THE ADJUSTING

ENTRIES
ADJUSTING PROCESS

 The updating of
accounts prior to the
preparation of financial
statements
ADJUSTING ENTRIES
- are prepared at the end of an
accounting period to unrecorded
revenue that has been earned and
unrecorded expenses that have been
incurred during the accounting period,
depreciation, and doubtful accounts.
 TYPES OF ADJUSTMENTS
Accrued Revenues
Accruals
Accrued Expenses
2 Major
Classifications
Unearned Revenues
Deferrals
Prepaid Expenses
 Depreciation
Classification
of Adjusting
Entries
Doubtful
Accounts
EACH ADJUSTING ENTRY HAS THE FF.
CHARACTERISTICS:
1. Each entry is recorded at the end of an accounting
period.

2. Each entry has at least one balance sheet account

(e.g asset or liability) and at least one income
statement account (e.g. revenue or expense)

3. Each entry has no cash account in either the debit

or the credit side.
ACCOUNTING PERIOD CONCEPT:
 Cash basis
 Revenues and expenses are reported in the income
statement in the period in which cash is received

 Accrual basis
 Revenues are reported in the income statement in
the period they are earned.
 Revenue recognition concept

 Matching concept
Depreciation ???

- is the assigning or allocating of a plant asset's

cost to expense over the accounting periods that
the asset is likely to be used.
- the reduction of recorded cost of a fixed asset in
a systematic manner until the value of the asset
becomes zero or negligible.
1. DEPRECIATION
 Applied to components of PPE.

 PPEare assets held by an entity and

expected to benefit more than 1
accounting period or for long term
purposes

 Is done to allocate the cost, less residual

 Intheory, an entity is benefited through
increased revenues when it uses its PPE.

 Although there is no real outflow of

resources by the entity, an expense is still
recorded in order to match depreciation
expense in the same period that revenue
is generated.
Entry to record depreciation:

Dr. Depreciation Expense Pxxx

Cr. Accumulated Depreciation Pxxx
Depreciation Expense is an INCOME
STATEMENT account while the

Accumulated Depreciation is a BALANCE

SHEET account.
Accumulated Depreciation is a deduction from a PPE
account.
The difference between a PPE account and its related
Accumulated Depreciation account is called BOOK
VALUE or CARRYING AMOUNT.

Cost of PPE P xxx

Accum. Dep. (xxx)
BOOK VALUE or P xxx
CARRYING AMOUNT
COMPUTATION OF DEPRECIATION:
Straight Line Method:

Cost - Residual Value

Depreciation Expense =
Estimated Useful Life
EXAMPLE:
The building with a cost of P12,500,000. is
expected to be used for a period of 20 years,
and the residual value is expected to be
P500,000.
How much is the depreciation expense to be
allocated every end of accounting period
using the straight line method?
The adjusting entry for depreciation affects the
accounting equation in the following manner:

ASSETS – will go down because the credit to

accumulated depreciation will bring down the
book value/carrying amount of the building.

EQUITY – will go down because an expense is

recorded – Depreciation Expense.
EXERCISES:
COMPUTE FOR THE DEPRECIATION EXPENSE AND GIVE THE
ADJUSTING ENTRIES:
ABC Company uses the straight line method for the computation of
the depreciation expense. The following are company’s PPE:

1. Computer Equipment – purchased January 1, 2016 with cost of

P63,000.00 with estimated useful life of 5 years and residual value
of P5,000.00
2. Building was constructed last April 1, 2015 costing P15,000,000. It
is estimated that this can sold for P1,000,000.00 after 25 years.
How much is to be charged as depreciation expense at Dec. 31, 2015?

3. The entity also bought a plant machinery amounting to

P5,000,000.00 last October 1, 2015. The useful life is 12 years with a
residual value P145,000.00. How much is the depreciation expense
to be recorded for Dec. 31, 2016?
Compute depreciation expense on December 31,
2015 and make the adjusting entries:
PPE COST RV USEFUL LIFE
1. Machinery P1,500,000 P20,000 15
2. Computer 85,000 13,000 5
3. Building 9,000,000 180,000 35
4. Factory Equipment 17,000,000 200,000 17
5. Service Vehicle 870,000 60,000 8
Machinery and computer were purchased July 31,2015.
The building was constructed and occupied on January 1, 2015.
Factory equipment was purchased December 1, 2015.
Service vehicle was acquired on 60 days before the end of 2015.
Bad Debts or Doubtful Accounts

- usually refers to accounts receivable (or trade

accounts receivable) that will not be collected.

