ADJUSTING ENTRIES

Adjusting entry = an entry that splits the nominal and real accounts from a mixed
account.

Purpose: 1. To bring records or balances of accounts updated.

2. To properly match income and expenses during the period.

Items that usually require Adjusting Entries:

I. ACCRUALS

1. Accrued Expense – expense already incurred by the business but not

yet paid at the end of the accounting period.
The proforma adjusting entry is:
_____________ Expense xxx
Accrued ___________ Expense xxx
Examples:
a. Salary of an employee for the period Dec. 16 – 31, 20A was not paid. The
accounting period ends on Dec. 31, 20A. The amount was P 3,000.
Adjusting Entry
Dec. 31, 20A Salaries Expense P 3,000
Accrued Salaries Expense P 3,000
To record unpaid salary of an employee.

b. Unpaid rent, P 1,000.

Rent Expense P 1,000
Accrued Rent Expense P1,000

c. On Nov. 1, 20A, the business issued a 90-day, 12%, P 10,000 note. The
accounting period ends on Dec. 31, 20A.
I = Prt ; P= Principal r= rate t= time
I = ( 10,000 ) (.12) ( 90/360) = 300/3 mos. = 100 / month

Dec. 31, 20A Interest Expense 200

Accrued Interest Expense 200
#
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d. The following expenses were accrued:

a. Taxes and Licenses 2,000
b. Utilities Expense 4,000
Adjusting Entry
Taxes and Licenses 2,000
Utilities Expense 4,000
Accrued Taxes and Licenses 2,000
Accrued Utilities Expense 4,000
#

2. Accrued Income = income already earned by the business but not yet
collected at the end of the accounting period.
The proforma adjusting entry is:
Accrued ____________ Income xxx
____________ Income xxx
Examples:
a. The rental of a tenant amounting to P 1,000 for the month of December was
not yet collected when the period ends on December 31, 20A.
Adjusting Entry
Dec. 31, 20A Accrued Rent Income P 1,000
Rent Income P 1,000
To record income earned but not yet collected.

b. On Oct. 1, 20A, the business received a 150-day, 12%, P 10,000 note.

I = ( 10,000 ) (.12) (150/360) = 500 / 5 mos. = 100 / mo.
Adjusting Entry
Dec. 31, 20A Accrued Interest Income 300
Interest Income 300

II. DEFERRALS:

1. Prepaid Expense = an expense that is already paid but not yet incurred.

2 Methods used in recording prepayments:

a. Expense Method ( Nominal Approach )
b. Asset Method (Real Approach)
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Examples:
a. On Oct. 1, 20A the business paid an insurance premium covering the
period from Oct. 1, 20A to Oct. 1, 20B in the amount of P 6,000.
6,000 / 12 mos. = 500 / mo.
Oct. 1, 20A – Dec. 31, 20A = 3 months (expense portion)
3 months x 500 = 1,500 expense portion

Jan. 1, 20B – Oct. 1, 20B = 9 months ( asset portion )

9 months x 500 = 4,500 (asset portion)
COMPARATIVE JOURNAL ENTRIES
EXPENSE METHOD ASSET METHOD
(Nominal Approach ) (Real Approach)

UPON Insurance Expense 6,000 Prepaid Insurance 6,000

PAYMENT Cash 6,000 Cash 6,000
Oct. 1, 20A To record insurance To record insurance premium
premium paid. paid.

Adjusting Prepaid Insurance 4,500 Insurance Expense 1,500

Entry Insurance Expense 4500 Prepaid Insurance 1,500
Dec.31,20A To record the unexpired To record the expired
( asset) portion of (expense) portion of insurance
insurance premium. premium.

b. On Nov. 1, 20A the business paid an advance rental covering the period from
Nov. 1, 20A – Jan. 31, 20B in the amount of P3,000.
3,000 / 3 Months = 1,000 / month
Nov. 1, 20A – Dec. 31, 20A = 2 months x 1,000 = 2,000 expense portion
Jan. 1, 20B – Jan. 31, 20B = 1 month x 1,000 = 1,000 asset portion
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COMPARATIVE JOURNAL ENTRIES

Expense Method Asset Method

Upon Rent Expense 3,000 Prepaid Rent 3,000

Payment Cash 3,000 Cash 3,000
Nov. 1, 20A To record rent expense paid. To record rent expense paid.

