Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 1

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 8 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

ADJUSTING ENTRIES – DEPRECIATION & CORRECTING ENTRIES

Learning Objectives:
At the end of this module, learners must be able to:
a. Identify accounts to be adjusted;
b. properly record adjusted transactions;

Depreciation
Long-term assets such as building, machineries, equipment, furniture and fixtures,
improvements to properties wears out by regular use or become obsolete by the passage of time.
This gradual decrease in value of these properties throughout their years of useful life is called
depreciation expense.

At the end of accounting period, depreciation is estimated and expensed via an adjusting
entry.

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
### Depreciation Expense ###
Accumulated Depreciation ###

To record depreciation expense

The accumulated depreciation account is a contra-asset account and is presented as a

deduction against the pertinent property account in the statement of financial position (Balance
Sheet). The cost of the asset less the accumulated depreciation is called the book value.

Depreciable Cost
Cost is what is paid for to acquire or purchase the property. Usually, this value does not
become totally zero at the end of the useful life of the property. Properties are still saleable at the
end of their service life. the estimated net realizable value from the ultimate disposal of the property
at the end of its useful life is called residual value, salvage value, or scrap value. The residual value is
the disposal proceeds less estimated cost of disposal.

For the purposes of depreciation, only the decrease in value of the property throughout its
service life is expensed through periodic provision of depreciation. This is called depreciable cost.

Depreciable Cost is simply: COST less RESIDUAL VALUE

The depreciable cost is periodically expensed every accounting period throughout the useful
life of the property using the method of depreciation (depreciation policy) that is adopted by the
business. Depreciation should start when the asset is available for use.

Useful Life is:

1. the period over which an asset is expected to e available for use by a business; or
2. the number of production or similar units expected to be obtained from the asset by the
business.

Common Methods of Depreciation

1. Straight Line Method
2. Production Output or Work-Hours Method
3. Sum of the Year’s Digit Method
4. Declining Balance Method

Fundamentals of Accountancy, Business & Management - 1 Page 1 of 6


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 8 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

1. Straight Line Method

The depreciable cost of the asset is simply spread over an expense over the useful life. This
method results in uniform depreciation expense throughout the life of the property.

Formula would be:

Annual Depreciation = Cost – Residual Value
Useful Life

Example 1
On January 1, the business purchased an equipment costing P100,000. The same is expected
to be used for 10 years after which it will be sold for P10,000 as scrap.

Computation for Annual Depreciation:

Annual Depreciation = Cost – Residual Value
Useful Life

Annual Depreciation = 100,000 – 10,000

10

Annual Depreciation = 90,000

10

Annual Depreciation = Php 9,000

This means that every end of the accounting period we will reduce the value of the asset in
the statement of financial position (balance sheet) by P9,000.

To record the depreciation:

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
Dec 31 Depreciation Expense 9,000
Accumulated Depreciation 9,000

To record depreciation expense

Note:
1. The book value of the equipment shall be P91,000 as of Dec 31.
2. There shall be another P9,000 depreciation per year until the depreciable cost is fully
exhausted through depreciation expense.
3. The book value of the property shall likewise decrease P9,000 per year until it equals the
residual value at the end of the useful life of the asset.

Example 2
The business made a purchase of machinery costing P100,000 on March 30,2020. The
machinery is expected to last 3 years with a residual value of P10,000.