When the allowance method is used, the journal

entry to Bad Debts Expense will include a
credit to Allowance for Doubtful Accounts, a
contra account and valuation account to the
asset Accounts Receivable.
 2. BAD DEBTS/DOUBTFUL ACCOUNTS

 Apply to the accounts receivable of a firm.

 The concept of bad debts is an application of the

conservatism principle of accounting which when
applied to assets will imply that overstatement of assets
is undesirable.

 It is just but normal to encounter customers who later

on, would not be able to pay their dues.
The most common method of estimating
bad debts is by multiplying the amount of
Accounts Receivable by a certain
percentage, which is determined through
years of experience of the entity.

The resulting figure is the REQUIRED

BALANCE of the Allowance for Doubtful
Accounts.
 PROFORMA ADJUSTING ENTRY FOR
BAD DEBTS:

Dr. Bad Debts Expense Pxx

Cr. Allowance for Doubtful Account Pxx
 BAD DEBTS EXPENSE is an Income
Statement account while ALLOWANCE
FOR DOUBTFUL ACCOUNTS is a Balance
Sheet Account.

 The Allowance for Bad Debts/Doubtful

Account is a deduction from Accounts
Receivable.
Accounts Receivable Pxx
Less: Allow. for Bad Debts (xx)
Net Realizable Value Pxx

Example:
Accounts Receivable P450,000.
Less: Allow. for Bad Debts 45,000.
Net Realizable Value P405,000.
===========
Example:
The accounts receivable at the end of the year is
P1,000,000. and is determined that 5% of these
receivables could be uncollectible. Determine the
allowance for doubtful account.

Solution:
Accounts Receivable - P1,000,000.
Multiply by - X 5%___
Allow. for Bad Debts P50,000.
ADJUSTING ENTRY:

Bad Debts Expense P50,000.

Allow. for Bad Debts P50,000.
or
Allowance for Doubtful Account
The adjusting entry affects the accounting
equation in the following manner:

a. ASSETS will go down because the credit to

Allow. for Doubtful Accounts will bring down
the Net Realizable Value of A/R.

b. EQUITY will go down because an expense is

recorded –Depreciation Expense.
When later on, a receivable is proved to
be uncollectible, it is simply written off.
Example, if P20,000. is deemed
uncollectible, the entry is:

Allow. for Bad Debts P20,000.

Accounts Receivable P20,000.
 If for example, the next A/R balance is
P1,500,000. and the estimated D/A of 5% is
still valid, these figures are just multiplied to
get P75,000. (P1,500,000 x 5%).

 P75,000. is the required balance of the

allowance account, not necessarily the
amount to be recorded as bad debts expense.
Since there is already an existing P30,000. balance, only
the deficiency of P45,000. is recorded as Bad Debts
Expense.

Bad Debts Expense P45,000.

Allow. for Bad Debts P45,000.

Notice that by making this adjusting entry, the new

balance of the allowance account is now P75,000.00
EA company
XERCISES estimates that P20,000 of its
P500,000 accounts receivable will be
uncollectible. Its Allowance for Doubtful
Accounts presently has a credit balance of
P8,000.

The adjusting entry will include a __________

to the Allowance for Doubtful Accounts.
2. A company estimates that P20,000 of its
P500,000 of accounts receivable will be
uncollectible. Its Allowance for Doubtful
Accounts presently has a credit balance of
P18,000. The adjusting entry will include a
__________ to Bad Debts Expense.
3. A company is expecting thousands of credit sales
transactions each week with terms of net 30 days. It believes
that 2% of its credit sales will be uncollectible. The company's
credit sales for its first week of operations are P500,000. The
credit sales for its second week are P600,000.
a. The company's bad debts expense for its first week of
operations will be P __________

b. The company's bad debts expense for its second week of

operations will be P __________
The company’s credit sales end of December 31,
2013 were P2,900,000. The company estimates
that 1.5% of credit sales are uncollectible.

a. The bad debts expense at Dec. 31, 2013 is?

b. If the Allowance for Doubtful Accounts has a

credit balance of P47,000. Record the adjusting
journal entry necessary to record bad debt.
The balance in Accounts Receivable on December
31, 2013 was P530,000. The company estimates
that 6% of receivables are uncollectible.