Adjusting Prepaid Rent 1,000 Rent Expense 2,000

Entry Dec. Rent Expense 1,000 Prepaid Rent 2,000
31, 20A To record the unexpired To record the expired
portion of the rent paid. portion of the rent paid.

c.On Sept. 1, 20A, the business paid in advance an advertising expense in the
amount of P12,000 covering the period from Sept. 1, 20A – Feb. 28, 20B.
12,000 / 6 months = P 2,000 / month
Sept. 1, 20A – Dec. 31, 20A = 4 months x 2,000 / month = P8,000 expense portion
Jan. 1, 20B – Feb. 28, 20B = 2 months x 2,000 / month = P4,000 asset portion

COMPARATIVE JOURNAL ENTRIES

Expense Method Asset Method

Upon Advertising Expense 12,000 Prepaid Advertising 12,000

Payment on Cash 12,000 Cash 12,000
Sept. 1, To record payment of To record payment of
20A advertising expense. advertising expense.

Adjusting Prepaid Advertising 4,000 Advertising Expense 8,000

entry Dec. Advertising Expense 4,000 Prepaid Advertising 8,000
31, 20A To record the asset portion of To record the expense
the advertising expense paid. portion of the advertising
expense paid.
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d. Of the P2,000 office supplies purchased, P500 cost of the supplies were on hand.
Asset account was debited upon purchase.
P2,000 -500 on hand (asset portion) = 1,500 expense portion

Entry upon purchase : Unused Office Supplies 2,000

Cash 2,000
To record the purchase of office supplies.

Adjusting Entry : Office Supplies Expense 1,500

Unused Office Supplies 1,500
To record the used portion of the office
Supplies.

e. Of the P 2,000 office supplies purchased, P500 cost of the supplies were on
hand. Expense account was debited upon purchase.

Entry upon purchase: Office Supplies Expense 2,000

Cash 2,000
To record the purchase of office supplies.

Adjusting entry : Unused office supplies 500

Office Supplies Expense 500
To record the unused portion of the office
supplies.

2. Precollected Income = income already collected by the business but not yet
earned at the end of the accounting period.

2 Methods used in recording precollections:

1. Income Method ( Nominal Approach )
2. Liability Method (Real Approach)
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Examples:
a. On August 1, 20A the business collected P 24,000 from a tenant
representing an advance collection from building rental for 1 year period.
P 24,000 / 12 Months = P 2,000 / month
Aug. 1, 20A – Dec. 31, 20A = 5 months x P2000 / month = P10,000 earned portion
Jan. 1, 20B – Aug. 1, 20B = 7 months x P2,000 / month = P14,000 unearned
Portion

COMPARATIVE JOURNAL ENTRIES

Income Method Liability Method

Upon Cash 24,000 Cash 24,000

collection Rental Income 24,000 Unearned Rental Income 24,000
Aug. 1, To record rental income To record rental income
20A collected in advance. collected in advance.

Adjusting Rental Income 14,000 Unearned Rental Income 10,000

Entry Unearned Rental Rental Income 10,000
Dec. 31, Income 14000 To record the earned portion
20A To record the unearned of rental income collected in
portion of rental income advance.
collected in advance.

b. Of the recorded interest income of P 1,000, only P580 is actually earned

during the period.
P1,000 – 580 earned = 420 unearned

Entry upon collection: Cash 1,000

Interest Income 1,000
To record interest collected in advance.

