FUNDAMENTALS OF ACCOUNTACY,

BUSINESS AND MANAGEMENT 2

TOPIC: PREPARATION OF ADJUSTING ENTRIES

SUBJECT TEACHER: JANZHEL LIMOS

At the end of the lesson, the student shall be able to:

• Define what is an adjusting entry

• Identify what are the accounts that need to be adjusted
• Prepare adjusting entries for accounts that need to be
adjusted
 1
8 2

ACCOUNTING
7 PROCESS 3

6 4
5
5 Preparation of
adjusting entries
 TIME PERIOD PRINCIPLE
Financial statements are to be divided into specific time intervals.

Quarterly

Semiannually

Annually
 ACCOUNTING PERIOD
- a period of 12 months. There are 3 types of
accounting period:

• Calendar Period – a period of 12 months

which will end of December 31

• Fiscal Period – a period of 12 months which

will end other than December 31

• Natural Business Year – lax season

 Adjusting Entries

Adjusting entries are journal entries made

at the end of the accounting period to update
account balances in the ledger.
Why we need to adjust?

1. To reflect the proper amounts of revenue

realized and expenses incurred during a
period.

2. To show a fairly measure of the assets,

liabilities, and owner’s equity.
 ACCRUAL BASIS
We recognized REVENUE, when it is EARNED
We recognized EXPENSES ,when it is INCURRED
Not when
Cash is received (revenues)
Cash is paid (expenses)

CASH BASIS
We recognized REVENUE, when cash is RECEIVED
We recognized EXPENSES, when cash is PAID
Accounts that need to be adjusted

• Adjustment for the expiration of

prepayments of expenses.
• Adjustment for the realization of income
collected in advance.
• Adjustment for the accrual of expenses.
• Adjustment for the accrual of income.
• Provision for bad debts.
• Provision for depreciation.
 Adjustment for Deferrals

Prepaid An expense already paid but

Expense not yet incurred

Deferrals

A revenue already collected but

Deferrals is the postponement of Unearned
Revenue not yet earned
the recognition of:
Adjustment for the Expiration of
Prepayment of Expenses

Prepaid expenses are expenses

paid in advance (e.g. supplies, rent and
insurance) At the time of payment, the
account is an asset and as it is used it
become an expense.
Adjusting entry for this account
depends on the original entries made
when it was paid.
1. ASSET METHOD. Under this method, the original entry made is charged to an
asset account.
Example: On November 1, 2020 C. Santos paid P 30,000 for a three-month rental of the office
space. Assuming the company’s year-end period is December 31, 2020, prepare the adjusting
entries.

Year End Period :

Prepaid Rent Period:
Dec. 31, 2020
3 months (Nov 1, 2020–
2020

X X
Jan 31, 2021)
Amount: 30,000

2021
Rent per month = 30,000÷3
= 10,000/mo.

Rent Expense = 10,000 x 2

= 20,000

= 30,000 x 2/3
= 20,000
 ASSET METHOD
Initial Journal Entry

Date Description PR Debit Credit

2020
1 Prepaid Rent 30 000 -
Nov
Cash 30 000 -
Payment of the 3-month rental of
the office space.

Adjusting Entry

Date Description PR Debit Credit

2020
31 Rent Expense 20 000 -
Dec
Prepaid Rent 20 000 -
Rent expense ftp. Nov
1 –Dec 31
Account Title: PREPAID RENT Account No.
Date Items PR Debit Date Items PR Credit
2020 2020
1 P 30 000 31 AJE P 20 000 -
Nov Dec
P 10, 000

Account Title: RENT EXPENSE Account No.

Date Items PR Debit Date Items PR Credit
2020
31 AJE P 20 000
Dec
P 20, 000
2. EXPENSE METHOD. Under this method, the original entry made is charged to
an expense account.
Example: On November 1, 2020 C. Santos paid P 30,000 for a three-month rental of the office
space. Assuming the company’s year-end period is December 31, 2020, prepare the adjusting
entries.

