FUNDAMENTALS OF ACCOUNTING I

Name: _____________________________
Section: ___________________________

Background Information for Learners

This lesson focuses on discussing the accounting entries and adjusted trial balance.

ASJUSTING ENTRIES

The length of time in which the life of a business is divided into monthly, quarterly, semi-annually or
annually is what we call accounting period. At the end of each accounting period, reports are prepared to show
the outcome of the operation of the business.

Reports such as income statement, balance sheet should always reflect the income realized and the
expenses incurred the fair measurement of the assets, liabilities and owner’s equity. And at the end of each
accounting period there are several accounts that are needed to be adjusted.

The accounts that need to be adjusted are:

1. Adjustment for the expiration of the prepayments of expenses
2. Adjustment for the realization of income collected in advance
3. Adjustment for the accrual of expenses
4. Adjustment for the accrual of income
5. Provision for bad debts
6. Provision for depreciation

Adjustment for the Expiration of Prepayment of Expenses

Prepaid expenses are the expenses paid in advance. From the time of payment, the account is an asset
and as it is used by the business it becomes and expense. The adjusting entry for this may vary from the original
journal entry.

There are two methods to be used:

1. Asset Method – under this method the original entry is made charged to an asset account. The expenses
are recorded as an asset example Prepaid Rent, Prepaid Insurance, Office Supplies, Supplies Unused,
etc.

Example:
On November 5 of the current year, A. Pamintuan paid Php30,000 for a three-month rental of the
office space.

Journal Entry:

Nov. 5 Prepaid Rent Php 30,000

Cash Php 30,000

Adjusting Entry:

Dec. 31 Rent Expense Php 20,000

Prepaid Rent Php 20,000
((Php 30,000 / 3 mos.) x 2 mos.)

Analysis

The Php 30,000 which was paid in November 5 is for a three-month rental of the office space
(NOVEMBER, DECEMBER, & JANUARY) Php 10,000 each month. As of December 31, at the end
of the accounting period, only Php 20,000 of rental has been incurred or used for the month of
November and December.

Note:

If you are using ASSET method the amount to be recorded in your adjusting entry is the
EXPIRED amount.
 2. Expense Method – under this method the original entry is made charged to an expense account. The
expenses are recorded as an expense immediately example Rent Expense, Insurance Expense, Office
Supplies Expense, Supplies Used, etc.

Example:

On November 5 of the current year, A. Pamintuan paid Php30,000 for a three-month rental of the
office space.

Journal Entry:

Nov. 5 Rent Expense Php 30,000

Cash Php 30,000

Adjusting Entry:

Dec. 31 Prepaid Rent Php 10,000

Rent Expense Php 10,000
((Php 30,000 / 3 mos.) x 1 mo.)

Analysis

The Php 30,000 which was paid in November 5 is for a three-month rental of the office space
(NOVEMBER, DECEMBER, & JANUARY) Php 10,000 each month. As of December 31, at the end
of the accounting period, only Php 20,000 of rental has been incurred or used for the month of
November and December and the remaining Php 10,000 is for the month of January of the next
accounting period which is not yet used.

Note:

If you are using EXPENSE method the amount to be recorded in your adjusting entry is the
UNEXPIRED amount.
Adjustment for the realization of income collected in advance or unearned income.

Unearned Income arises when the payment is already received before goods are delivered or before the
service is rendered.

There are two methods to be used:

1. Income Method- in this method the business records the amount collected in the income account
immediately example Rent Income, Service Income etc.

Example:

On November 5 of the current year, the business received Php 30,000 cash from the tenant of the
vacant space of the store.

Journal Entry:

Nov. 5 Cash Php 30,000

Rent Income Php 30,000

Adjusting Entry:

Dec. 31 Rent Income Php 10,000

Unearned Rent Php 10,000
((Php 30,000 / 3 mos.) x 1 mo.)

Analysis

The Php 30,000 which was received in November 5 is for a three-month rental of the office space
of the tenant for the month of NOVEMBER, DECEMBER, & JANUARY, Php 10,000 each month.
November 5 of the accounting period, the amount received is automatically recorded as an income of
the business. At the end of the year the business must decrease the recorded amount in the income
account, because not all income recorded is for the current accounting period. As of December 31, the
two-month rental income of Php 20,000 was already earned. Only the Php 10,000 of the rental for the
month of January is still unearned.
 Note:

If you are using INCOME method the amount to be recorded in your adjusting entry is the
UNEARNED amount.

