By: JDC

ADJUSTING ENTRIES- Depreciation and

Doubtful Accounts DEPRECIATION
EXPENSES
Definitions:

1. The systematic and rational allocation of the cost of property, plant, and
equipment that is used for more than one period.
2. It is a contra account of Property, plant and equipment which decreases their
value due to physical deterioration and inadequacy or obsolescence.
Three factors to be considered in determining Depreciation:

1. Cost of the Asset

- Acquisition price, including incidental expenses necessary to acquire the asset
and make it ready for use.
2. Residual value or salvage value or scrap value or disposal value
- Exchange value at the end of its estimated useful life
3. Useful life
- Productive life of the assets which may be expressed in number of years or
machine hours or number of units produced during its lifetime.

Formula to get Depreciation: Using straight-line method

Depreciation expenses = Cost-Estimated Residual Value

Estimated Useful Life

Adjusting Entry:
Debit Credit
Depreciation Expense xxx
Accumulated Depreciation-Fixed Asset xxx

Note:
Depreciation expense= normal balance (Debit)
Accumulated depreciation expense = normal balance (Credit)

Sample Problem:
Assume that X Company purchased washing machines and dryers by issuing a P
22,000, 12%, 60-day note on June 1, 2019. It is estimated that these machines will be
useful for the next five years and can be disposed of at the end of its useful life for P
1,000.
Requirements:

1. Compute for depreciation expense.

Annual Depreciation expense = Cost-Estimated Residual Value

Estimated Useful Life
= P 22,000- P 1,000
5 years

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= P4, 200

2. What is the adjusting entry to record depreciation expense for the month of
June?
June Debit Credit
Depreciation Expense (4,200 x 1/12) 350
Accumulated Depreciation-Machine 350

3. How much is the net book value of the Machine for the month of June?

Machine, at cost P 22,000

Less: Accumulated depreciation 350
Net book value P 21, 650

DOUBTFUL ACCOUNTS/ BAD DEBTS

Note:
Doubtful accounts expense= normal balance (Debit)
Allowance for doubtful account expense = normal balance (Credit)
Definitions:

1. These are the loss from uncollectible accounts.

2. It is a valuation or a contra-asset account that is credited to record the
corresponding decrease in value of related asset account, which is the
ACCOUNTS RECEIVABLE.
Adjusting entry:
Debit Credit
Bad debt Expense xxx
Allowance for Bad Debts xxx

Two methods of Recognizing Doubtful Accounts or Bad Debts:

1. Direct Write-off Method

-The entity only recognizes the “Bad debts” when it is already certain that they
will not be able to collect from the customers.

Illustration:
The JDC Company rendered service for a credit customer valued at P 20,000.
Three months after, the company was able to collect 50% of the amount due.
However, after six months from rendering of service, the management found out
that such customer was declared bankrupt by the court and the company would
not able to collect from such customer anymore.

Journal Entries:

Debit Credit
Accounts Receivable 20,000
Service income 20,000

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To record services rendered to a customer

Cash (50% x 20,000) 10,000
Accounts Receivable 10,000
To record the collection
Bad debts expense 10,000
Accounts receivable 10,000
To write-off the uncollectible account

2. Allowance Method
- The entity recognizes an allowance every period either as a percentage of
credit sales during the period or as a percentage of receivables still
outstanding as of the end of the period.
Rules in adjusting the Allowance for doubtful accounts:

1. As a % of SALES= Total Sales x % =Doubtful accounts expense/ Bad debt

expense
2. As a % of RECEIVABLES
= Receivables x %= Allowance for Doubtful accounts, Ending Balance

Case 1: Assume the company’s policy is to provide doubtful accounts on the basis of
5% of credit sales. What are the adjusting entries for each year?
Total Service Revenue
Period 1 P 1,000,000
Period 2 1,200,000
Period 3 1,650,000

Period 1: Computation= 5% x 1,000,000 = 50,000 Bad Debt expense

Adjusting entry:
Bad debt expense 50,000
Allowance for bad debt expense 50,000

Period 2: Computation= 5% x 1,200,000 = 60,000 Bad Debt expense

Adjusting entry:
Bad debt expense 60,000
Allowance for bad debt expense 60,000

Period 1: Computation= 5% x 1,650,000 = 82,500 Bad Debt expense

Adjusting entry:
Bad debt expense 82,500
Allowance for bad debt expense 82,500

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Case 2: Assume the company’s policy is to provide doubtful accounts on the basis of
3% of Accounts Receivable. What are the adjusting entries for each year?
Accounts Receivable
Period 1 P 200,000 BEGINNING BALANCE
Period 2 220,000
Period 3 250,000
COMPUTATIONS and ADJUSTING ENTRY:
Period 1: 3% x 200,000= 6,000 Allowance for Doubtful Accounts expense, Ending
balance

Allowance for Doubtful Accounts

Adj. ?
Ending balance 6,000

Allowance for Doubtful Accounts

Adj. 6,000 Doubtful account expense 6,000

Ending balance 6,000 Allowance for DA 6,000

Period 2: 3% x 220,000= 6,600

Allowance for Doubtful Accounts
expense, Ending balance Allowance for
Beg. Bal 6,000
Adj. ?
from P1
Ending balance 6,6

Doubtful Accounts 00

Allowance for Doubtful Accounts

Beg. Bal 6,000 from , end. Bal. of previous period will become the beg. Bal of this period
P1

Doubtful account expense 600

Adj. 600

Ending balance 6,6 00 Allowance for DA 600

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Period 3: 3% x 250,000= 7,500 Allowance for Doubtful Accounts expense, Ending

Beg. Bal 6,600

Adj. ?

Ending balance 7,5

balance Allowance for Doubtful Accounts

from P2

00

Allowance for Doubtful Accounts

Beg. Bal 6,600 from P2
Adj. 900 Doubtful account expense
900

Ending balance
7,500 Allowance for DA
900

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