The depreciation expense and book value of the machinery shall be as follows from 2020-
2023:
As of Dec of Year 2020 (in PHP) 2021 (in PHP) 2022 (in PHP) 2023 (In PHP)
Depr. Expense 22,500 2 30,000 1 30,000 7,5003
*Accum. Depr. 22,500 52,500 82,500 90,000
**Book Value 77,500 47,500 17,500 10,0004

*Previous year balance plus depreciation expense for the year

**Cost less Accumulated Depreciation

Fundamentals of Accountancy, Business & Management - 1 Page 2 of 6


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 8 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Note:
1. Annual Depreciation = [(100,000 – 10,000)/3] = P30,000
2. Annual depreciation will be multiplied to 9/12 because for the first year only 9 months has passed
(from Apr 1 – Dec 31). If the property was bought on Jan 1, then we will use P30,000 instead, but
for 9 months it is only equivalent to P22,500 (30,000 x 9/12).
3. The depreciation for the missing months on the first year will be computed in its last year to
complete one year. The first year only had 9 months, hence, if we stop in 2022, then we did not
exhaust the useful life of 3 years of the asset. Therefore, we need to account for the missing
months, which is 3 months, equivalent to P7,500 (30,000 x 3/12).
4. Salvage Value

Alternatively, the straight line depreciation can be computed by getting the straight-line rate,
computed as follows:

Straight-Line Rate = 1
Useful Life

This is 1/3 or 33.33% (from our example 2)

The periodic annual depreciation can be computed as depreciable cost x depreciation rate.
Hence, 90,000 x 1/3 = P30,000 (from example 2).

It should be noted that once depreciation is commenced, it will be continued even if the
asset is not actively used because depreciation does not occur only through usage but also
through passage of time due to obsolescence.

Observe that the straight-line method provides equal depreciation expense over the service
life of the asset. The straight-line method simply presumes that the asset has uniform service utility
throughout its life.

2. Production Output or Work-Hours Method

The provision depreciation expense is variable depending on the output produced over
expected output of the asset or work-hours used over the expected work-hours usage of the
asset. The depreciable cost is simply presumed exhausted over the service life in hours or output.

Example
On July 1, 2020, the business purchased a machinery for P1,000,000. The machinery is
expected to be sold for P200,000 after 1,000,000 service hours. The machinery was used for 52,000
hours during 2020.

The depreciation expense for 2020 shall be computed as:

Depreciation Expense = 1,000,000 – 200,000

X 52,000
1,000,000

Depreciation Expense = 800,000

X 52,000
1,000,000

Depreciation Expense = 0.80 X 52,000

Depreciation Expense = P41,600

This is the amount of depreciation expense without regard to the actual number of months the
property is used during the period. Every period will vary in amount depending on the number of
hours used or output.

Fundamentals of Accountancy, Business & Management - 1 Page 3 of 6


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 8 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

To record the depreciation for 2020:

DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
Dec 31 Depreciation Expense 41,600
Accumulated Depreciation 41,600

To record depreciation expense

3. Sum of The Year’s Digits Method

The sum of the year’s digit method provides for a declining depreciation as the asset get
older.

The annual depreciation is computed as a factor of the remaining life over the sum of all the
digits throughout the useful life.

Example
On January 1, 2021, the business purchased an equipment with a cost of P100,000 and
expects a salvage value of P25,000 after its 5-year useful life. the business uses the sum-of-the-
year’s digit method.

The depreciable cost of an asset with a 5-year useful life shall be depreciated based on the
following factor:

Formula would be:

SYD = Life in Years x (Life in Years +1)
2

Thus, [5 x (5 + 1) / 2] = 15

YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

5/15 4/15 3/15 2/15 1/15

The denominator is arrived at by adding all the digits in the useful life of the asset (i.e. 5 + 4 + 3
+ 2 + 1). This mathematical series can be conveniently computed by a formula as shown above.

The depreciation expense throughout the useful life of the of the equipment shall be:

Year Computation Depr. Expense Accum. Depr. Book Value

1 5/15 x (100,000 – 25,000) 25,000 25,000 75,000
2 4/15 x (100,000 – 25,000) 20,000 45,000 55,000
3 3/15 x (100,000 – 25,000) 15,000 60,000 40,000
4 2/15 x (100,000 – 25,000) 10,000 70,000 30,000
5 1/15 x (100,000 – 25,000) 5,000 75,000 25,000
Total Depreciable Cost P75,000

These are the amounts of depression expense that will be recorded by adjusting entries at
each year.