2. Liability Method- in this method the business records the amount collected in the liability account
immediately example Unearned Rent Income, Unearned Service Income etc.

Example:

On November 5 of the current year, the business received Php 30,000 cash from the tenant of the
vacant space of the store.

Journal Entry:

Nov. 5 Cash Php 30,000

Unearned Rent Income Php 30,000

Adjusting Entry:

Dec. 31 Unearned Rent Income Php 10,000

Rent Income Php 10,000
((Php 30,000 / 3 mos.) x 1 mo.)

Analysis

The Php 30,000 which was received in November 5 is for a three-month rental of the office space
of the tenant for the month of NOVEMBER, DECEMBER, & JANUARY, Php 10,000 each month.
November 5 of the accounting period, the amount received is automatically recorded as a liability of
the business. At the end of the year the business must decrease the recorded amount in the liability
account, because not all liability recorded is for the current accounting period. As of December 31,
the two-month rental income of Php 20,000 was already earned. Only the Php 10,000 of the rental for
the month of January is still unearned.

Note:

If you are using LIABILITY method the amount to be recorded in your adjusting entry is the
EARNED amount.

Accrual of Expenses

Accrued Expense – are the expenses that are already incurred but not yet paid or recorded. At the end of
the accounting period, the income statement should be reflected such expense and the balance sheet should reflect
a liability account. Examples of accrued expense: Accrued Salaries, Accrued Utility, etc.

Example:

Office employees are paid every two weeks. On December 31, five days’ salaries of an office
employee for Php 300 per day have accrued.

Adjusting Entry:

Dec. 31 Salaries Expense Php 1,500

Accrued Salaries Php 1,500
(Php 3000 x 5 days not yet paid)

Accrual of Income

Accrued Income – arises when the goods have been delivered or the services have been rendered but no
amounts of payment have been collected or there is no payment collected or recorded. To avoid understatement
of income and assets, an adjusting entry is needed at the end of the accounting period. Examples of accrued
income: Accrued Rent Income, Accrued Interest Income, etc.

Example:

A tenant, who occupies the right side of the shop space, is two months in arrears as of the balance
sheet date. The monthly rental is Php 2,500 per month.
 Adjusting Entry:

Dec. 31 Accrued Rent Income Php 5,000

Rent Income Php 5,000
(Php 2,500 x 2 months)

Provision of Bad Debts

Businesses extend credits to get more customers and to sell more goods. Not all credits are collectible.
There are certain percentage of this receivables are not collected, for the reason that the business should provide
for such losses for non-collectible of credits. The losses from uncollectible accounts are what we call bad debts.

Bad Debt is a nominal account which must be shown in the income statement at the end of the accounting
period.

The entry to adjust the bad debts is:

Bad Debts Php XXX

Allowance for Bad Debts Php XXX

There are several methods of estimating the losses from the bad debts:

1. Increasing the accumulated allowance for bad debts by a certain percentage of the account
receivable.

2. Increasing the accumulated allowance for bad debts to a certain percentage of accounts
receivable.

Example:

The following accounts are shown in the pre-adjusted trial balance of Mr. Reyes as of December 31,
2020.
DEBIT CREDIT
Accounts Receivable Php 7,000
Allowance for Bad Debts Php 500

1. Increasing the accumulated allowance for bad debts by a certain percentage of the account
receivable.

What is the adjusting entry to increase the allowance for bad debts by 10% of the accounts
receivable?
Computation:

Bad Debts estimate = Php 7,000 x .10 = Php 700

Adjusting Entry:

Bad Debts Php 700

Allowance for Bad Debts Php 700

Balance Sheet Presentation:

Accounts Receivable Php 7,000

Less: Allowance for Bad Debts 1,200
Net Realizable Value Php 5,800

Example:

The following accounts are shown in the pre-adjusted trial balance of Mr. Reyes as of December 31,
2020.
DEBIT CREDIT
Accounts Receivable Php 7,000
Allowance for Bad Debts Php 500