Adjusting entry: Interest Income 420

Unearned Interest Income 420
To record the unearned portion of interest income.
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c. Of the recorded unearned interest income of P 1,000, only P 580 is actually

earned during the period.

Entry upon collection: Cash 1,000

Unearned Interest Income 1,000
To record interest income collected in
Advance.

Adjusting Entry: Unearned Interest Income 580

Interest Income 580
To record the interest income earned during the
period.

III. PROVISION FOR DEPRECIATION OF FIXED ASSETS:

Depreciation = portion of the cost of fixed assets allocated and chargeable to

expense.

Method of computing depreciation: Straight-Line Method

Formula : Without scrap or salvage value:

Depreciation expense = Cost / Estimated life of the asset in years

With scrap value:

Depreciation Expense = Cost – Salvage Value / Estimated life of the asset in

Years

Salvage value or scrap value = estimated price that a fixed asset can be sold at the
end of its life.

Proforma adjusting entry: Depreciation Expense xxx

Accumulated Depreciation – name
Of the asset xxx
#
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Cost of Fixed Asset xxx

Less: Accumulated Depreciation xxx
NET BOOK VALUE xxx

Examples:

a. On August 1, 20A the business acquired a Delivery Car costing P100,000

with an estimated life of 5 years.

August 2, 20A Delivery Equipment 100,000

Cash 100,000
To record the acquisition of delivery car.

December 31, 20A Depreciation Expense 8,333.33

Accumulated Depreciation-
Delivery Equipment 8, 333.33
To record the depreciation expense
for 20A.

Depreciation Expense = 100,000/5 years = 20,000/year x 5/12 = 8,333.33

Delivery Equipment 100,000

Less: Accumulated Depreciation 8,333.33
NET BOOK VALUE – Dec. 31, 20A 91,666.67

December 31, 20B Depreciation Expense 20,000

Accumulated Depreciation 20,000
To record the depreciation expense
for 20B.

Delivery Equipment 100,000

Less: Accumulated Depreciation 28,333.33
NET BOOK VALUE – Dec. 31, 20B 71,666.67

b. On August 1, 20A the business acquired a Delivery Car costing P100,000

with an estimated life of 5 years and a scrap value of P10,000 at the end of
its life.
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Depreciation expense = 100,000 – 10,000 / 5 years = 18,000/year x 5/12 =P 7,500

Adjusting entry:
Dec. 31, 20A Depreciation Expense 7,500
Accumulated Depreciation-Delivery
Equipment 7,500
To record depreciation expense for
20A.

Delivery Equipment 100,000

Less: Accumulated Depreciation 7,500
NET BOOK VALUE – Dec. 31, 20A 92,500

Cost less scrap value = depreciable cost

Adjusting entry:
December 31, 20B Depreciation Expense 18,000
Accumulated Depreciation- Delivery
Equipment 18,000
To record depreciation expense for 20B.

Delivery Equipment 100,000

Less: Accumulated Depreciation 25,500
NET BOOK VALUE – Dec. 31, 20B 74,500

SALE OF FIXED ASSETS:

The business has a machine which it acquired a year ago. Per record, the
acquisition cost was P35,000 and its accumulated depreciation was P 7,000 as of
the date of sale.
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Case 1: The machine was sold for P 30,000.

Journal entry to record the sale:

Cash 30,000
Accumulated Depreciation – Machine 7,000
Machine 35,000
Gain on Sale of Machine 2,000
To record the sale of the machine.

Cost of Machine 35,000

Less: Accumulated Depreciation 7,000
Net Book Value 28,000
Selling price 30,000 – Net book value 28,000 = 2,000 gain

Case 2: The machine was sold for P 25,000.

Journal entry to record the sale:

Cash 25,000
Accumulated Depreciation-Machine 7,000
Loss on sale of machine 3,000
Machine 35,000
To record the sale of the machine.