1. The bad debts expense at the end of Dec. 31,2013

is?
2. If Allowance for Doubtful Accounts has a credit
balance of P27,000. Record the adjusting journal
entry necessary to record bad debt.
DEFERRALS

- is the postponement of the

recognition of an expense
already paid or revenue already
received.
Example:

1. PREPAID EXPENSES
- are expenses already paid in advance but
may not have been recorded as an EXPENSE
because the benefits have not been used.

e.g. prepaid insurance, prepaid rent,

prepaid taxes, prepaid advertisment
 2 METHODS OF RECORDING PREPAID EXPENSES

1. ASSET METHOD
 On the Date of Entry, the ASSET
account is identified and DEBITED.

 On the End of the Year, the USED

portion is recorded.
2. EXPENSE METHOD
On the Date of Entry, the EXPENSE
account was identified and DEBITED.

On the End of the Year, the UNUSED

portion is recorded.
1. ASSET METHOD
Date of Entry:
1/1/16 Prepaid Rent P36,000
Cash P36,000
To record advance payment for rent.
End of the Year
12/31/16 Rent Expense P12,000
Prepaid Rent P12,000
To record USED portion of rent.
2. EXPENSE METHOD
Date of Entry
1/1/16 Rent Expense P36,000
Cash P36,000
To record advance payment of rent.

End of the Year

12/31/16 Prepaid Rent P24,000
Rent Expense P24,000
To record UNUSED portion of rent.
 TIPS IN ANALYZING DEFERRALS
(PREPAID EXPENSES & UNEARNED INCOME)

1. Identify what account is being tackled in

each adjustment.
2. Count the number of months from the
Date of Entry until Dec. 31 of the current
year, to determine the months
USED/EARNED.
 If DOE is at the beginning of the month,
include the month in counting
(ex. Jan.1, May2, July 1…)

 If DOE is at the middle or ending days,

count the next month as your 1st month
USED/EARNED.
(Ex. June 30, March 31, Aug. 15, Feb. 29)
3. Before considering the different
portions used/earned, determine the
duration of the said payment.
a. Adjusting Entry made to Prepaid Expenses affects
the accounting equation in the following manner:

b. ASSETS will go down because the credit to

Prepaid Expense will bring down the value of
Prepaid Account.

c. EQUITY will go down because an expense is

recorded.
 SAMPLE PROBLEMS:
Prepare the appropriate adjusting entry for each
transaction. Show both ASSET and EXPENSE method.

1. On March 1, 2015, Ms. Wa paid P18,000.00 representing

one-year rent for office space.
Analysis:
Date of Entry:
End of the Year: How many months?
Duration of Payment
Account:
2. Office supplies costing P1,200. were
bought on Dec.1, 2015 and on Dec. 31 of
the same year only P550. were used.

3. Ms. Venus paid in advance a 5-year

contract of rent for a building she will be
using. Payment was made on June 30,
2016, P500,000.
EXERCISE 1
Prepare the Date of Entry and End of the Year transactions
for the following Adjusting Entries. Use the ASSET
METHOD.
1. An insurance policy covering a three-year period
from date of payment was purchased on March 1,
2015 for P10,800.00
2. Store supplies costing P5,000.00 were purchased
on Jan. 31, 2016 and on Dec. 31 of the same year, 65%
of store supplies were unused.
EXERCISE 2
Prepare the Date of Entry and End of the Year
transactions for the ff. journal entries. Use the EXPENSE
METHOD.

1. On January 28, 2016, LG Mktg. purchased

cleaning supplies for the use of the business
costing P3,500. At the end of the year, Dec.
31, the bookkeeper reported that ¼ of these
supplies have been used.
2. Mr. Craig paid his utilities in advance
worth P105,000.00. The payment was
recorded on February 1, 2015 which is good
for 24 months.

3. On Oct. 31, 2015, Mr. Banks paid a 3-year

advertising contract for his product, “Banks
and Riches Liquid Soap” worth
P300,000.00
UNEARNED
REVENUES
2. UNEARNED REVENUES/INCOME
-are services that have been paid for by the
customer but business has an obligation to
render service.