2. Increasing the accumulated allowance for bad debts to a certain percentage of accounts receivable.

What is the adjusting entry to increase the allowance for bad debts to 10% of the accounts
receivable?
 Computation:

Bad Debts estimate = Php 7,000 x .10 = Php 700

Allowance for Bad Debts Php 500

Less: Bad Debts Estimate 700
Increase in Allowance for Bad Debts Php 200

Adjusting Entry:

Bad Debts Php 200

Allowance for Bad Debts Php 200

Balance Sheet Presentation:

Accounts Receivable Php 7,000

Less: Allowance for Bad Debts 700
Net Realizable Value Php 6,300

Provision of Depreciation

Assets that are fixed in nature and they are used by the business operation and are not intended for sale.
The values of these assets are decrease except land. Land only decreases as time passes by due to wear and tear
from operations and inadequacy and obsolescence.

The cost of the fixed asset is allocated to the number of its useful life. Depreciation is the cost of asset
which is already used or consumed.

There are different methods used in depreciating an asset. However, this module will focus on the simplest
form, the straight line method of depreciation.

D = (C-S) /n

DEPRECIATION = (ORIGINAL COST – SALVAGE VALUE) / ESTIMATED USEFUL LIFE

Example 1:

A service truck was purchased for Php 250,000. It is estimated that it will last 10 years after which it shall
have a value of Php 5,000.

D = (C – S) / n
D = (Php 250,000 – Php 5,000) / 10 years
D = Php 200,000 / 10 years
D = Php 20,000 / year

Adjusting Entry:

Depreciation – Service Truck Php 20,000

Accumulated Depreciation – Service Truck Php 20,000

Balance Sheet Presentation:

Service Truck Php 250,000

Less: Accumulated Depreciation 20,000
Php 230,000
Example 2:

The owner of the business purchased a service truck last April 9, 2020 worth Php 250,000. It is estimated
that it will last 10 years after which it shall have a value of Php 5,000.

D = {[(C – S) / n ] / 12 mos. x no. of mos. used}

D = {[(Php 250,000 – Php 5,000) / 10 years] / 12 mos. x 9 mos.}
D = {[Php 200,000 / 10 years] / 12 mos. x 9 mos.}
D = (Php 20,000 / 12 mos.) x 9 mos.
 D = Php 1,666.67 x 9 mos.
D = Php 15,000 for 9 mos.

Note: 9 months if from April 9, 2020 up to December 31, 2020.

Adjusting Entry:

Depreciation – Service Truck Php 15,000

Accumulated Depreciation – Service Truck Php 15,000

Balance Sheet Presentation:

Service Truck Php 250,000

Less: Accumulated Depreciation 15,000
Php 235,000

Illustration
CLARING REPAIR SHOP
TRIAL BALANCE
DECEMBER 31, 2020

DEBIT CREDIT
CASH Php 900
ACCOUNTS RECEIVABLE – S. MARIANO 1,200
REPAIR SUPPLIES 1,500
REPAIR TOOLS 1,200
FURNITURE AND FIXTURES 6,500
SERVICE TRUCK 20,000
NOTES PAYABLE Php 3,250
CLARING, CAPITAL 25,200
CLARING, DRAWING 750
SERVICE INCOME 5,900
ADVERTIING 250
SALARIES AND WAGES 900
UTILITY EXPENSE 150
RENT EXPENSE 1,000
Php 34,350 Php 34,350

On December 31, the end of the accounting period, the following data were taken:

1. An actual count of repair supplies showed a balance of Php 850.

2. Repair tools are depreciated at 10% per annum.
3. Furniture and fixtures are estimated to have a useful life of 5 years while service truck has a useful life
of 10 years. Both assets were bought on September 1 of the current year.
4. A 10% interest has accrued on the note payable.
5. Of the income received, Php 900 is applicable to the next accounting period.
6. Accrual of expenses: salaries and wages Php 250, rent Php 500.
7. The balance of the advertising expense account represents payment for five months. Paid on September
1 of the current year.

Reqiired:

Prepare the Adjusting Entries and the Adjusted Trial Balance.

