Tanauan Institute, Inc.

– Senior High School Department

TANAUAN INSTITUTE, INC.

Senior High School Department

Modified Learning Scheme : Workbook

Fundamentals of Accountancy, Business, and Management 2
1st Semester, S.Y. 2020-2021
Subject Teacher: ____________________

Name: ___________________________________ Score: ________________

Section: __________________________________ Date: _________________

Topic Session

Adjustments for Accruals Chapter 3

Objectives of the Lesson

At the end of the lesson, the student should be able to:
1. Determine the adjusting accounts that are involved in an adjusting
transaction.
2. Compute for the right adjustment amount.
3. Write the correct adjusting entry.

Values Integration
Perseverance. The attitude that no matter an issue or a problem maybe
one will still continue until he or she succeeds. The lesson that will be
discussed involves analytical thinking which will require the perseverance
of the students in order to learn it.

Vocabulary
Prepaid Expenses – Expense paid in advance.
Accrued Expenses – Expenses that are incurred but not yet paid.
Depreciation – It is the decrease in the market value of long lived assets
due to the wear and tear that it incurs in the course of its useful life.

Discussion
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 Tanauan Institute, Inc. – Senior High School Department

Adjustments for Accruals

Accrued Expense
An entity often incurs expenses before paying for them. Cash payments are usually
made at regular intervals of time such as weekly, monthly, quarterly or annually. If the
accounting period ends on a date that does not coincide with the scheduled cash
payment date, an adjusting entry is needed to reflect the expense incurred since the last
payment.
Accrued Salaries. Makabayan Enterprise records an expense for the salaries of
his part-time employee who was hired last November 26. The employee’s rate is P350
per day. The scheduled pay day is December 10 but the end of the accounting period of
Makabayan Enterprise is November 30.
Question: What will be the adjusting entry for this transaction?
Transaction: Accrual of unrecorded expense.
Analysis: Liabilities (salaries payable) Increased. Expense (salaries
expense) Increased which results to a Decrease in Owner’s
Equity.
Computation: P350 X 5 days = P1,750
Since the employee started working on Nobember 26 and
the accounting period ends at November 30, this means that
5 days’ worth of salaries expense has been incurred by the
business. Therefore, we only multiply P350 (daily rate) by 5
days (number of days the employee worked) to get the
amount of the accrued salaries.

Dr. Cr.
Adjusting Entry: Nov. 30 Salaries Expense 1,750
Salaries Payable 1,750

Salaries payable was used instead of cash because an expense was incurred (namely
payment for salary) however there is no cash that was involved. The business in return
have an obligation to pay (a liability) to its employee on December 10. Therefore the
journal entries for December 10 will be as follows:

Dr. Cr.
Journal Entry: Dec. 10 Salaries Payable 1,750
Cash 1,750

Note: Utility, taxes and other expenses can also become accruals when incurred but not
yet paid at the end of the accounting period. Therefore the treatment of such accounts
will be the same as the discussion provided for the accrued salaries.
Accrued Interest

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Interest is a charge for the use of money over time. Interest expense is matched to a
particular period during which the benefit – the use of borrowed money – is received.
The interest is a fixed obligation and accrues regardless of the results of the entity’s
operations. Interest rates are expressed at annual rates, so if interest is being
calculated for less than a year, the calculation must express time as a portion of a year.
Interest calculations usually exclude the day that loans occur and include the day that
loans are paid off.
Example: Makabayan Enterprise’s P100,000 note payable, which was signed on Nov. 2,
carries an 18% interest rate. Makabayan uses the simple interest formula to calculate
how much interest expense accrued during the final twenty-eight days of November.
The calculation is shown as follows:
Interest = Principal X Interest Rate X Length of Time
= P100,000 X .18 (from 18% annual interest) X 28/360 days
= P1,400

Question: What will be the adjusting entries?

Transaction: Accrual of unrecorded expense.

Analysis: Liabilities (interest payable) Increased. Expense (interest
expense) Increased which results to a Decrease in Owner’s
Equity.

Dr. Cr.
Adjusting Entry: Interest Expense 1,400
Interest Payable 1,400

At the end of November, Makabayan Enterprise owed the bank P1,400 for the interest
in addition to P100,000 loan.

