ADJUSTING ENTRIES
Notes by: wiwingondamex
Accounting cycle: AJPUAFCPR
NARA OH, ARON MA REFRESH KA BASAHA.
Adjusting Entries are entries made prior to the
preparation of the financial statements to update
certain accounts so that they reflect correct
balances as of the designated time.
PURPOSE OF ADJUSTING ENTRIES
1. To take up unrecorded income and expense of
the period.
2. To split mixed accounts into their real and
nominal elements.
Mixed Accounts may be represented by either a
real or nominal title but it contains any amount
that is partly real and partly nominal.
For example, 3 month rental of 12,000 was paid
on June 1 and recorded as rent expense. The rent
expense is a nominal account, however by June 30
(end of the reporting period), only part of the
12,000 (12,000 ÷ 3 = P4,00) is the rental
applicable to June which is the actual expense
while the balance of 8,000 is considered
unconsumed or unused and therefore an asset.
REASONS FOR ADJUSTMENTS
 Accruals of Income and Expenses
 Recognition of depreciation expense and
bad debts expense
 Deferrals of Income and Expenses (splitting
of mixed accounts)
A. To apportion the mixed accounts into their
real and nominal elements:
1. Provision for Depreciation. (Depreciable
Cost over Life is equal to Depreciation
expense)
2. Provision for Doubtful accounts/bad
debts.
3. Adjustments for the expiration of
prepayments of expenses (nag bayad ka
inadvance for insurance, others)
4. Adjustments for the realization of
Income collected in advance. (nangolekta
or nakakoleta ka ng income in advance)
B. To bring into the accounts unrecorded
accrued items:
1. Adjustments for accrual of expenses.
(this is the recognition of expenses that is
already incurred but not yet paid.)
Ex. Salaries expenses xx
Salaries payable xx
2. Adjustments for accrual of income. (this
is the recognition of income already
earned but not yet collected)
Ex. Rent receivable xx
Rent income xx
Accrual accounting means that income is
recognized when earned regardless of when
received and expense is recognized when incurred
regardless of when payment is made.
TANDAE LODS: Accruals give rise to both income
and receivable (or both expense and payable).
1. All adjusting entries involve at lease one
balance sheet account and one income statement
account.
2. All adjusting entries affect the profit/loss for
the period.
A1. PROVISION FOR DEPRECIAITION
PPE such as building, equipments and machineries,
furniture, etc. are recorded at cost as an asset
(cost principle lods). These assets are expected to
benefit the business for a number of years before
they will retired.
Balik ta sa PPE na topic : The cost of living asset
(less scrap value, called depreciable cost or DC)
gina allocate over its service life. The portion of
the assets cost allocated as expense for the period
is called depreciation. Mao nanang target naton
lods.
Depreciation Methods: SYD, Double Declining Bal.
method, other accelerated methods. Hala
kulbaan, nakalimtan na niya, reviewhi lang unya
ih.
EX. On Jan. 1, 2022, Assume that an equipment
was bought for P400,000 to be used in the
business for 10 years with an estimated residual
value of 40,000 after.
Annual Dep. = 400k – 40k /10 years
Annual Depreciation= 36,000 (for 1 year na siya M3.Percentage of A/R
lods ha?) Accounts receivable x %= Required Allowance
ADJE: Depreciation Expense 36,000
Accumulated Depreciation 36,000
CASE 1: If the period covered by the report naman
Ex. Assume an A/R of P3,000,000 and a credit
like one month, the depreciation should be
balance in the allowance account of 20,000 before
(36,000 ÷ 12) or (36,000 x 1/12) 3,000 only.
adjustment. Doubtful accounts are estimated to
ADJE: Depreciation Expense 3,000 be 3% of accounts receivable.
Accumulated Depreciation 3,000
Solution:
CASE 2: If the na acquire naman siya in October 1.
Required allowance for DA (3% x 3M) 90,000
October 1 to December 31 is 3 months (36,000 x
Less: credit balance of AFDA b4 adj. 20,000
3/12) P9,000 *same entry ra)
Doubtful accounts expense 70,000
ANALYSIS: Depreciation expense (debit) is
Allowance of Doubtful Accounts
reported in the income statement while the
20,000 (beg)
Accumulated depreciation (credit) is reported as
70,000 (DA)
a contra asset account that is shown as a
90,000
deduction from the equipment in the balance
sheet. Doubtful Accounts expense 70,000
Allowance for Doubtful accounts 70,00
A2. PROVISION FOR DOUBTFUL ACCOUNTS
NOTE: Allowance for doubtful accounts has a
Doubtful accounts/Bad debts (alanganin na
normal credit balance.
