ADJUSTING ENTRIES

Lesson Objectives:
1. define adjusting journal entries and know their importance
2. make the required adjusting journal entries for prepayments, deferrals,
accrued expenses, accrued income, bad debts and depreciation expense.

Adjusting Journal Entries - these are entries used to update the accounts prior to the
preparation of Financial Statement because they affect more than one accounting
period.

PREPAYMENTS

Prepayments - these are expenses already paid but not yet incurred or used.

Asset Method

Journal Entry upon payment

Prepaid Expense xxx

Cash xxx

Adjusting Journal Entry at the end of the accounting period

Expense xxx
Prepaid Expense xxx

Note: the amount on the adjusting journal entry represents the expired or used
portion of the prepayment.

Example 1:

On April 30, 2016, DMZ Co. Paid ₱36,000.00 worth of insurance premium for two
years. Give the Adjusting Journal Entry on June 30, 2016.
Journal Entry upon payment on April 30, 2016

Date Account Title and Explanation P.R Dr Cr

Prepaid Insurance 36,000
Cash 36,000
Paid two-year insurance

Adjusting Journal Entry at end of the accounting period June 30, 2016

Date Account Title and Explanation P.R Dr Cr

Insurance Expense 3,000
Prepaid Insurance 3,000
To record the expired insurance

Computation:

The ₱36,000.00 amount of insurance premium represents insurance premium for

two years or 24 months. Divide ₱36,00.00 by 24 to get the monthly premium. Then,
multiply it by 2 months representing the premium from May 1 to June 30, 2016.

₱36,000 X 2 = ₱3,000
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₱3,000.00 is therefore the expired insurance from May 1 to June 30, 2016.

Example 2

On September 1, 2016, RXY Co. Paid a one-year advance rent for ₱30,000.00. Give
the Adjusting Journal Entry on Dec. 31, 2016.

Journal Entry upon payment on September 1

Date Account Title and Explanation P.R Dr Cr

Sept. 1 Prepaid Rent 30,000
Cash 30,000
Paid rent for one year

Adjusting Journal Entry at end of the accounting period December 31, 2016

Date Account Title and Explanation P.R Dr Cr

Dec 31 Rent Expense 10,000
 Prepaid Rent 10,000
To record expired rent

Computation:
The 30,000.00 amount of rent represents one-year or 12-month rent. Divide
₱30,000.00 by 12 to get the monthly rent. Then, multiply it by 4 months representing
the rent from September 1 to December 31, 2016.

₱30,000 X 4 = ₱10,000
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Example 3
Supplies account showed a balance of ₱4,000.00. Supplies used during the year
amounted to ₱2,300.00. Give the Adjusting Journal Entry on Dec. 31, 2016.

Adjusting Journal Entry on Dec. 31, 2016.

Date Account Title and Explanation P.R Dr Cr

Supplies Expense 2,300
Supplies 2,300
To record supplies used for the year

Computation:
There is no computation necessary because the ₱2,300.00 supplies used during
the year was already given in the problem.

Example 4
Supplies account on January 1, 2016, showed a balance of ₱8,000.00. On Dec. 31,
2016, supplies on hand amounted to ₱3,500.00.

Adjusting Journal Entry on Dec. 31, 2016

Date Account Title and Explanation P.R Dr Cr

Supplies Expense 4,500
Supplies 4,500
To record supplies used for the year

Computation:
Supplies at the beginning of the year is ₱8,000.00. At the end of the year, the
remaining balance is ₱3,500.00. The difference represents the supplies used during
the year. Subtract ₱3,500.00 from ₱8,000.00 to get the supplies used during the
year.

₱8,000 - ₱3,500 = ₱4,500

DEFERRALS

Unearned or Deferred Income - this is an income already received but not yet
earned.

LIABILITY METHOD

Journal entry upon receipt of cash

Cash xxx
Unearned Income xxx
Received cash for services to be rendered

Adjusting journal entry at the end of the accounting period

Unearned Income xxx

Income xxx
To record earned portion of the liability

Note: The amount of the Adjusting Journal Entry is the earned portion of the amount
initially received.

Example 1
On August 1, 2016 Dr. Cruz received ₱90,000.00 for dental fee to be rendered in
the next 6 months. Give the adjusting journal entry at the end of Sept.

Journal Entry upon receipt of cash on August 1

Date Account Title and Explanation P.R Dr Cr

Cash 90,000
Unearned Dental Fees 90,000
Received cash for dental services to be
rendered

Adjusting Journal Entry on September 30

Date Account Title and Explanation P.R Dr Cr

Unearned Dental Fees 30,000
 Dental Fees 30,000
To record dental fees earned

Computation:
The ₱90,000.00 amount of cash received represents 6-month dental services to be
rendered. Divide ₱90,000.00 by 6 to get the monthly dental fee. Multiply the result
by 2.

₱90,000 X 2 = ₱30,000
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₱30,000.00 is therefore the dental fees earned from August 1 to September 30,
2016.

Example 2
On Dec. 1, 2016, RVX Co. Received ₱48,000.00 amount of advanced rentals for 6
months. Give the Adjusting Journal Entry on Dec. 31, 2016.

