UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2020-2021

Lesson 7: Adjusting Entries

Topic: a. Accruals of Income and Expenses

Learning Outcomes:
b. Depreciation
c. Bad Debts
At the end of this module, you are expected to :
1. Identify the types of adjustments and their purposes.
2. Prepare and Explain the adjusting entries
3. Interpret the effects of omission of adjusting entries in the Financial
Statements
4. Develop skills in preparing the adjusting journal entries.

Let us start with a short prayer

God our heavenly father, we praise you and thank you for the gift of life. You make all things bright and wonderful,
Father. As we begin this week, we ask forgiveness for our mistakes and the grace to acknowledge them in your
presence. We invoke the presence of the Holy Spirit to shower upon us its wonderful gifts to guide us as we go
along the path of life. In Jesus’ most powerful name, we pray, AMEN.

Hi guys, this is now the 6th week of our journey together in FAR. I hope you are well after the first term
examinations!

Here’s another ”Laughter is the Best Medicine” for your story bank. I hope you enjoyed the
first two ones. If you remember the story, you will remember the lesson, I promise. Here you go:

An elderly couple with memory problems are advised by their doctor to write notes to help them
remember things.

One evening, while watching TV, the wife asks her husband to get her a bowl of ice-cream. “Sure” he
says. “Write it down”. She suggests. “No”, he says “I can remember a simple thing like that.” “I also want
strawberries and whipped cream”, she says. “Write it down.” “I don’t need to write it down”, he insists, heading
to the kitchen.

Twenty minutes later, he returns bearing a plate of bacon and eggs. “I told you to write it down”, his
wife says. “I wanted fried eggs”.

Source: RD: Laughter is the Best Medicine

https://vectortoons.com/products/laughing-sunny-side-up-egg-emoji

Do you have memory problems? Survey says that:

ACCT 1026- Financial Accounting and Reporting | 1

https://www.npr.org/2016/04/17/474525392/attention-students-put-your-laptops-away

An excerpt:

In the study published in Psychological Science, Pam A. Mueller of Princeton University and Daniel M. Oppenheimer of the
University of California, Los Angeles sought to test how note-taking by hand or by computer affects learning. "When people
type their notes, they have this tendency to try to take verbatim notes and write down as much of the lecture as they can,"
Mueller tells NPR's Rachel Martin. "The students who were taking longhand notes in our studies were forced to be more
selective — because you can't write as fast as you can type. And that extra processing of the material that they were doing
benefited them."

But the students taking notes by hand still performed better. "This is suggestive evidence that longhand notes may have
superior external storage as well as superior encoding functions," Mueller and Oppenheimer write.

The answer is your Journal of Learning.

Don’t be confused guys! I hope you do not get the wrong notion that you only write lectures and drills as
instructed by your teachers. You can write anything and everything in you JoL for better recall of lessons.

I am making an emphasis on the JOL, why? Because writing down the salient points of the discussion about
the Adjusting Entries will make you assimilate to a greater degree as compared to just reading it. Solve
everything in the “Problems” portion of your book. Read ahead of your classmates, it will make you gain more
self-confidence.

Adjusting entries has always been my favorite topic when I was a student. And still is, as I became a teacher.
My good preparation and foundation of adjusting entries became useful in my auditing subjects later on. More
so, when I was an employee. Why? Because it makes all my dead brain cells come alive! Just kidding.

Let us continue our study of the accounting cycle.

Steps in the Accounting Cycle:

1. Identifying and Analyzing – finished

2. Journalizing - finished
3. Posting – finished
4. Preparing the Unadjusted
Trial Balance – finished
5. Preparing the adjusting Entries - now showing
6. Preparing the Adjusted Trial Balance – coming next week

Adjusting Entry - is a mandatory procedure for businesses using the accrual basis of accounting. It is
prepared at the end of the year just before the financial statements are finalized to:
 Take up unrecorded income and expenses for the accounting period and
ACCT 1026- Financial Accounting and Reporting | 2
  Split mixed accounts into real and nominal accounts.

https://www.writework.com/essay/cash-and-accrual-paper-1

I hope you still remember the topic on cash basis and accrual basis of accounting? If not, go over your JoL for
a refresher. This diagram says everything about adjusting entries. Pay close attention.