makolekta) The amount of loss the business
expects to suffer due to uncollectibility of M4. Aging of Accounts Receivable
accounts receivable. It is seldom, however that all
accounts due from customers are collected. For The aging of accounts receivable involves an
this reason, the receivable a real account, analysis of the accounts receivable. These are
becomes a mixed account at the end of the classified into not due or past due. Past due
accounting period. accounts are further classified in terms of the
length of period they are past due. The common
ANALYSIS: The portion of the receivable which is classifications are:
expected to be collected is the real element
- Not yet due -91 to 120 days past due
while the portion estimated to be uncollectible is
- 1 to 30 days past due -121 to 180 days past due
the nominal element. - 31 to 60 days past due -181 to 365 days past due
-61 to 90 days past due -more than 1 year past due
Four methods of estimating doubtful accounts
expense: The required allowance for doubtful accounts is
then determined by multiplying the total of each
1. Fixed percentage of the total sales. (IS)
classification by the percent of loss experienced
2. Fixed percentage of the total credit sales. (IS)
by the enterprise to each class.
3. Percentage of accounts receivable at the end of
the accounting period. (BS approach) ILLUSTRATION
4. An amount computed through the aging of (a) (b) (axb)
receivables. (BS approach) Balance Experience rate Req. allowance

Not yet due P1M 1% P10,00

M1.Fixed percentage of total sales. 1 to 30 days past due 600k 2% 12,000
Total sales x % = Doubtful accounts expense 31 to 60 days past due 400k 4% 16,000
61 to 90 days past due 200k 7% 14,000
(total sales meaning, both cash and credit sales) 91 to 180 days past due 100k 10% 10,000
M2.Fixed percentage of credit sales. (only credit 181 to 365 days past due 60k 30% 18,000
more than 1 year past due 40k 50% 20,000
sales lang) 2,400,000 100,000
Total Credit sales x %= Doubtful Acc. Expense
Assume that the AFDA balance before adjustments
is P20,000 credit.
Req. Allowance (per aging) P100,00
Less: credit allowance for DA b4 adj. 20,000
Doubtful accounts expense 80,000
Doubtful accounts expense 80,000
Allowance for Doubtful Accounts 80,000
A3. ADJUSTMENTS FOR THE EXPIRATION OF
PREPAYMENTS
Prepayment or prepaid expenses is an expense
paid in advance, the benefit from which is spread
over a period extending beyond the current
accounting period.
The common types of prepaid expenses are
prepaid rent, interest, insurance, advertising,
and prepaid unused supplies.
The adjusting entry for prepaid lies on the entry
made at the time of its payment. There are two
methods of recording prepayments of expenses
namely: ASSET METHOD and EXPENSE METHOD.
ASSET METHOD
Under the asset method a prepaid expense is
recorded as an asset. At the end of the accounting
period, the asset account, which is classified as a
real account, now becomes a mix account. That is
partly real and partly nominal. The used, expired
or consumed portion is the expense element
while the unused, unexpired or unconsumed
portion remains as an asset.
Thus, the asset is overstated and expense is
understated. The two elements can be corrected
by preparing an adjusting entry debiting the
understated expense account and crediting the
overstated asset account. The adjusting amount
should be properly determined.
Illustration: On Oct. 1, 2021, MLQ Corporation
paid one year rental of the office building for
P120,000. The period covered is from Oct. 1, 2021
to September 30, 2022.
TIP: It answers the question HOW MUCH SHOULD
BE THE EXPENSE? =P30,000
ASSET METHOD:
Initial Entry
10/01/21 Prepaid Rent 120,000
Cash 120,00
On Dec.31, 2021, the end of the accounting
period, the adjusting entry should be made as
follows:
12/31/21 Rent Expense 30,000 (120kx3/12)
Prepaid Rent 30,000
NOTE: At times it is important to know what the
original entry was. Para magawan ng correct
adjusting entry.
Using T-accounts:
Since under the ASSET METHOD the advance
payment on October 1, 2021 has originally been
recorded as an asset, then the entire P120,000 is
an asset.
Prepaid Rent
P120,000
To leave this unadjusted until December 31, 2021
means to not recognize the expired portion which
will misstate both the assets and the expenses.
Again, it answers the question HOW MUCH
SHOULD BE THE EXPENSE? =P30,000
Therefore as shown, 9/12 or P90,000 is the correct
amount of the asset (prepaid rent) since this is the
unexpired portion and that 3/12 has already
expired. Thus, the P30,000 adjustment.
Prepaid Rent
P120,000
P30,000
P90,000
AJE: Rent Expense P30,000
Prepaid Rent P30,000
The debit to Rent expense recognizes the expired
portion and the credit to Prepaid Rent brings this
asset account to its correct balance.
EXPENSE METHOD
Under the expense method, a prepayment of
expense is recorded as an expense by debiting an
expense account. At the end of the accounting
period, the expense account which is classified as
nominal account, new becomes a mixed account.