Year End Period : Dec. 31, 2020 2020

Prepaid Rent Period: 3 months (Nov 1, 2020–

X X
Jan 31, 2021)
Amount: 30,000

2021
Rent per month = 30,000 ÷ 3
= 10,000/mo.

Prepaid Rent = 10,000 x 1

= 10,000

= 30,000 x1/3
= 10,000
 EXPENSE METHOD
Initial Journal Entry

Date Description PR Debit Credit

2020
1 Rent Expense 30 000 -
Nov
Cash 30 000 -
Payment of the 3-month
rental of the office space.

Adjusting Entry

Date Description PR Debit Credit

2020
31 Prepaid Rent 10 000 -
Dec
Rent Expense 10 000 -
Prepaid rent for the
month of January
Account Title: PREPAID RENT Account No.
Date Items PR Debit Date Items PR Credit
2020
31 AJE P 10 000
Dec
P 10, 000

Account Title: RENT EXPENSE Account No.

Date Items PR Debit Date Items PR Credit
2020 2020
1 P 30 000 31 AJE P 10,000
Nov Dec
P 20, 000
 Adjustment for Deferrals

Prepaid An expense already paid but

Expense not yet incurred

Deferrals

A revenue already collected but

Deferrals is the postponement of Unearned
Revenue not yet earned
the recognition of:
Adjustment for the realization of income
collected in advance or unearned income

Unearned Income/ Deferred revenue

arises when payment is received before
goods are delivered or before services are
rendered.

There are two methods to be used the income

method and the liability method. Again, the method to
be used depends on the original entries made.
1. INCOME METHOD. Under this method, income account is credited when cash is
received.
Example: On November 1, 2020 the business received P 30,000 cash for a three-month rental fee
from the tenant of the vacant space of the store. Assuming the company’s year end is December 31,
2020, prepare the adjusting entries.

Year End Period :

Unearned Rent Period:
Dec. 31, 2020
3 months (Nov 1, 2020 –
2020
Jan 31, 2021)

X X
Amount: 30,000

2021
Rent per month = 30,000÷3
= 10,000/mo.

Unearned Rent = 10,000 x 1

= 10,000

= 30,000 x 1/3
= 10,000
 INCOME METHOD
Initial Journal Entry

Date Description PR Debit Credit

2020
1 Cash 30 000 -
Nov
Rent Income 30 000 -
3-month rental fee of the
tenant

Adjusting Entry

Date Description PR Debit Credit

2020
31 Rent Income 10 000 -
Dec
Unearned Rent 10 000 -
Unearned rent for the
month of January
Account Title: RENT INCOME Account No.
Date Items PR Debit Date Items PR Credit
2020 2020
31 AJE P 10 000 1 P 30 000
Dec Nov
P 20,000

Account Title: UNEARNED RENT Account No.

Date Items PR Debit Date Items PR Credit
2020
31 AJE P 10 000
Dec
P 10,000
2. LIABILITY METHOD. Under this method, a liability account is credited upon
receipt of cash.
Example: On November 1, 2020 the business received P 30,000 cash for a three-month rental fee
from the tenant of the vacant space of the store. Assuming the company’s year end is December 31,
2020, prepare the adjusting entries.

Year End Period : Dec. 31, 2020

2020
Unearned Rent Period: 3 months (Nov 1, 2020 –

X X
Jan 31, 2021)
Amount: 30,000

2021
Rent per month = 30,000÷3
= 10,000/mo.

Rent Income = 10,000 x 2

= 20,000

= 30,000 x 2/3
= 20,000
 LIABILITY METHOD
Initial Journal Entry

Date Description PR Debit Credit

2020
1 Cash 30 000 -
Nov
Unearned Rent 30 000 -
3-month rental fee of the
tenant

Adjusting Entry

Date Description PR Debit Credit

2020
31 Unearned Rent 20 000 -
Dec
Rent Income 20 000 -
Rent income ftp. Nov. 1
– Dec. 31
Account Title: UNEARNED RENT Account No.
Date Items PR Debit Date Items PR Credit
2020 2020
31 AJE P 20 000 1 P 30 000
Dec Nov
P 10,000

Account Title: RENT INCOME Account No.

Date Items PR Debit Date Items PR Credit
2020
31 AJE P 20 000
Dec
P 20,000
Provision for depreciation

Depreciation is the portion of the cost

of the asset which is already used or
consumed. There are several methods of
depreciating assets.