Journal Entry upon receipt of cash on Dec. 1

Date Account Title and Explanation P.R Dr Cr

Cash 48,000
Unearned Rent Income 48,000
Received 6 months rent in advance

Adjusting Journal Entry on Dec. 31

Date Account Title and Explanation P.R Dr Cr

Unearned Rent Income 8,000
Rent Income 8,000
To record rent earned for the month

Computation:
The ₱48,000.00 cash you received represents six months of rent. Divide
₱48,000.00 by 6 to get the monthly rent. Then, multiply it by 1 month representing
the rent from Dec. 1 to Dec. 31, 2016.

₱48,000 X 1 = ₱8,000
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₱8,000.00 is therefore the rent income from Dec. 1 to Dec. 31, 2016
ACCRUED EXPENSES

Accrued expenses - these are expenses already incurred or used, but not yet paid.
Adjusting Journal Entry at the end of the accounting period

Expenses xxx
Expenses Payable xxx

Example 1:
The company received a Maynilad bill in the amount of ₱9,800.00 on Dec. 26,
2016. The company intends to pay on January 8, 2017.

Adjusting Journal Entry on December 31, 2016

Date Account Title and Explanation P.R Dr Cr

Utilities Expense 9,800
Utilities Payable 9,800
To record unpaid utilities for the month

Example 2:
Unpaid salaries at the end of December 31, 2016 amounted to ₱18,800.00.

Adjusting Journal Entry on December 31,2016

Date Account Title and Explanation P.R Dr Cr

Salaries Expense 18,800
Salaries Payable 18,800
To record unpaid salaries at year end

ACCRUED INCOME

Accrued income - this is income already earned but not yet received.
 Income Receivable xxx
Income xxx
To record income earned

Example:
A one-year, 6% note receivable in the amount of ₱200,000.00 was received on
January 1, 2016. The interest and the principal are payable on maturity date. Give
the Adjusting Journal Entry on June 30, 2016.

Adjusting Journal Entry on June 30,2016

Date Account Title and Explanation P.R Dr Cr

Interest Receivable 6,000
Interest Income 6,000
To record interest income earned

Computation:

Interest = Principal x Rate x Time

= ₱200,000 x 6% x 0.5 year
= ₱200,000 x 0.06 x 0.5
= ₱6,000

The interest for 6 months is ₱6,000.00.

BAD DEBTS/DOUBTFUL ACCOUNTS/UNCOLLECTIBLE ACCOUNTS

Bad debts/ Doubtful accounts - these are losses due to uncollectible accounts.

Adjusting Journal Entry at the end of the accounting period

Bad Debts Expense xxx

Allowance for Bad Debts xxx
To record estimated uncollectible accounts

OR

Doubtful Accounts Expense xxx

Allowance for Doubtful Accounts xxx
To record estimated uncollectible accounts
OR

Uncollectible Accounts Expense xxx

Allowance for Uncollectible Accounts xxx
 To record estimated uncollectible accounts

Example 1:
Accounts Receivable shows a balance of ₱100,000.00. It is estimated that 8% of
this is uncollectible. Give the adjusting journal entry on December 31, 2016 for the
provision of the estimated uncollectible account.

Date Account Title and Explanation P.R Dr Cr

Bad Debts Expense 8,000
Allowance for Bad Debts 8,000
To record estimated uncollectible accounts

Computation:

₱100,000 x 0.08 = ₱8,000

Example 2:
Accounts Receivable shows a balance of ₱100,000.00. It is estimated that 8% of
this is uncollectible. Allowance for Bad Debts per general ledger has a balance of
₱1,000.00. Give the adjusting journal entry on December 31, 2016 for the provision
of the estimated uncollectible account.

Date Account Title and Explanation P.R Dr Cr

Bad Debts Expense 7,000
Allowance for Bad Debts 7,000
To record estimated uncollectible accounts

Note: The required allowance for doubtful accounts is ₱8,000.00 (100,000 x 8%).
However, per general ledger, the allowance for doubtful accounts already shows a
balance of ₱1,000.00. An adjusting journal entry to bring the balance of the
allowance for doubtful accounts to the required balance of ₱8,000.00. is necessary.

DEPPRECIATION EXPENSE
Depreciation expense - this is the allocation of plant asset cost over its estimated
useful life. This is the expense allotted for the wear and tear of property, plant, and
equipment due to passage of time.

The following are the three factors considered in computing the depreciation
expense:

Cost - this is the purchase price of the depreciable asset.

Salvage value - this is the estimated value of the asset at the end of its useful life.

Estimated useful life - as the name connotes, is not an exact measurement but
merely an estimation of the number of years an asset can be useful to the entity.

The formula for computing for annual depreciation is as follows:

Cost ₱ xxx
Less: Salvage Value xxx
Depreciable cost ₱ xxx
Divided by: Estimated useful life xxx
Annual Depreciation ₱ xxx

Example:
A building with an estimated useful life of 30 years finished construction on June
1, 2016. The cost of the building is 4.8 million pesos with an estimated salvage value
of ₱300,000.00.
Give the Adjusting Journal Entry on December 31, 2016 to record the
depreciation of the building.

Adjusting Journal Entry on Dec. 31, 2016

Date Account Title and Explanation P.R Dr Cr

Depreciation Expense 87,500
Accumulated Depreciation 87,500
To record depreciation expense for the
building

Computation:
Cost ₱4,800,000
Less: Salvage Value 300,000
Depreciable cost ₱4,500,000
Divided by: Estimated Useful Life 30 years
Annual Depreciation ₱150,000

₱150,000 X 7 = ₱87,500
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