Chapter 6

Adjusting Entries for a Service Provider

 Reasons for Adjusting Entries. Adjusting entries are journal entries made at the
end of the accounting period to allocate revenue and expenses to the period in
which they actually are applicable. Adjusting entries are needed to ensure that the
revenue recognition and matching principles are followed. Adjusting entries are
required every time financial statements are prepared.
The end goal of accounting is the preparation of the financial statements. If
the financial statements are to be useful to the intended users, they must be
complete and up to date. The use of adjusting entries makes it possible to report
on balance sheet the appropriate assets, liabilities, and owner’s equity at
statement date, and to report on the income statement the proper net income/loss
for the period.

 Fiscal and Calendar Years. Both small and large companies prepare financial
statements on a periodic basis in order to assess their financial condition and
results of operations. Accounting time periods are generally a month, a quarter, or
a year. Monthly and quarterly time periods are often referred to as interim periods.
An accounting time period that is one year in length is referred to as a fiscal
year. A fiscal year usually begins with the first day of a month and ends 12 months
later on the last day of a month. The accounting period used by most businesses
coincides with the calendar year (January 1 to December 31).

 Types of Adjusting Entries

1. Asset Depreciation 3. Accrued Expenses 5. Prepaid Expenses
2. Doubtful Accounts 4. Accrued Revenues 6. Unearned Revenues

o Asset Depreciation. Depreciation is the process of allocating the cost of

an asset to expense over its useful life in a rational and systematic manner.

Straight-line method formula:

Depreciation = Cost of asset – Estimated residual value
Estimated useful life
Adjusting entry: e.g. Building
Date Account Titles Debit Credit
Depreciation Expense – Building xx
Accumulated Depreciation – Building xx

On August 1, Dr. Calayan contributed building to the business worth

₱7,500,000. The building is estimated to have a serviceable life of 25 years
and a residual value of ₱1,500,000. The journal entry to record the
transaction would be:
Date Account Titles Debit Credit
Aug. 1 Building 7,500,000
Calayan, Capital 7,500,000

On August 31 the adjusting entry to record the depreciation would be:

7,500,000 - 1,500,000 240,000 20,000
Depreciation =
25 years per year per
month
Date Account Titles Debit Credit
Aug. 31 Depreciation Expense - Building 20,000
Accumulated Depreciation - Building 20,000

o Doubtful Accounts. An account receivable that is doubtful of collection is

known as bad debts.
Adjusting entry:
Date Account Titles Debit Credit
Doubtful Accounts Expense xx
Allowance for Doubtful Accounts xx

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Chapter 6
Adjusting Entries for a Service Provider

On August 1, Dr. Calayan sent a bill to various client for professional

services rendered, ₱10,000. The journal entry to record the transaction
would be:
Date Account Titles Debit Credit
Aug. 1 Accounts Receivable 10,000
Professional Fees 10,000

On August 31, out of the ₱10,000 accounts receivable, ₱800 is doubtful of

collection. The adjusting entry would be:
Date Account Titles Debit Credit
Aug. 31 Doubtful Accounts Expense 800
Allowance for Doubtful Accounts 800

o Accrued Revenues are revenues for services rendered or goods delivered

but not yet received.

Adjusting entry: e.g. Interest

Date Account Titles Debit Credit
Interest Receivable xx
Interest Revenue xx

On August 1, Dr. Calayan loaned ₱20,000 to a customer on a 60-day note

with interest at annual rate of 9%. The journal entry to record the transaction
would be:
Date Account Titles Debit Credit
Aug. 1 Notes Receivable 20,000
Cash 20,000

On August 31 the adjusting entry to record the interest earned for 30 days
would be:
Date Account Titles Debit Credit
Aug. 31 Interest Receivable 150
Interest Revenue 150

o Accrued Expenses are expenses incurred during the period but not yet
paid.

Adjusting entry: e.g. Interest

Date Account Titles Debit Credit
Interest Expense xx
Interest Payable xx

Simple interest formula: Interest = Principal x Rate x Time

On August 1, Dr. Calayan borrowed ₱30,000 from a bank, issuing a 6-

month 12% interest-bearing note. The journal entry to record the transaction
would be:
Date Account Titles Debit Credit
Aug. 1 Cash 30,000
Notes Payable 30,000

On August 31 the adjusting entry to record the interest incurred for 30 days
would be:
Date Account Titles Debit Credit
Aug. 31 Interest Expense 300
Interest Payable 300

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Adjusting Entries for a Service Provider

o Prepaid Expenses are expenses paid in advance but not yet used.

Adjusting entry: e.g. Rent

Asset method Expense method
Date Account Titles Debit Credit Date Account Titles Debit Credit
Rent Expense xx Prepaid Rent xx
Prepaid Rent xx Rent Expense xx

(a) Prepaid rent or rent paid in advance

Assume that Dr. Calayan rents the office space he occupies. On August 1,
Dr. Calayan paid in advance ₱45,000 as rent for three months from August
1 to October 31. The journal entry to record the transaction would be:

Asset method Expense method

Date Account Titles Debit Credit Date Account Titles Debit Credit
Aug. 1 Prepaid Rent 45,000 Aug. 1 Rent Expense 45,000
Cash 45,000 Cash 45,000

On August 31, one-third of the prepayment corresponding to the month of

August should be expensed. The adjusting entry would be:
Asset method Expense method
Date Account Titles Debit Credit Date Account Titles Debit Credit
Aug. 31 Rent Expense 15,000 Aug. 31 Prepaid Rent 30,000
Prepaid Rent 15,000 Rent Expense 30,000

