LICEO DE LA SALLE SENIOR HIGH SCHOOL

FIRST SEMESTER | QUARTER 2

AY 2020 – 2021 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

MODULE 7: ADJUSTING ENTRIES - DEFERRALS

Prepaid Expenses

These are expenditures (e.g. supplies, rent, and insurance) that are customarily paid in advance.
Prepaid expenses are assets, not expenses. At the end of the accounting period, a portion or all
of these prepayments may have expired. The portion of an asset that has expired becomes an
expense. Prepaid expenses expire either with the passage of time or through use and consumption.

If adjustments for prepaid expenses are not made at the end of the period, both the balance sheet
and the income statement will be misstated. First, the assets of the entity will be overstated; second
the expenses of the entity will be understated. For this reason, owner’s equity in the balance sheet
and profit in the income statement will both be overstated.

Asset Method

Initial Entry (Journal entry upon payment):

Prepaid Expense xxx

Cash xxx

Adjusting Journal entry at the end of the accounting period:

Expense xxx
Prepaid Expense xxx

Note: The amount on the adjusting journal entry represents the expired or used portion of the
prepayment.

Prepaid Rent

Example 1. On September 1, 2016, X Co. paid a one-year advance rent for Php 30,000. Give the
adjusting entry on Dec 31, 2016.

Journal Entry upon payment on September 1, 2016:

Prepaid Rent 30,000

Cash 30,000
Paid rent for one year.

Adjusting journal entry at the end of the accounting period December 31, 2016:

Rent Expense 10,000

Prepaid Rent 10,000
To record expired rent.

Computation:

The Php 30,000 of the rent represents one year or 12 months’ worth of rent. Divide Php 30,000 by
12 to get the monthly rent. Then, multiply it by 4 months representing the rent from September 1
to December 31, 2016.

Php 30,000 / 12 = Php 2,500 (monthly rent)

Php 2,500 x 4 = Php 10,000 (used portion of rent)

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 LICEO DE LA SALLE SENIOR HIGH SCHOOL
FIRST SEMESTER | QUARTER 2
AY 2020 – 2021 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

Analysis:

When you paid Php 30,000 for one year rent in advance on September 1, you debited the asset
account Prepaid Rent representing 12 months rent. On December 31, the end of accounting period,
the Php 30,000 Prepaid Rent is not totally an asset since it includes the 4 months used portion
(Sept. 1 to Dec 31). Hence, an adjusting entry is necessary to recognize the rent expense for 4
months by debiting it and decreasing the balance of Prepaid Rent by crediting it.

Example 2. On October 1, 2019, Del Mundo paid for rent good for 3 months, Php 21,000. Del
Mundo makes an adjusting entry to record the expiration of one month of the 3 months’ advance
rent paid on Nov. 1.

Journal Entry upon payment of October 1:

Prepaid Rent 21,000

Cash 21,000
Paid rent for three months.

Adjusting journal entry at the end of the accounting period November 1, 2019:

Rent Expense 7,000

Prepaid Rent 7,000
To record expired rent.

Computation:

The Php 21,000 of the rent represents 3 months’ worth of rent. Divide Php 21,000 by 3 to get the
monthly rent (Php 7,000). Then, multiply it by 1 month representing the expired rent from October
1 to November 1, 2019.

Php 21,000 / 3 = Php 7,000 (monthly rent)

Php 7,000 x 1 = Php 7,000 (used portion of rent)

After adjustments, the prepaid rent account has a balance of Php 14,000 (prepayments of Php
21,000 less the Php 7,000 expired portion); the rent expense account reflects the Php 7,000 (Php
21,000 / 3 months) expense for the month.

Prepaid Insurance

Example 1. On April 30, 2016, X Co. paid Php 36,000 worth of insurance premium for two years.
Give the adjusting journal entry on June 30, 2016.

Journal Entry upon payment on April 30, 2016:

Prepaid Insurance 36,000

Cash 36,000
Paid two- year insurance.