Straight-line method
Cost – Salvage Value
Depreciation =
Estimated Useful Life
Example:
A delivery truck was purchased for P 350,000 on May 1, 2021. It is
estimated to last 10 years after which it shall have a salvage value of P 50, 000.
Assuming the company follows a calendar period. Compute for depreciation.

Initial Journal Entry

Date Description PR Debit Credit

2021
1 Automobile 350 000 -
May
Cash 350 000 -
Purchase of delivery
truck
 A delivery truck was purchased for P 350,000 on May 1, 2021. It is
estimated to last 10 years after which it shall have a salvage value of P 50, 000.
Assuming the company follows a calendar period. Compute for depreciation.

Cost – Salvage Value

Depreciation =
Estimated Useful Life

350,000 – 50,000
=
10 years
300,000
=
10 years
= 30,000 / yr.
= 30,000/ 12 months
= 2,500/mo.
 Adjusting Entry

Date Description PR Debit Credit

20 000 –
2021
31 Depreciation expense - automobile (2,500 x 8
Dec
mos.)
Accumulated depreciation - automobile 20 000 -
Depreciation expense ftp. May 1 –
Dec. 31.

Balance Sheet Presentation

Automobile P 350, 000

Less: Accumulated Depreciation 20, 000 P 330, 000

Depreciation is an expense account. Accumulated depreciation is a contra

asset account. A contra asset account is an asset account where
the account balance is a credit balance.
Account Title: ACCUMULATED DEPRECIATION - AUTOMOBILE Account No.
Date Items PR Debit Date Items PR Credit
2021
31 AJE P 20, 000 -
Dec
P 20, 000

Account Title: DEPRECIATION EXPENSE Account No.

Date Items PR Debit Date Items PR Credit
2021
31 AJE P 20, 000 -
Dec
P 20, 000
Adjustment for Accruals

Accrued An expense already incurred

Expenses but not yet paid

Accruals

A revenue already earned but

Accruals is the recognition of Accrued
Revenue not yet collected
Adjustment for Accrued Expenses

Accrued expenses are those expenses already

incurred during the period but are not yet paid or
recorded. Salaries, interest, taxes, utilities ( electricity,
water, telecommunications).

At the end of the accounting period, the income

statement should reflect such expense and the balance
sheet should reflect a liability account. The adjusting entry
to record accrual of expenses is debit the expense account
and credit the liability account.
Office employees are paid every 7th and 22nd of the month. Office employee's
workweek is from Monday to Friday. On December 31,2019 12 days’ salaries of
an office employee for P 500 per day have accrued.

SALARY: 500/day
WORKWEEK: Monday – Friday
YEAR-END PERIOD: December 31, 2019

CUT-OFF PAYDAY

1st -15th day of the month 22nd

16th – 30th of the month 7th

ADMINISTRATIVE STAFF
 Date Description PR Debit Credit
2019 Salaries Expense
22 5 500 -
Nov (500 x 11 days)
Cash 5 500 -
Paid salaries ftp
Nov 1 -15.

2019 Salaries Expense

7 5 000 -
Dec (500 x 10 days)
Cash 5 000 -
Paid salaries ftp
Nov 16 – 30.

Salaries Expense
22 5 000 -
(500 x 10 days)
Cash 5 000 -
Paid salaries ftp
Dec 1 - 15
Date Description PR Debit Credit
Salaries Expense
22 5 000 -
(500 x 10 days)
Cash 5 000 -
Paid salaries ftp
Dec 1 - 15

ADJUSTING ENTRY
Salaries Expense
31 6 000 -
(500 x 12 days)
Accrued Salaries /
6 000 -
Salaries Payable
Accrued salaries ftp
Dec 16 - 31
Account Title: SALARIES PAYABLE/ ACCRUED SALARIES Account No.
Date Items PR Debit Date Items PR Credit
2019
31 AJE 6, 000 -
Dec
P 6, 000

Account Title: SALARIES EXPENSE Account No.