- are items that have been initially recorded as

liabilities but are expected to become revenues
over time or through the normal operations of
the business. These are deposits by customers for
work to be done in the future.
 Unearned rent, Unearned Subscription
 2 METHODS OF RECORDING UNEARNED
REVENUE
1. LIABILITY METHOD 2. INCOME METHOD
 When at the time cash is  When at the time cash
received, a LIABILITY is received, an INCOME
account was recognized account was
and CREDITED. recognized and
CREDITED.
 At the End of the Year,
the EARNED portion is  At the End of the Year,
recorded. the UNEARNED
portion is recorded.
EXERCISE:
CONVERT THE FF. ACCOUNTS INTO AN INCOME & LIABILITY
ACCOUNT INCOME LIABILITY
1.Rent
2.Interest
3.Advertising
4.Insurance
5.Subscription
6.Internet Fees
JOURNAL ENTRY USING THE LIABILITY METHOD
DATE OF ENTRY:
Cash P10,000
Unearned Rent P10,000
To record the advance collection of
rent.
END OF THE YEAR:
Unearned Rent P6,000
Rent Income P6,000
To record EARNED portion of rent.
JOURNAL ENTRY USING INCOME METHOD
DATE OF ENTRY:
Cash P10,000
Rent Income P10,000
To record advance collection of rent.

END OF THE YEAR:

Rent Income P4,000
Unearned Rent P4,000
To record UNEARNED portion of rent.
The adjusting entry affects the accounting
equation in the following manner:

a. LIABILITY will go down because of the

debit to Unearned Revenue.

a. EQUITY will go up because a revenue is

recorded.
SAMPLE PROBLEMS:
PREPARE THE APPROPRIATE ADJUSTING ENTRY FOR EACH
TRANSACTION. SHOW BOTH LIABILITY AND INCOME METHOD

1. On April 1, 2015, Menzi Corp. received

P1,500.00 from Mr. Ping, for a one-year
subscription of the Daily Star
newspaper.
2.On Dec. 1, 2016, Mr. Cee Sy received
P18,000 representing six months rental
for office space, from Mr. Tal Aba.

3. On September 30, 2016, ABC

Dentistry received P100,000 from Ms.
Olivia for dentistry service good for 5
months.
QUIZ
Prepare the Date of Entry and End of Year for each
adjustment. Use the LIABILITY and INCOME method.

1. Killer Bee received a 10-month paid advertisement

from Sen. Gordon in aid of his campaign. Advertisement
is worth P25,000 given on August 30, 2016.

2. Commission income account which is shown in the

books at P1,000. is only ¾ earned on Dec. 31,2016.
ACCRUALS
ACCRUED REVENUES
 Revenues that have been earned but
not yet collected.

This is usually the case when rendering of

service is subject to certain conditions that
would make it necessary to finish rendering
the services before payment is made.
ADJUSTING JOURNAL ENTRY:

Receivable Pxx
Revenue Pxx
To record the amount
collectible for the services
rendered.
For instance, if a certain tenant failed to pay the
rent during a certain month, an adjusting entry
should still be made even though cash is yet to
be received. The entry should be:

Rent Receivable Pxx

Rent Revenue Pxx
To record the amount collectible
from the tenant for the month of
January.
Adjusting entry for Accrued Revenues affects
the accounting equation in the following
manner:
ASSETS will go up because of debit to
receivable.
EQUITY will go up because a revenue is
recorded.
 EXAMPLE:
JM Photocopying Center rendered P7,500.00 worth of
photocopying services that have not been recorded.

The adjusting entry will be made assuming the Dec. 31,

2016 is the end of accounting period:

Accrued Revenue (Accounts Receivable) P7,500.

Photocopying Revenues P7,500.
To record revenue for services rendered.
On November 1, 2015 Ritz Laundry Services received a
promissory note from their client Mrs. Cruz for the laundry
services rendered amounting to P6,000.00 that will due
on January 31, 2016. The said note bears interest of 10%.

Analysis:
Date of Entry:
End of Accounting Period:
Maturity:
Rate:
Adjusting Entry
Drumstick Chickens rendered
catering services last Dec. 15, 2015.
The contract price amounted to
P75,000.
Since no payment had been received
yet, Drumstick did not make any
journal entry last Dec. 15.
ACCRUED EXPENSE
ACCRUED EXPENSES
-are expenses already incurred but not
yet paid. Since these expenses have not
been paid, they are considered as a
LIABILITY for the period.
 Wages payable
 Interest Payable
 Utilities Payable
EXAMPLE:
Accrued expense for utilities like electricity
and water. The actual bill for utilities comes
after the month end, or any other period for
that matter.

