Adjusting Journal

Entries
(4TH STEP OF THE ACCOUNTING PROCESS)
 AFTER STUDYING THE
TOPIC, WE SHOULD BE ABLE

Learning TO:

Know and understand the

Objectives purpose and types of adjusting

entries
Learn what are the real and
nominal accounts
  Are journal entries which are to be recorded
in the General Journal and are usually
Adjusting prepared at the end of an accounting period
of one year following the preparation of
entries
trial balance.
Reasons Why
Adjusting To bring records or balances of
accounts updated
To properly match revenues against
expenses during the period
Journal
Entries are
Prepared
What are Real
and Nominal
Accounts?
 Are accounts listed in the

Real Accounts Statement of Financial

Position and are considered
“Permanent Accounts”.
 Are accounts listed in the Statement of
Comprehensive Income and are considered
Nominal
“Temporary Accounts” of Owner’s Equity. Accounts
  Accruals
 Deferrals

Types of  Provision for Depreciation of Property and Equipment or

Fixed Asset
Adjusting  Provision for Estimated Uncollectible Accounts (Bad
Debts)
Entries  Unused Supplies Inventory Adjustment
 Adjustment on Inventories (this is typical in
merchandising and manufacturing concern)
 ACCRUED INCOME

Accruals ACCRUED EXPENSE

 It is an income that is already earned but
not yet collected when the accounting
period ends.

Accrued
income
The purpose of the adjusting entry is to
record the income earned and recognize
the corresponding asset account
(receivable)
It is an expense that is already incurred but
not yet paid when the accounting period
ends.

Accrued
Expense
The purpose of the adjusting entry is to
record the expenses incurred and recognize
the corresponding liability account
(payable).
To illustrate:

 A building owned by Metro Davao Hotel was partly rented by Allied

Banking Corporation for P50,000 per month payable every 5th day of
the following month. This rental for the month of December 2019
will be paid on January 5, 2020.
Analysis

 2019 and 2020 are two different and separate accounting periods.
Metro Davao Hotel should record the income earned although not
yet received by debiting Accrued Rent Receivable and Crediting
Rental Income. On the Other hand, Allied Banking Corporation
should record the expense incurred although not yet paid by debiting
Rent Expense and crediting Accrued Rent Expense on December 31,
2019.
Effects of error/omission on financial
statements
 Failure to record accrued Rent Income or Rent Receivable will
understate assets in the Statement of Financial Position. Failure to
record Rent Income will understate total income in the Statement of
Comprehensive Income and as a consequence, profit will be
understated. Understated profit will understate Owner’s Equity.
 Failure to record Rent Expense will understate total expenses in the
Statement of Comprehensive Income. Failure to record Accrued
Rent Expense or Rent Payable will understate the liability in the
Statement of Financial Position and as a consequence, profit will be
overstated. Overstated profit will overstate Owner’s Equity.
 Precollected Income

• Income Method
• Liability Method

Deferrals
Prepaid Expenses

• Expense Method
• Asset Method
 This is an income that Is already collected but
not yet earned.

Precollected
Income
There are two methods in recording precollected
income:

Income Method Liability Method

An income method is credited upon
collection or receipt of cash.

Income
Method
Also called as “nominal approach”
Liability Method

A liability account
is credited upon Also called as “real
collection or receipt approach”
of cash.
 On October 1, 2019, Cordillera Realty Co. collected
P12,000 from a tenant representing an advance
collection from building rental for one year. The To illustrate:
accounting period ends on December 31, 2019.
Comparative Journal Entries

Income Method Liability Method

Cash P12,000 Cash P12,000
Rent Income P12,000 Unearned Rent Income P12,000
To record collection of advance To record collection of advance
rental for the period from Oct 1, 2019 to Oct. rental for the period from Oct 1, 2019 to Oct.
1 2020. 1 2020.
Effects of Error/Omission on Financial
Statements
Under Income Method Under Liability Method
 Statement of Comprehensive Income –  Statement of Comprehensive Income –
PROFIT is overstated PROFIT is understated

 Statement of Financial Position –  Statement of Financial Position-

LIABILITY is understated and LIABILITY is overstated and
OWNER’S EQUITY is overstated OWNER’S EQUITY is understated.
 This is an expense already paid but not yet
incurred.

