ADJUSTING

ENTRIES (PART 2)
Depreciation

■ Based on the concept of systematic and rational allocation that provides that “costs
that provide economic benefits over several accounting periods but cannot be directly
associated with the earning of revenues are recognized as expenses over the periods
where the economic benefits are consumed.
– The expenditure in acquiring an equipment is recognized as an asset, then, an
expense is recognized over the periods the equipment is used.
■ There are different methods of depreciation, but for now we will use the straight-line
method (SLM)
– (Cost – Salvage Value) / Useful Life
Depreciation - Illustration

■ On January 1, 2020, a business acquired equipment for

P20,000. The business expects to use the equipment over the
next 4 years. How much is the depreciation expense?
■ Entry to record depreciation
Depreciation Expense XX
Accumulated Depreciation XX
Bad Debts Expense

■ Based on the concept of immediate recognition that provides that “a cost

that produces no future economic benefits or an asset that ceases to
provide future economic benefits is recognized immediately as an
expense”
■ There are many ways of determining how much is the bad debts expense
in a given period.
– Percentage of Accounts Receivables
– Percentage of Sales
– Aging of Accounts Receivable
Bad Debts Expense
PERCENTAGE OF ACCOUNTS RECEIVABLE
■ When the policy of the accounting entity involves setting up bad debts expense as a percentage
of the accounts receivable balance at the end of the period. The product becomes the required
balance of the allowance for doubtful accounts expense.
■ Journal Entry to record Bad Debt Expense is:

Bad Debts Expense XX

Allowance for Bad Debts XX

■ For instance: The policy dictates that the bad debts per period is 5% of the total Accounts
Receivable. The Accounts Receivable at the end of the year is equal to P100,000. It means that
the ledger of the Allowance for Doubtful Accounts should show a balance of P5,000
(100,000x5%). If the Allowance for Doubtful Account has no beginning balance then the
amount of adjustment is P5,000. However, if the Allowance account has a beginning balance of
P3,000, for instance, you will only have to recognize additional bad debts of P2,000. Because
again the product is the required balance of the allowance account when using the percentage of
accounts receivable method.
Bad Debts Expense
PERCENTAGE OF SALES
■ When the policy of the accounting entity involves setting up bad debts expense as a
percentage of the SALES amount of a certain period. The product becomes the required
adjustment on the allowance for doubtful accounts expense.
■ Journal Entry to record Bad Debt Expense is:
Bad Debts Expense XX
Allowance for Bad Debts XX

■ For instance: The policy dictates that the bad debts per period is 5% of the total Sales.
The Sales at the end of the year is equal to P300,000. It means that the adjusting amount
should be P15,000 (300,000x5%) regardless of the balance of the Allowance for
Doubtful Accounts should. Hence, the amount of adjustment is P15,000. Because again
the product is the required adjustment on the allowance account when using the
percentage of sales method.
Bad Debts Expense
AGING OF ACCOUNTS RECEIVABLE
■ In aging, accounts receivable are categorized based on the how long it has been outstanding or
unpaid. The longer the time that it has been in the balance sheet, the less likely it would be
collected and so on. The total uncollectible is the required balance of the Allowance for Doubtful
Accounts.
■ Journal Entry to record Bad Debt Expense is:
Bad Debts Expense XX
Allowance for Bad Debts XX

■ For instance: Suppose the policy of the accounting entity in aging is as follows: (Rememvber, this
policy is not necessarily uniform among entities. The required balance in the Allowance account
has to be P12,600 (P3,600+P7,000+P2,000).
Days Outstanding Amount Probability of Bad Debts
Uncollectibility
1 -10 days P120,000 3% P3,600
11-20 days P70,000 10% P7,000
21-30 days P10,000 20% P2,000
Bad Debt Expense

■ There are two methods of recording bad debts

– Allowance Method
– Direct Method
Bad Debt Expense
ALLOWANCE METHOD
■ Bad debts expense is recognized based on the likelihood of uncollectibility or even when
there is still a possibility of not being collected.
■ Accounts receivable is WRITTEN OFF if its final that it can’t be collected anymore,
not just mere estimation.
■ Journal Entries are as follows:
Upon estimation of uncollectible accounts Bad Debt Expense XX
Allowance for Bad Debts XX
Upon Writing Off Allowance for Bad Debts XX
Accounts Receivable XX
Upon recovery Accounts Receivable XX
Allowance for Bad Debts XX
Bad Debt Expense
DIRECT METHOD
■ Bad debts expense is recognized only when there are receivable to be WRITTEN OFF
■ Accounts receivable is WRITTEN OFF if its final that it can’t be collected anymore,
not just mere estimation.
■ Journal Entries are as follows (Notice that there is NO Allowance account anymore.
Upon estimation of uncollectible accounts No entry

Upon Writing Off Bad Debts Expense XX

Accounts Receivable XX
Upon recovery (during the period) Accounts Receivable XX
Bad Debts Expense XX