Accrued Revenues
An entity may provide services during the period that are neither paid for by clients nor
billed at the end of the period. The value of these services represents revenue earned
by the entity. Any revenue or income that has been earned but not recorded during the
accounting period calls for an adjusting entry that debits an asset account and credits
an income account.
Example: On July 14, Makabayan Enterprise rendered services to Mr. Balikbayan worth
P24,000. Mr. Balikbayan then promised to pay the services rendered on August 10.
Question: At the end of July what will be the adjusting entry?
Transaction: Accrual of unrecorded revenue or income.
Analysis: Assets (accounts receivable) increased. Income (service
income) Increased which results to an Increase in Owner’s
Equity.

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Dr. Cr.
Adjusting Entry: July 31 Accounts Receivable 24,000
Service Income 24,000

Accrual for Uncollectible Accounts

Entities often allow clients to purchase goods or avail services on credit. Some of these
accounts will never be collected; hence, there is a need to reflect these as charges
against income. In practice, an expense is recognized for the estimated uncollectible
accounts in the current period, rather than when specific accounts actually become
uncollectible. This practice produces a better matching of income and expenses.
Estimates of uncollectible accounts may be based on credit sales for the period or the
accounts receivable balance.
For example, an entity made credit sales (sales on account) worth P1,100,000 in 2016
and prior experience indicates an expected 1% (the percent of uncollectible accounts is
based on what the business apply) average uncollectible accounts rate based on credit
sales. The contra account (contra-asset account to be more specific) – Allowance for
Uncollectible Accounts has a normal credit balance and is shown in the balance sheet
as a deduction from Accounts Receivable. The allowance account need to be increased
by P11,000 (P1,100,000 X .01(1%)) because accounts receivable in that amount is
doubtful of collection (there is a possibility that the business will not be able to collect
the receivable). The adjustment will be:
Dr. Cr.
Entry: Uncollectible Accounts Expense 11,000
Allowance for Uncollectible Accounts 11,000

Throughout the accounting period, when there is positive evidence that a specific
account is definitely uncollectible, the appropriate amount is written off against the
contra account.

Example: If a P1,500 of the accounts receivable were considered uncollectible, that

amount would be written off as follows:
Dr. Cr.
Adjusting Entry: Allowance of Uncollectible
Accounts 1,500
Accounts Receivable 1,500

No entry is made to Uncollectible Accounts Expense, since the adjusting entry has
already provided for an estimated expense based on previous experience for all
receivables.
Things to Remember
Types of Account Balances Before
Adjusting Entry
Adjustment Adjustment

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Income
Balance Sheet Account Account
Statement
Account Debited Credited
Account
Prepaid Expenses:
Asset method Assets Expenses Expense Prepaid Expense
Overstated Understated (Asset)
Expense Assets Expenses Prepaid Expense Expense
method Understated Overstated (Asset)
Depreciation Assets Expenses Expense Contra Asset
Overstated Understated
Unearned Revenues:
Liability method Liabilities Income Unearned Revenues or
Overstated Understated Revenues Income
Income method Liabilities Income Revenue or Unearned
Understated Overstated Income Revenues
Accrued Liabilities Expenses Expense Payable
Expenses Understated Understated
Accrued Assets Income Receivable Revenue or
Revenues Understated Understated Income

Questions

1. What are the conditions needed in order for a transaction to be considered

as an accrual?
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2. In this lesson what adjusting account is considered as a contra account?

What are the factors considered for its computation?
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3. Does the entity intentional do not pay its employees’ salaries when it have
Salary Payable in its adjusting entries? Why?
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Activity
Types of Accounts Affected. Complete the table by filling in the
accounts to be debited and to be credited in preparing the adjusting entries.
Account Debited Account Credited
Accruals:
Accrued Expenses
Salary _________________
_________________
Interest _________________
_________________
Uncollectible Accounts _________________
_________________
Accrued Income _________________
_________________

Quiz
Direction: Prepare the adjusting entry for Golden Gate Tours under each
of the following situations. The last day of the accounting period is Dec. 31. (Also
show the computation for the answer.)
a. Golden Gate Tours rendered services to Classic Company on account for
P200,000.

b. The company allotted 5% of the receivable from transaction a as allowance just

in case the account might become uncollectible.

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c. All employees earn a total of P10,000 per day for five-day week beginning on
Monday and ending Friday. They were paid for the workweek ending Dec. 26.
They worked on Monday, Dec. 29, Tuesday, Dec, 30 and Wednesday, Dec. 31.

d. The 10% interest was incurred from the loan worth P56,000 made by Golden
Gate Tours at the start of the year.

e. 5% of the receivable were deemed uncollectible at the end of the year.

Reflection

What did you realize in this lesson?

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References
Book:
Ballada, Win. 2017. Fundamentals of Accountancy Business & Management
1. Manila, Philippines. DomDane Publishers. pp. 202-214.

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