4. Declining Method
Similar to the SYD, the declining balance method provides for a declining depreciation
expense throughout the useful life of the asset. The difference with SYD is that it initially ignores
salvage value. The salvage value I simply considered near the end of the useful life of the asset.
The depreciation expense in the terminal years is adjusted to ensure that the remaining book
value equals the salvage value of the property.

Fundamentals of Accountancy, Business & Management - 1 Page 4 of 6


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 8 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Examples of Declining Method:

1. Double Declining Balance Method
Provides a periodic depreciation expense equivalent to double the straight-line rate

2. 150% Declining Balance Method

Provides a periodic depreciation expense equivalent to 150% of the straight-line rate

Example
The business purchased an equipment costing P100,000 on January 1, 2021. It is expected
to last for 5 years after which is expected to be sold at a scrap value of P10,000. The business
uses the double declining balance method in depreciating the equipment.

The straight-line rate is:

Straight-Line Rate = 1
Useful Life

Straight-Line Rate = 1
5

Straight-Line Rate = 1/5 or 20%

The double declining rate shall be 20% x 2 = 40%

The cost of the equipment shall be depreciated as follows:

Year Computation (in PHP) Depr. Expense Accum. Depr. Book Value
1 100,000 x 40% 40,000 40,000 60,000
2 60,000 x 40% 24,000 64,000 36,000
3 36,000 x 40% 14,400 78,400 21,600
4 21,600 x 40% 8,640 87,040 12,960
5 12,960 – 10,000 salvage value* 2,960 90,000 10,000
Total Depreciable Cost P90,000

Note:
1. Note that the declining rate is imposed on the cost less accumulated depreciation without initially
considering the residual value. The residual value is merely considered at end of the useful life of
the equipment.
2. This is merely an adjustment to ensure that the remaining book value is the residual value*

For 150% declining balance method, simply multiply the straight-line rate by 1.5 instead of 2.

The sum of the year’s digit method and the declining balance method is premised on the
assumption that assets are more productive in their initial years compared to their terminal years
and hence a larger portion of their cost must be accordingly expensed during their early service
years.

Correcting Entries
A correcting entry is an entry made to correct an accounting error in recording. Sometimes,
we record erroneously some transactions. Sometimes, amounts are over or under the actual amount.

Example
A collection of P10,000 cash for payment of receivable was recorded as P100,000.

Fundamentals of Accountancy, Business & Management - 1 Page 5 of 6


Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 1
Grade Level/Section: Grade 11- ABM

MODULE 8 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Entry made:
DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
### Cash 100,000
Accounts Receivables 100,000

To record collection of receivable

Correcting Entry:
DEBIT CREDIT
DATE ENTRY
(in PHP) (in PHP)
Dec 31 Accounts Receivable 90,000
Cash 90,000

To correct the improper recording of 10,000

collection as 100,000

To see the effect, let’s use the T-Account:

CASH
Wrong Debit Entry 100,000
90,000 Correcting Entry
100,000 90,000
Correct Debit Entry P 10,000

ACCOUNTS RECEIVABLE
100,000 Wrong Credit Entry
Correcting Entry 90,000
90,000 100,000
P 10,000 Correct Credit Entry

References:
• Banggawan, R., Asuncion, D.(2017).Fundamentals of Accountancy, Business and
Management 1. Aurora Hill, Baguio City: Real Excellence Publishing.
• Ferrer, R., Millan, Z.(2017). Fundamentals of Accountancy, Business and Management 1.
Bakakeng Sur, Baguio City: Bandolin Enterprise.
• Ong, F.(2016). Fundamentals of Accountancy, Business and Management 1. South Triangle,
Quezon City: C & E Publishing.
• Baysa, G., Lupisan, M.(2011). Accounting for Partnership and Corporation. Mandaluyong City:
Millenium books,

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