Regrouping the items for adjusting journal entries in another way is:

 Accruals – accrued expense and accrued income

 Deferrals – prepaid expenses and unearned income
 Estimates – depreciation and bad debts fall under this category

Definition of Some Terms

Real Accounts – are the accounts appearing in the Statement of Financial Position (SFP). They are also
referred to as permanent accounts. Real accounts are retained and rolls forwards its ending
balance at the end of the year to become the beginning balances in the next period.

ACCT 1026- Financial Accounting and Reporting | 3

 https://www.differencebetween.com/difference-between-nominal-account-and-vs-real-account/

Nominal Accounts – are accounts appearing in the Income Statement, also referred to as temporary
accounts. These accounts are closed at the end of the accounting period.

https://www.wallstreetmojo.com/nominal-account/

Mixed accounts – have both the components of real and nominal accounts.

The application of the accrual basis of accounting will necessitate the adjusting entries for the following:

ACCRUAL – is recognition of an expense already incurred but unpaid and recognition of a revenue already
earned but not yet collected.

1. Accrued Expense - are expenses a company accounts for when they happen, as opposed to when
they are actually invoiced or paid for. An accrual method allows a
company’s financial statements, such as the balance sheet and
income statement, to be more accurate.

ACCT 1026- Financial Accounting and Reporting | 4

 https://valueinvestingphilippines.wordpress.com/2014/01/12/cash-flow-part-9-current-liability-accrued-expense/

Accrued expenses, looking at another angle, are expenses a company knows it must pay, but cannot
do so because it has not yet been billed for them. Under accrual accounting, the company accounts for
these costs anyway so that the management has a better indication of what its total liabilities really are.

Here are some common examples of expenses that can be accrued:

Interest on loan(s) Goods received

Services received Wages for employees

Taxes Commissions

Utilities Rent

Illustration 1. Interest on Notes Payable

Assume that Dec. 31 is the end of the accounting period. And no interest has been paid
For a 60-day, 6% note for P3,000,000 issued on Nov. 11, 2019.

Take note that interest on notes payable is recorded when it is paid in cash when it matures on January 10,
2020. Following accrual system of accounting, the business should pass an adjusting entry on 12-31-2019 as
follows:

Adjusting Journal Entry:

DATE ACCOUNT TITLES DR CR COMPUTATION: I= PRT
12/31/2019 Interest Expense 25,000
Accrued Interest Payable 25,000 I= (P3,000,000 x 6% x 50
To record accrual of
interest 360
I= P25,000

*** Interest Expense is an Income Statement account while Accrued Interest Payable is a Balance Sheet
account

2. Accrued Revenue – or Accrued Income refers to income that has been earned or is not yet due
for collection. Under accrual accounting, income is considered as earned
or realized in the period when the service is rendered.

Illustration 2. Accrued Rent Income

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The business subleases a portion of the store to a Sweepstakes ticket vendor for P3,000 a month. The end of
the fiscal period is March 31, 2020. No payment has been made for the last three (3) months and no entry has
been made to record this income.

DATE ACCOUNT TITLES DR CR

3/31/2020 Rent Receivable 9,000
Rent Income 9,000
To record accrual of rent from Jan-March, 2020
(P3,000 x 3 months)

*** Rent Income is an Income Statement account while Rent Receivable is a Balance Sheet account

Illustration 3. Accrued Interest on Notes Receivable

Assume that June 30, 2020 is the end of the accounting period. And no interest has been paid
For a 120-day, 12% note for P5,000,000 issued on April 16, 2020.

COMPUTATION: I= PRT
Interest = 5,000,000 x 12% x 75/360
DATE ACCOUNT TITLES DR CR Interest = P125,000
6/30/2020 Interest Receivable 125,000
Interest Income 125,000 COMPUTATION: NUMBER OF DAYS
To record accrual of Interest from May 16-June
30 16-Apr 30-16 15
May 31-16 31
June 30
TOTAL days 75
*** Interest Income is an Income Statement account while Interest Receivable is a Balance Sheet account.
3. Depreciation of Fixed Assets
Fixed assets also referred to as Plant, Property and Equipment and Non- Current Assets are those long-lived
and permanent in nature. They are acquired by the business used by the business in its operation and are not
intended for sale. Common examples are:

ACCT 1026- Financial Accounting and Reporting | 6

Although durable and permanent in nature, with the exception of Land, these properties decrease in value due
to

https://www.slideshare.net/AshaA9/unit-v-depreciation-70547272

The gradual decrease in the value of a fixed asset attributable to reasons stated above is called depreciation.

https://www.slideshare.net/TarekAElsherif/fixed-assets-and-depreciation-methods

There are several methods of computing depreciation but the Straight Line Method will used in our
discussion. Other methods of computation will be introduced in higher accounting subjects.
The following factors are considered in the computation of depreciation:

Original Cost – refers to the invoice price less discounts plus incidental costs such as installation and
freight.
Estimated Useful Life – the length of time expressed in years during which a depreciable fixed asset is
expected to contribute to operations.
Estimated Scrap or Salvage Value – refers to the estimated amount to be realized when the asset is
sold after its serviceable life.

ACCT 1026- Financial Accounting and Reporting | 7

Illustration 4 – Depreciation of Fixed Assets

Problem: The following items appear on the pre-adjusted trial balance on June 30, 2020:

The Delivery Equipment was bought on May 04, 2020 estimated to last for 5 years with estimated scrap value
of P120,000. As a matter of company policy, May 4 to 31 is considered a month.

Computation of Annual Depreciation

Original Cost 1,200,000
Less: Estimated Salvage Value 120,000
Depreciable Cost 1,080,000
Divided by: Estimated Useful
Life 5
Depreciation Expense per year 216,000

Adjusting Journal Entry:

6/30/2020 Depreciation Expense (216,000 x 2/12) 36,000

Accumulated Depreciation, Delivery Equipment 36,000

To record depreciation expense from May 04 to June 30

How much is the Net Book Value of the Delivery Equipment as of June 30, 2020?

Original Cost 1,200,000

Less: Accumulated Depreciation 252,000
Net Book Value/Carrying Amount 948,000

Accumulated depreciation is the sum of all recorded depreciation on an asset to a specific

date. Accumulated depreciation is presented on the balance sheet just below the related capital asset line. It
is also called a contra asset account.

4. Bad Debts or Estimated Uncollectible Accounts

Bad debts or Uncollectible accounts is an inevitable risk of doing business on credit terms. Not all customers
availing credit will be able to pay for varied reasons. Some of the reasons for the failure of collection are
bankruptcy of the debtor, unwillingness to pay due to unsettled disputes. Regardless of the reason, accounting
practitioners must be able to reflect the estimated uncollectible account in the current period.

There are several methods being used in the computation of estimated uncollectible accounts. Please refer to
the diagram below:

ACCT 1026- Financial Accounting and Reporting | 8

Illustration 5 – Estimated uncollectible accounts or bad debts

a) Assume that Accounts Receivable has a balance of P240,000. It is estimated that 5% of this will be
uncollectible.

Adjusting Entry:

Bad Debts Expense (P240,000 x 5%) P12,000

Allowance for Bad Debts P12,000

b) Experience shows that 7% of accounts receivable will be uncollectible. The balance of accounts receivable
is P190,000 and the balance of the allowance for doubtful accounts is P5,800.

Adjusting Entry:

Doubtful Accounts Expense P7,500

Allowance for Doubtful Accounts P7,500

Computation:
Estimated doubtful accounts (190,000 x 7%) P13,300
Less: Amount already setup for allowance 5,800
Doubtful Accounts Expense P 7,500

END OF LESSON 7

Proceed to the Drills/ Activities Part

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REFERENCES

Textbooks

1. Ballada, W. (2019). Basic Financial Accounting and Reporting. Manila: DomDane Publishers.
2. Cabrera, E.(2017) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila
3. Millan, Z. V. (2020). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin
Enterprise.
4. Valencia, E. and Roxas, G. (2017), Basic Accounting, Valencia Educational Supply
5. Valix, C. and Peralta, J. (2018). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila

Online Reference

1. Introduction to accounting, https://courses.lumenlearning.com/sac-finaccounting/chapter/chapter-1/

2. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation
3. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the-
accounting-system-and-accounting-basics
4. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp
5. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation
6. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html

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