimated that the printer will have a useful life of 10 years with a residual value of P300,000. Required:
AJE on December 31, 2010 AJE on December 31, 2011

Another example
Office Equipment costing P15,000 was purchase on October 1, 2010. It is estimated to have a useful life of 5 years after which it could be sold for P1,000. Required: On December 31, 2010 and December 31, 2011, prepare the following:
Adjusting journal entries Balance of Depreciation expense Balance of Accumulated Depreciation

Bad Debts Expense

Two methods: (Pro-forma entry) Direct write-off method
(Dr) Bad debts expense (Cr) Accounts receivable xxx xxx xxx xxx

Allowance method
(Dr) Bad debts expense (Cr) Allowance for bad debts

Methods of allowance approach

Income statement approach
Percentage of net sales is the basis

Balance Sheet approach

Percentage of accounts receivable is the basis

Aging of Receivables
Detailed analysis of each account is made.

Income statement approach

Assuming that the Gross sales for the year 2010 is P5,050,000. Sales Discount is P20,000 and Sales returns and allowances is P30,000. Bad debts is estimated to be 2% of net sales. What will be the AJE on December 31, 2010

Answer
Net sales = P5,000,000 Bad debts is 2%. AJE:
(Dr) Bad debts (Cr) Allowance for bad debts 100,000 100,000

Balance Sheet Approach

Assuming the balance of the accounts receivable in the trial balance as of December 31, 2010 is P500,000 and it has an allowance for bad debts in the amount of P20,000. Bad debts is estimated to be 10% of accounts receivable. Required:
AJE on December 31, 2010

Solution
Accounts receivable P500,000 Allowance for bad debts P20,000 Bad debts is 10% of Accounts receivable Bad debts (10% x P500,000) = P50,000 Less: Allowance for bad debts =P20,000 Bad debts to be provided this year =P30,000 AJE:
(Dr) Bad debts expense (Cr) Allowance for bad debts 30,000 30,000