Adjusting Entries:

1. Repair supplies used Php 650

Repair supplies Php 650
(Php 1,500 – Php 850)

2. Depreciation – repair tools 120

Accumulated Depreciation – repair tools 120
(Php 1,200 x .10)

3. Depreciation – furniture and fixtures 433

Accumulated Depreciation – furniture and fixtures 433
[(Php 6,500 / 5yrs) / 12 mos. x 4 mos]
 Depreciation – service truck 667
Accumulated Depreciation – service truck 667
[(Php 20,000 / 10 yrs) / 12 mos. x 4 mos]

4. Interest expense 325

Accrued Interest expense 325
(Php 3,250 x .10)

5. Service Income 900

Unearned Service Income 900

6. Salaries and Wages 250

Accrued Salaries and Wages 250

Rent Expense 500

Accrued Rent Expense 500

7. Prepaid Advertising 50
Advertising 50
[(Php 250 / 5 mos.) x 4 mos. expired]

Adjusted Trial Balance:

STEP I: Rewrite the unadjusted trial balance and add the adjustments.

CLARING REPAIR SHOP

TRIAL BALANCE
DECEMBER 31, 2020

DEBIT (+ or -) CREDIT (+ or -)
CASH Php 900
ACCOUNTS RECEIVABLE – S. 1,200
MARIANO
REPAIR SUPPLIES 1,500 Php (650)
REPAIR TOOLS 1,200
FURNITURE AND FIXTURES 6,500
SERVICE TRUCK 20,000
NOTES PAYABLE Php 3,250
CLARING, CAPITAL 25,200
CLARING, DRAWING 750
SERVICE INCOME 5,900 Php (900)
ADVERTIING 250 (50)
SALARIES AND WAGES 900 250
UTILITY EXPENSE 150
RENT EXPENSE 1,000 500
Adjustments:
Repair Supplied Used 650
Depreciation – Repair Tools 120
Accumulated Depreciation – 120
Repair Tools
Depreciation – Furniture and 433
Fixtures
Accumulated Depreciation – 433
Furniture and Fixtures
Depreciation – Service Truck 667
Accumulated Depreciation – 667
Service Truck
Interest expense 325
Accrued Interest Expense 325
Unearned Service Income 900
Accrued Salaries Expense 250
Accrued Rent Expense 500
Prepaid Advertising 50
Php 36,695 Php 3,245 Php 34,350 Php (900)
Php 33,450 Php 33,450
STEP II: Re-arrange the account titles according to their classification and adjust the amount as to
increase or decrease.

CLARING REPAIR SHOP

ADJUSTED TRIAL BALANCE
DECEMBER 31, 2020

DEBIT CREDIT
CASH Php 900
ACCOUNTS RECEIVABLE – S MARIANO 1,200
PREPAID ADVERTISING 50
REPAIR SUPPLIES 850
REPAIR TOOLS 1,200
ACCUMULATED DEPRECIAITON – REPAIR TOOLS Php 120
FURNITURE AND FIXTURES 6,500
ACCUMULATED DEPRECIAITON - FURNITURE AND 433
FIXTURES
SERVICE TRUCK 20,000
ACCUMULATED DEPRECAITION - SERVICE TRUCK 667
NOTES PAYABLE 3,250
UNEARNED SERVICE INCOME 900
ACCRUED INTEREST EXPENSE 325
ACCRUED SALARIES EXPENSE 250
ACCRUED RENT EXPENSE 500
CLARING, CAPITAL 25,200
CLARING, DRAWING 750
SERVICE INCOME 5,000
ADVERTIIING 200
SALARIES AND WAGES 1,150
UTILITY EXPENSE 150
RENT EXPENSE 1,500
REPAIR SUPPLIES USED 650
DEPRECIAITON – REPAIR TOOLS 120
DEPRECIAITON – FURNITURE 433
DEPRECAITION - SERVICE TRUCK 667
INTEREST EXPENSE 325
Php 36,645 Php 36,645

Activity I: FILL IN THE BLANK!

Direction: Give the year-end adjusting entry required by each of the following transactions.

1. One month interest on the mortgage, Php 4,000 has accrued.

2. Accrued drivers’ wages at the end of the year is Php 5,000

3. A tenant, occupying a space of the building agreed beginning on November 1 to pay Php 5,500
per month , and on that date he paid six month rent in advance. The amount paid was credited to
the Unearned Rent account.