An expense should be recorded, although

there is no actual outlay of cash.
JOURNAL ENTRY FOR ACCRUED EXPENSES

End of the Year

Utilities Expense Pxx
Accrued Utilities Payable Pxx
To record UNPAID utilities for
water and electricity.
SAMPLE PROBLEM
1. Guitar Café received the following bills
covering the month of December, 2015
that will due on January 3, 2016:
advertising for P19,800.00; repairs for
P2,000.00, and utilities of P4,860.00.

Provide the adjusting journal entries at

year end 2015.
On November 1, 2016, Bella Padilla business
owner issued a 12% - 3 months, P20,000
promissory note Citi Bank for her loan.
Date of Entry:
End of the Year:
Principal Amount:
Rate:
Adjusting Entry:
Mrs. Himala is paid weekly but
as of December 31, 2016, her
wages for 3 days at P200/day
has not been paid yet.
ACTIVITY/BOARDWORK
1. SM Mall has a 2-year contract with Smart
Janitorial Services amounting to ₱5,000.000. The
two parties agreed that SM will pay to Smart
Janitorial Services every quarter.
The following is the schedule for payment:
1st quarter – April 1, 2nd quarter – July 1, 3rd
quarter- October 1, and 4th quarter January 2 for
Jan. 1 is a holiday.
What is the adjusting entry on Dec. 31?
2. JM Photocopying Center borrowed
money from Mr. Chaka on January 1, 2015.
The promissory note bears an interest of 15%
payable within 2 years for an amount of
P300,000. Assuming the end of accounting
period is Dec. 31.
Analysis:
Date of Entry:
End of the Year:
Principal Amount
Rate:
3. The daily payroll is P500.00.
Payroll is payable every
Saturday.
Said payment includes payroll
from Monday to Saturday and
December 31, 2015 is a Friday.
 Analysis
1. What is the specific accrued expense account did you
adjust at the end of accounting period for problem no.
1,2 & 3?
2. Why do we need to make adjustments in our record
for accrued expenses at the end of the accounting
period?
3. What is the effect to the asset and liability accounts
with the adjustments made to accrued expenses at
year end?
Abstraction
 What do we mean by accrued
expense?
 How do we prepare the
adjusting journal entry for
accrued expenses?
Application
How can we relate accrued expense
accros other discipline like in
Entrepreneurship etc.?
Or what other instances where you
can apply the saying “enjoy now, pay
later”?
EVALUATION:
Tall Tourist Service Company is a well- known
rent a car provider. However, on January 27,
2016, 2 of their service vehicles needs calibration
and overhaul so the entity brought the vehicles to
Goodyear Servitek, an auto repair shop. The
calibration and overhaul services will be finished
on February 10, 2016 that will cost them by
P53,300.
 ASSIGNMENT

1.On September 1, 2015 Pedro’s Electrical Shop

issued a promissory note to Fast Lending
Company amounting to P75,000.00 that will
due on February 28, 2016 with interest of 14%.
What is the adjusting entry at Dec. 31 on the
part of Pedro’s Electrical Shop?
2.Study for a summative test next meeting.
However, since Tall Tourist Service
Company is a long time customer and
the company approved that payments
for every job order will be made a
month after the job is done.

What is the adjusting entry at the end

of February, 2016?
 QUIZ-DEPRECIATION
1. A computer, printer, and a copier were purchased for a
total price of ₱250,000- on August 1,2013. The company
estimated that the equipment purchased will be effectively
used for 5 years and after that the equipment can be sold
for ₱20,000.
a. How much is the annual depreciation of the equipment?
b. How much depreciation will be recorded in year 2013,
assuming the company is maintaining a calendar period?
c. How much is the depreciation for year 2014?
d. Prepare the adjusting journal entry for years 2013 and
2014.
2. Office chairs and tables were purchased from a
furniture shop amounting to ₱350,000- on December 1,
2013. The company estimated that the life of the pieces of
furniture will be 10 years and can be sold for a scrap of
₱30,000.

a. What is the adjusting journal entry at the end of the

calendar period of December 31, 2013?

b. What is the book value of the pieces of furniture at the

end of the calendar year 2015?
3. A company purchased an air conditioner at
SY Appliance Center for ₱45,000 and paid
an installation fee of ₱6,000 with a delivery
charge of ₱1,000. The air conditioner has an
estimated life span of 5 years with a residual
value of ₱15,000.
a. What is the depreciable cost of the air
conditioner?
b. How much is the annual depreciation?