Adjusting journal entry at the end of the accounting period June 30, 2016:

Insurance Expense 3,000

Prepaid Insurance 3,000
To record expired insurance.

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 LICEO DE LA SALLE SENIOR HIGH SCHOOL
FIRST SEMESTER | QUARTER 2
AY 2020 – 2021 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

Computation:

The Php 36,000 of the insurance represents insurance premium for 2 years or 24 months. Divide
Php 36,000 by 24 to get the monthly premium. Then, multiply it by 2 months representing the
premium from May 1 to June 30, 2016.

Php 36,000 / 24 = Php 1,500 (monthly insurance)

Php 1,500 x 2 = Php 3,000 (used portion of insurance)

Example 2. On Nov. 5, 2019, Del Mundo paid for a one year insurance policy, Php 24,000. Del
Mundo records the expiration of one-twelfth of the entity’s one-year insurance policy.

Journal Entry upon payment of Nov. 5:

Prepaid Insurance 24,000

Cash 24,000
Paid insurance for one year.

Adjusting journal entry at the end of the accounting period December 5, 2019:

Insurance Expense 2,000

Prepaid Insurance 2,000
To record expired insurance.

Computation:

The Php 24,000 of the insurance represents insurance premium for one year. Divide Php 24,000
by 12 to get the monthly premium. Then, multiply it by 1 month representing the premium from
Nov 5 to December 5, 2019.

Php 24,000 / 12 = Php 2,000 (monthly insurance premium)

Php 2,000 x 1 = Php 2,000 (used portion of insurance)

The Prepaid Insurance account has a balance of Php 22,000 (Php 24,000 prepayment less Php
2,000) and Insurance Expense reflects the expired cost of Php 2,000 (Php 24,000 / 12 months) for
the month.

Supplies

Example 1. Easy Book Publishing purchased supplies for the office worth Php 4,000. Supplies
used during the year amounted to Php 2,300. Give the adjusting entry on Dec. 31, 2019.

Journal Entry upon payment on April 30, 2016:

Supplies 4,000
Cash 4,000
Purchase of supplies.

Adjusting journal entry at the end of the accounting period December 31,2019:

Supplies Expense 2,300

Supplies 2,300
To record used supplies.

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 LICEO DE LA SALLE SENIOR HIGH SCHOOL
FIRST SEMESTER | QUARTER 2
AY 2020 – 2021 | FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS, AND MANAGEMENT 1

Computation:

There is no computation necessary because the Php 2,300 supplies used during the year was
already given in the problem.

Analysis:

The asset account, Supplies, showed a balance of Php 4,000 during the year. Supplies used during
the year amounted to Php 2,300. This should be recorded as expense by debiting Supplies Expense
and crediting the asset account Supplies to decrease its balance.

Example 2. Supplies account on January 1, 2018 showed a balance of Php 8,000. On Dec. 31,
2018, supplies on hand amounted to Php 3,500.

Adjusting journal entry at the end of the accounting period December 31,2019:

Supplies Expense 4,500

Supplies 4,500
To record used supplies.

Computation:

Supplies at the beginning of the year is Php 8,000. At the end of the year, the remaining balance is
Php 3,500. The difference represents the supplies used during the year. Subtract Php 3,500 from
Php 8,000 to get the supplies used for the year.

Php 8,000 – Php 3,500 = Php 4,500 (used portion of supplies)

Analysis:

On January 1, 2016, the asset account Supplies has a balance of Php 8,000. A the end of the year,
the remaining balance is Php 3,500. The difference represents the supplies used during the year.
You will have to recognize the used supplies as an expense by debiting Supplies Expense and
decrease the asset account Supplies by crediting it.

With this adjustment, the asset account, Supplies, will bear an adjusted amount of Php 3,500 and
expense account, Supplies Expense, will have an amount of Php 4,500 in the business’ books as
of December 31, 2019.