Date Items PR Debit Date Items PR Credit
2019
31 AJE P 6, 000 -
Dec
P 6, 000
Adjustment for Accruals

Accrued An expense already incurred

Expenses but not yet paid

Accruals

A revenue already earned but

Accruals is the recognition of Accrued
Revenue not yet collected
Adjustment for Accrued Revenues

Accrued revenue arises when goods have been

delivered or services have been rendered but no amount of
payment have been collected or if there is payment, such
collection is not yet recorded.
In order to avoid understatement of income and asset,
an adjusting entry is needed at the end of the period. The
entry to adjust accrual of income is to debit the asset account
and credit the income account.
A tenant who occupies the right side of the shop space, is two months in
arrears as of Dec 31, 2020. His monthly rental is P 2,500 per month.
Prepare the adjusting entries assuming the company is using calendar
period.

Adjusting Entry

Date Description PR Debit Credit

2020 Accrued Rent Income/Rent

31 5 000 -
Dec Receivable

Rent Income 5 000 -

Two months accrued

rent of a tenant for 2, 500 per

month.
Account Title: RENT RECEIVABLE Account No.
Date Items PR Debit Date Items PR Credit
2020
31 P 5, 000 -
Dec
P 5, 000

Account Title: RENT INCOME Account No.

Date Items PR Debit Date Items PR Credit
2020
31 P 5, 000 -
Dec
P 5, 000
On November 1, 2020 Charlie Company lent 240,000 at 10% annual
interest. Both the interest and the capital will be paid by the debtor in 1 year.
At the end of the accounting period – Dec 31, 2020, no entry was recorded
on the journal for interest income

Interest Income = Principal x Rate x Time

= 240,000 x .10 x 1 yr
= 24,000/ yr
= 24,000/ 12
= 2,000/ mo

= 2,000 x 2 mos. ( Nov and Dec)

= 4,000
 Adjusting Entry

Date Description PR Debit Credit

2020 Accrued Interest Income/Interest

31 4 000 -
Dec Receivable

Interest Income 4 000 -

Two months accrued

interest of debtor for 2, 000 per

month.
Account Title: INTEREST RECEIVABLE Account No.
Date Items PR Debit Date Items PR Credit
2020
31 P 4, 000 -
Dec
P 4, 000

Account Title: RENT INCOME Account No.

Date Items PR Debit Date Items PR Credit
2020
31 P 4, 000 -
Dec
P 4, 000
Adjustment for Bad Debts

Usually most business firms extend credits to attract more

customers and to sell more goods. However, not all credits
extended are good or collectible. For a reason or another, a
certain percentage of these collectibles are not collected. For
this reason, the business should provide for such losses for
non-collection of credits.
This loss from uncollectible accounts is called bad debts. Bad
debt is an expense/ nominal account which must be shown in
the income statement at the end of the accounting period.
There are two methods to account for bad debt loss:

1. ALLOWANCE METHOD - a company records an adjusting entry at the end of

each accounting period for the amount of the losses it anticipates as the
result of extending credit to its customers. The entry will involve the operating
expense account Bad Debts / Doubtful Account Expense and the contra-
asset account Allowance for Bad Debts/ Doubtful Accounts.

• Aging of Accounts Receivable (Statement of Financial Position Approach)

• Percent of Accounts Receivable ( Statement of Financial Position
Approach)
• Percent of Sales (Income Statement Approach)
 AGING OF ACCOUNTS RECEIVABLES
Accounts are classified into not due or current and past due or overdue.

The balance of entity’s accounts receivable amounted to 505,000. The following data
are summarized in aging the account receivable at the end of the accounting period –
Dec 31, 2020.

Estimated % Estimated amount

Amount
uncollectible uncollectible
Current 250,000 1% 2,500
1 – 30 days 100,000 5% 5,000
31 – 60 days 80,000 10 % 8,000
61 – 90 days 50,000 20 % 10,000
Over 90 days 25,000 50 % 12,500
Total 505,000 38,000
 Adjusting Entry

Date Description PR Debit Credit

2020
31 Bad Debts Expense 38 000 -
Dec

Allowance for Bad Debts 38 000 -

To record the estimated

amount of uncollectible

A/R, Net Realizable Value, Dec 31, 2020 = 505,000 – 38,000

= 467,000
Account Title: ALLOWANCE FOR BAD DEBTS Account No.
Date Items PR Debit Date Items PR Credit
2020
31 AJE P 38, 000 -
Dec
P 38, 000

Account Title: BAD DEBTS EXPENSE Account No.