Selling price 25,000 – Net book value 28,000 = (3000) loss

RECORDING ACQUISITION OF FIXED ASSET AT A DISCOUNT:

When a fixed asset is acquired at a discount, the amount of the discount is

considered as a “reduction” from its acquisition cost.
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Example:
A machine is acquired on account costing P50,000. If paid within 20 days
from date of purchase, a 10% discount can be availed.

Journal entry on the date of purchase:

Machine 50,000
Accounts Payable 50,000
To record the acquisition of machine on account.

Journal entry upon payment with a discount availed:

Accounts Payable 50,000

Machine (50,000 x .10) 5,000
Cash 45,000
To record payment within the discount period.

Incidental costs such as installation costs of the machine, freight and handling,
trial-run cost or testing cost are added to the purchase cost of the machine.

Assuming that the business incurs incidental costs of P 3,000, the journal
entry would be as follows:
Machine 3,000
Cash 3,000
To record installation and trial-run
Costs incurred.

IV. PROVISION FOR DOUBTFUL ACCOUNTS:

Bad Debts = anticipated loss that the business may incur arising from these
doubtful accounts.

Proforma adjusting entry:

Bad Debts / Doubtful Accounts / Uncollectible Accounts xxx
Allowance for Bad Debts or
Allowance for Doubtful Accounts or
Estimated Uncollectible Accounts xxx
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Accounts Receivable xxx

Less: Estimated Uncollectible Accounts xxx
NET REALIZABLE VALUE xxx

Examples:

1. The business has an outstanding accounts receivable from various

customers in the amount of P 20,000. At the end of its accounting period,
it is estimated that 5% of this is doubtful of collection.
Adjusting entry:
Bad Debts ( 5% x 20,000) 1,000
Allowance for Bad Debts 1,000
To record the provision for uncollectible
Accounts.

Accounts Receivable 20,000

Less: Allowance for Bad Debts 1,000
NET REALIZABLE VALUE 19,000

2. The business has an outstanding Accounts Receivable of P80,000 and has

already provided an Allowance for Doubtful Accounts in the amount of
P2,000.

CASE A: The Allowance for Doubtful Accounts should be increased to

P 7,000.

Adjusting entry:
Bad Debts 5,000
Allowance for Bad Debts 5,000
To record the provision for uncollectible accounts.

Accounts Receivable 80,000

Less: Allowance for Bad Debts 7,000
NET REALIZABLE VALUE 73,000
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CASE B: The Allowance for Doubtful Accounts should be increased by

P 7,000.

Bad Debts 7,000

Allowance for Doubtful Accounts 7,000
To record the provision for uncollectible
Accounts.

Worthless Accounts:

Assuming that the account of Mr. X in the amount of P800 is hopeless for
collection, the balance of his account is written off as follows:

Allowance for Doubtful Accounts 800

Accounts Receivable – Mr. X 800

Direct Write-off Method = directly charging to expense an account of a customer

whom it believed could not pay anymore the balance
without providing an Allowance for Doubtful Accounts.

Bad Debts 800

Accounts Receivable – Mr. X 800

Bad Debts Recovery:

After the write off, Mr. X paid his account. The journal entry to record
collection would be:

Cash 800
Miscellaneous Income 800
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V. CORRECTION OF ERRONEOUS JOURNAL ENTRY:

CASE 1: Bought computers and typewriters on account, P250,000. The account

debited is Office Furniture and Fixtures.

Wrong entry : Office Furniture and Fixtures 250,000

Accounts Payable 250,000
#
Correct entry: Office Equipment 250,000
Accounts Payable 250,000
#
Adjusting Entry: Office Equipment 250,000
Office Furniture and Fixtures 250,000
#

CASE 2: Bought various supplies on account, P5,300. The correct amount should
have been P 3,500.

Wrong entry: Supplies Inventory 5,300

Accounts Payable 5,300
#
Correct entry: Supplies Inventory 3,500
Accounts Payable 3,500
#
Adjusting entry: Accounts Payable 1,800
Supplies Inventory 1,800
#

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