4. The company owns and occupies a building that was completed and occupied for the first time on
April 1 of the current year. The building cost Php 200,000, has an estimated useful life of 40 years
and is not expected to have nay salvage value at the end of its useful life.

5. Four employees earn a total of Php 1,000 per day for a five-day week that begins on Monday and
ends on Friday. They are paid for the week ended assuming December 28 is Friday.
6. The balance of the Repair Supplies account as of January 1 is Php 1,200, Php 3,500 of repair
supplies are purchased during the year, and a year-end inventory showed Php 1,100 of supplies
used.
 7. Three months’ property taxes, estimated at Php 1,500 have accrued but are unrecorded at the end
of the accounting period.

8. Depreciation on delivery equipment was estimated at Php 3,500.

9. One month interest on a Php 10,000, 10%, 60-day note was collected.

10. The business has an account receivable of Php 10,500 in which 10% is proved uncollectible.

Activity 2: ADJUST ME!

Direction: Prepare the necessary adjusting entries of the given problem. Use the space provided.
a. URSULA CINEMA
TRIAL BALANCE
DECEMBER 31, 2020
DEBIT CREDIT
CASH Php250,000
PREPAID ADVERTISING 52,000
PREPAID FILM RENTAL 200,000
LAND 300,000
BUIDING 1,000,000
ACCUMULATED DEPRECIATION-BUILDING Php50,000
PROJECTION EQUIPMENT 350,000
ACCUMULATED DEPRECIATION –PROJECTION 35,000
EQUIPMENT
NOTES PAYABLE 20,000
ACCOUNTS PAYABLE 30,000
URSULA, CAPITAL 867,000
URSULA, DRAWINGS 20,000
REVENUE FROM ADMISSION 1,500,000
SALARIES EXPENSE 195,000
POWER AND LIGHT 135,000
Php 2,502,000 Php 2,502,000
Adjustment Data:
1. Advertising expense for the period, Php 30,000.
2. Rental expense for the period Php 50,000.
3. Depreciation expense on building Php 20,000; on projection equipment Php 15,000.
4. Accrued interest on notes payable Php 2,000.
5. Salaries not yet paid to employees, Php 15,000.

GENERAL JOURNAL Page: _____

DATE PARTICULARS F DEBIT CREDIT
 b. CANADA STORAGE
TRIAL BALANCE
DECEMBER 31, 2020

DEBIT CREDIT

CASH Php2,330
ACCOUNTS RECEIVABLE 970
PREPAID INSURANCE 1,450
OFFICE SUPPLIES 410
OFFICE EQUIPMENT 1,780
ACCUMULATED DEPRECIATION-OFFICE Php450
EQUIPMENT
TRUCKS 15,000
ACCUMULATED DEPRECIATION-TRUCKS 4,550
LAND 20,000
ACCOUNTS PAYABLE 1,050
UNEARNED STORAGE FEES 750
MORTGAGE PAYABLE 15,000
CANADA, CAPITAL 44,500
CANADA, DRAWINGS 2,000
STORAGE INCOME 40,750
OFFICE SALARIES EXPENSE 5,500
DRIVER’S WAGE EXPENSE 10,600
GAS, OIL, AND REPAIRS 3,010
Php 108,550 Php 108,550

Adjustment Data:
1. It is estimated that 10% of the accounts receivable is proven to be uncollectible.
2. An examination of insurance policies showed that Php 650 of insurance expired.
3. Actual count of office supplies showed a balance of Php 110.
4. Fixes assets are 15% depreciated annually.
5. Storage fees earned amounted to Php 450.
6. Accrued office salaries Php 1,500; truck drivers’ wage Php 4,200.
 GENERAL JOURNAL Page: _____
DATE PARTICULARS F DEBIT CREDIT
Activity 3: TRY ME!

Direction: Using the unadjusted trial balance and your answer in adjusting entries in activity no. 2, prepare
the ADJUSTED TRIAL BALANCE of each problem. Use the space provided.

a. URSULA CINEMA
_________________________________
_________________________________

ACCOUNT TITLE DEBIT CREDIT

b. CANADA STORAGE
_________________________________
_________________________________

ACCOUNT TITLE DEBIT CREDIT