Date Items PR Debit Date Items PR Credit
2020
31 AJE P 38, 000 -
Dec
P 38, 000
PERCENT OF ACCOUNTS RECEIVABLES
Certain rates are being multiplied to A/R to get the required allowance for bad debts.

The balance of entity’s accounts receivable amounted to 505,000. The following data are
summarized at the end of the accounting period – Dec 31, 2020.

Amount

Current 250,000
1 – 30 days 100,000 Allowance for Bad Debts
31 – 60 days 80,000 is 10%
61 – 90 days 50,000
Over 90 days 25,000
Total 505,000
 Adjusting Entry

Allowance for Bad Debts: 505,000 x . 10 = 50,500

Date Description PR Debit Credit

2020
31 Bad Debts Expense 50 500 -
Dec

Allowance for Bad Debts 50 500 -

To record the estimated

amount of uncollectible

A/R, Net Realizable Value, Dec 31, 2020 = 505,000 – 50,500

= 454,500
Account Title: ALLOWANCE FOR BAD DEBTS Account No.
Date Items PR Debit Date Items PR Credit
2020
31 50, 500 -
Dec
P 50, 500

Account Title: BAD DEBTS EXPENSE Account No.

Date Items PR Debit Date Items PR Credit
2020
31 50, 500 -
Dec
P 50, 500
 PERCENT OF SALES
A certain rate is multiplied to the amount of sales in order to get the required allowance for
doubtful accounts.

The following accounts are gathered from the ledger of Armina’s General Merchandise at the
end of the accounting period – December 31, 2020.

Accounts Receivable, P 500,000

Sales, 1,050,000
Sales returns and allowances, 40,000
Sales Discount, 10,000

Doubtful accounts are estimated at 1% of net sales.

Net Sales = Sales – Sales Returns and Allowances – Sales Discount

= 1,050,000 – 40,000 – 10,000
= 1,000,000
 Adjusting Entry

Doubtful Accounts Expense = Net Sales x .01

= 1,000,000 x .01
= 10,000

Date Description PR Debit Credit

2020
31 Bad Debts Expense 10 000 -
Dec

Allowance for Bad Debts 10 000 -

To record the estimated

amount of uncollectible

A/R, Net Realizable Value, Dec 31, 2020 = 500,000 – 10,000

= 490,000
Account Title: ALLOWANCE FOR BAD DEBTS Account No.
Date Items PR Debit Date Items PR Credit
2020
31 AJE 10, 000 -
Dec
P 10, 000

Account Title: BAD DEBTS EXPENSE Account No.

Date Items PR Debit Date Items PR Credit
2020
31 AJE P 10, 000 -
Dec
P 10, 000
2. DIRECT WRITE-OFF METHOD allows a business to record Bad Debt
Expense only when a specific account has been deemed uncollectible. The
account is removed from the Accounts Receivable balance and Bad Debt
Expense is increased.
Example #1: On March 1, 2020 Toto Repair Company has deemed that a 2,000 in
Accounts Receivable, due from Cynthia Villar, is uncollectible and should be recorded
as a bad debt.

Date Description PR Debit Credit

2020
1 Bad Debts Expense 2 000 -
Mar

Accounts Receivable 2 000 -

To record bad debts

 REFERENCES
Aliling L. E (2019) Fundamentals of Basic Accounting First Edition, Sampaloc,
Manila, Philippines: Rex Bookstore
Binuya, M,A.J (2016) Fundamental of Accountancy Business and
Management 2, First Edition, Pasay City, Philippines: JFS Publishing
Services
De Guzman, A. A. (2018) Fundamentals of Accountancy, Business and
Management 1. Cubao, Quezon City, Philippines: Lorimar Publishing, Inc.

Arganda, et al (2012) Accounting Principles, Fourth Edition, Mandaluyong

City, Philippines: National Bookstore