(b) Prepaid supplies or unused supplies

August 1, Dr. Calayan bought supplies for cash, ₱50,000. The journal entry
to record the transaction would be:
Asset method Expense method
Date Account Titles Debit Credit Date Account Titles Debit Credit
Aug. 1 Supplies 50,000 Aug. 1 Supplies Expense 50,000
Cash 50,000 Cash 50,000

On August 31, supplies unused amounted to ₱11,500. The adjusting entry

would be:
Asset method Expense method
Date Account Titles Debit Credit Date Account Titles Debit Credit
Aug. 31 Supplies Expense 38,500 Aug. 31 Supplies 11,500
Supplies 38,500 Supplies Expense 11,500

o Deferred Revenue. Unearned (deferred) revenues are cash received

before services are rendered or goods are delivered.
Adjusting entry: e.g. Rent
Liability method Revenue method
Date Account Titles Debit Credit Date Account Titles Debit Credit
Unearned Rent Revenue xx Rent Revenue xx
Rent Revenue xx Unearned Rent Revenue xx

Assume that Dr. Calayan owns a building for rent. It was rented on August
1, to a tenant who immediately paid ₱120,000 corresponding to five months
rent up to December 31. The journal entry to record the transaction would
be:
Liability method Revenue method
Date Account Titles Debit Credit Date Account Titles Debit Credit
Aug. 1 Cash 120,000 Aug. 1 Cash 120,000
Unearned Rent Revenue 120,000 Rent Revenue 120,000

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Adjusting Entries for a Service Provider

On August 31, one-fifth of the advance collection corresponding to the

month of August should be realized as revenue. The adjusting entry would
be:
Liability method Revenue method
Date Account Titles Debit Credit Date Account Titles Debit Credit
Aug. 31 Unearned Rent Revenue 24,000 Aug. 31 Rent Revenue 96,000
Rent Revenue 24,000 Unearned Rent Revenue 96,000

 Illustrative Problem: Adjusting Entries

The trial balance of B.A. Laundry Shop at the end of March is presented below.

B.A. Laundry Shop

Trial Balance
March 31, _____
Account Titles Debit Credit
Cash…………………………….. 23,900
Accounts Receivable…………… 17,700
Laundry Supplies………….…… 8,000
Laundry Equipment………….… 82,000
Delivery Vehicle………………… 240,000
Accounts Payable……………… 241,200
Brian Aguila, Capital…………… 117,000
Brian Aguila, Drawing…………. 2,000
Laundry Income……………….. 45,200
Rent Expense………………….. 6,000
Taxes and Licenses……………. 1,600
Salaries and Wages…..……….. 16,800
Electricity and Water…………… 3,700
Repairs and Maintenance…….. 1,700
Totals 403,400 403,400

Other data:
1. An actual count showed that of the supplies invested and bought only
₱2,600 worth of supplies remain unused.
2. The laundry equipment was invested on March 1 with a 4-year estimated
useful life and ₱4,000 residual value.
3. The delivery vehicle was bought on March 2 with a 5-year estimated useful
life and ₱15,000 residual value.

GENERAL JOURNAL
Date Account Titles Debit Credit
Mar. 31 Laundry Supplies Expense 5,400
Laundry Supplies 5,400
~ ₱8,000 on hand less 2,600 unused = 5,400 used ~

31 Depreciation Exp. – Laundry Equip. 1,625

Accumulated Dep. – Laundry Equip. 1,625
~ one month depreciation of laundry equipment ~

31 Depreciation Exp. – Delivery Vehicle 3,750

Accumulated Dep. – Delivery Vehicle 3,750
~ one month depreciation of delivery vehicle ~

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Adjusting Entries for a Service Provider

GENERAL LEDGER

Cash Accounts Receivable Laundry Supplies Laundry Equipment

Dr Cr Dr Cr Dr Cr Dr Cr
23,900 17,700 8,000 5,400 82,000

---------- ----------
2,600

Accumulated Dep. – Accumulated Dep. –

Laundry Equip. Delivery Vehicle Delivery Vehicle Accounts Payable
Dr Cr Dr Cr Dr Cr Dr Cr
1,625 240,000 3,750 241,200

Brian Aguila, Capital Brian Aguila, Drawing Laundry Income Rent Expense
Dr Cr Dr Cr Dr Cr Dr Cr
117,000 2,000 45,200 6,000

Repairs and
Taxes and Licenses Salaries and Wages Electricity and Water Maintenance
Dr Cr Dr Cr Dr Cr Dr Cr
1,600 16,800 3,700 1,700

Laundry Depreciation Exp. – Depreciation Exp. –

Supplies Expense Laundry Equip. Delivery Vehicle
Dr Cr Dr Cr Dr Cr
5,400 1,625 3,750

B.A. Laundry Shop

Adjusted Trial Balance
March 31, _____

Account Titles Debit Credit

Cash……………………………………. P 23,900
Accounts Receivable………………….. 17,700
Laundry Supplies……....……..………. 2,600
Laundry Equipment…………………… 82,000
Accumulated Dep. – Laundry Equip…. P 1,625
Delivery Vehicle……………………….. 240,000
Accumulated Dep. – Delivery Vehicle 3,750
Accounts Payable…………………….. 241,200
Brian Aguila, Capital………………….. 117,000
Brian Aguila, Drawing………………… 2,000
Laundry Income………………………. 45,200
Rent Expense…………………………. 6,000
Taxes and Licenses…………………… 1,600
Salaries and Wages………………….. 16,800
Electricity and Water..………………… 3,700
Repairs and Maintenance…………… 1,700
Laundry Supplies Expense………….. 5,400
Depreciation Exp. – Laundry Equip….. 1,625
Depreciation Exp. – Delivery Vehicle 3,750
Totals 408,775 408,775