Prepayment of
Expenses
Two methods of recording prepayments:

Expense Method Asset Method

Expense Method

Under this method, an

This method is also
expense account is
called “nominal
debited upon payment
approach”
of prepaid expense.
 An asset account is debited
upon payment of the prepaid
expense.
Asset
Method
Also called the “real
approach”
 On September 1, 2019, Rajah Buayan
Commercial paid an insurance
premium covering the period from
September 1, 2019 to September 1,
2020 in the amount of P3,600. The
To illustrate:
accounting period ends on December
31, 2019.
Journal Entry

Expense Method Asset Method

Insurance Expense P3,600 Prepaid Insurance P3,600
Cash P3,600 Cash P3,600
To record insurance premium paid. To record insurance premium paid.
Adjusting entries

Expense Method Asset Method

Prepaid Insurance P2,400 Insurance Expense P1,200
Insurance Expense P2,400 Prepaid Insurance P1,200
To record unexpired portion of To record the expired portion of
insurance premium. insurance premium.
Effects of Error/Omission on Financial
Statements
Under Expense Method Under Asset Method
Statement of Comprehensive Income – Statement of Comprehensive Income –
Expense is overstated and Profit is Expense is understated and profit is
understated overstated

Statement of Financial Position- asset is Statement of Financial Position – Asset is

understated and Owner’s Equity is also overstated and Owner’s equity is also
understated overstated
Provision for Estimated
Uncollectible Accounts (Bad
Debts)
 Methods to estimate uncollectible accounts

By setting a certain By setting up a certain

percentage of uncollectible By aging the accounts percentage of uncollectible
account based on the receivable account based on credit
outstanding receivable sales
Allowance  Under this method, uncollectible account is being
recognized in anticipation that “what if the whole amount
Method of Accounts receivable cannot be collected?”
Illustration:

Let us assume that the business has an outstanding Accounts receivable from various
customers in the amount of P20,000. At the end of its accounting period, it is
estimated that 5% of this, is doubtful of collection.
Adjusting Entry

Computation:
Uncollectible Accounts P1,000 Accounts Receivable P20,000
Est. Uncollectible Account P1,000 X % of provision 5%
To set up provision for doubtful
accounts.
Uncollectible Accounts P1,000
 Effects of
If uncollectible account expense is not
error/omission

recorded, expense section of the income
statement is understated and profit is
overstated. on financial
statements
Financial Statement Presentation

Accounts Receivable P20,000

Estimated Uncollectible Accounts 1,000

Estimated Unrealizable Value P19,000

  When an account of a certain customer is
Worthless already “hopeless” for collection, it is
considered as “worthless account” and same
Accounts must be written-off from the record.
Direct Write-off Method

 Under this method, the business adopts a policy of directly charging to

Uncollectible Account Expense the account of a customer whom he believed
could not pay its balance anymore without providing an Estimated for
Uncollectible Accounts. This result sin identifying the particular customer’s
account that needs to be written-off.
Provision For Depreciation of Property
and Equipment
 Tangible assets which are held by an enterprise for
use in the production of supply of goods and services
for rental to others, or for administrative purposes,
Property and
and are expected to be used during more than one
year.
Equipment
Depreciation  The portion of the property and
equipment that should be allocated over
the number of years and chargeable
against expenses during the period.
Physical
depreciation
Kinds of
depreciation
Economic
depreciation
  Results to the ultimate retirement of the property or
Physical termination of the service of the asset because of wear
and tear due to frequent use, passage of time due to
depreciation non-use, action of elements, such as wind, sunshine,
rain or dust and others.
Functional or
 Arises from obsolescence or inadequacy of the assets
Economic to perform efficiently.
Depreciation
Straight-line
method of Annual depreciation = Cost of asset – salvage value

depreciation Estimated life of the asset in years

  Acquisition cost
 It is the amount paid or liability incurred when the asset is
acquired. It includes the purchase price and other incidental
cost of its acquisition
Factors to
consider in  Scrap Value

determining  The estimated value of the asset at the end of its economic
or useful life
depreciation
 Estimated useful life
 The estimated length of time usually stated in years that the
asset can be of use