That is partly nominal and partly real. The
unused, unexpired or unconsumed portion is the
asset element while the used, expired or
consumed part is the expense element.
Because of this, the expense is overstated and the
asset is understated. The two elements can be
corrected by preparing an adjusting entry debiting
the understated asset account and crediting the
overstated expense account. The adjusting
amount should be properly determined.
Illustration: On Oct. 1, 2021, MLQ Corporation
paid one year rental of the office building for
P120,000. The period covered is from Oct. 1, 2021
to September 30, 2022.
TIP: It answers the question HOW MUCH SHOULD
BE THE ASSET?
EXPENSE METHOD:
Initial Entry
10/01/21 Rent Expense 120,000
Cash 120,00
On Dec.31, 2021, the end of the accounting
period, the adjusting entry should be made as
follows:
12/31/21 Prepaid Rent 90,000 (120kx9/12)
Rent Expense 90,000
Using T-accounts:
Under the EXPENSE METHOD all of the advance
payment on October 1, 2021 is recorded as
expense, thus the entire P120,000 is debited to
the expense account.
Rent Expense
P120,000
In the same way, to leave this unadjusted until
December 31, 2021 means to not recognize the
unexpired portion which will misstate both the
assets and the expenses. Assets will be
understated and expenses overstated.
Again, It answers the question HOW MUCH
SHOULD BE THE ASSET?= P90,000
Rent Expense
P120,000
P90,000
P30,000
AJE: Prepaid Rent P90,000
Rent Expense P90,000
The debit to Prepaid rent recognizes the
unexpired portion and the credit to Rent expense
brings this expense account to its correct balance.
A4. ADJUSTMENTS FOR THE REALIZATION OF
INCOME COLLECTED IN ADVANCE.
INCOME COLLECTED IN ADVANCE
An income collected in advance is actually a
liability at the date of collection. This is
technically called unearned income. However,
the transaction can be recorded in two different
methods namely: (1) LIABILITY METHOD, and
(2)EXPENSE METHOD.
LIABILITY METHOD
Under the liability method, the total amount of
cash received in advance is credited to a liability
account. This method is theoretically the sound
method considering that at the point of collection
no portion of the amount had yet been earned.
However, as days pass, the unearned income will
gradually be earned.
The unearned income account is a real account
being a liability. This account, however, becomes
a mixed account at the end of the reporting
period. The earned portion is the income element
while the unearned portion remains a liability.
Thus, the liability account is overstated while the
income account is understated.
The adjusting entry to correct the accounts would
be to debit liability account and credit income.
Illustration: On August 1, 2021 AB Realty collected
a one year rental from a tenant, P180,000. The
rental covers the period August 1, 2021 to July 31,
2021.
LIABILITY METHOD:
Initial Entry
08/01/2021 Cash 180,000
Unearned Rent income 180,000
On December 31, 2021, end of the reporting
period, the adjusting journal entry:
AJE
12/31/2021 Unearned Rent income 75,000
Rent Income 75,000
TIP: It answers the question HOW MUCH SHOULD
BE THE INCOME? =P75,000
The income portion=5/12x180,000= 75,000
Using T-account:
Unearned Rent Income
P180,000
P75,000
P105,000
INCOME METHOD
Under the Income method, the total amount of
cash received in advance is credited to an income
account, While the amount collected is not yet at
the date of collection, eventually this will be
earned. The credit to income account is actually
in anticipation that this will be earned later.
The income account is classified as nominal
account. However, this account becomes a mixed
account at the end of the accounting period if a
portion appears to have not yet been earned. The
unearned portion is the real element while the
earned portion is the nominal portion.
Since, income was credited at the date when the
cash was received, the income account is
overstated and the unearned income account is
understated.
The adjusting entry to correct the accounts would
be to debit income account and credit unearned
income account.
Illustration: On August 1, 2021 AB Realty collected
a one year rental from a tenant, P180,000. The
rental covers the period August 1, 2021 to July 31,
2021.
INCOME METHOD:
Initial Entry
08/01/2021 Cash 180,000
Rent income 180,000
On December 31, 2021, end of the reporting
period, the adjusting journal entry:
AJE: 12/31/2021
Rent Income 105,000
Unearned Rent Income 105,000
TIP: It answers the question HOW MUCH SHOULD
BE THE LIABILITY? =P105,000
Rent Income
P180,000
P105,000
75,000
B1. ADJUSTMENTS FOR ACCRUAL OF EXPENSES
Expenses are normally recorded when paid.
However, under the accrual basis of accounting,
expenses should be recognize when incurred
regardless of when payment was made.
Expenses already incurred but not yet paid as of
the end of the accounting period are called
accrued expenses. Examples of AE are Accrued
salaries, interest and utilities expense.
Failure to record an expense because it is not yet
paid results in an understatement of expense and
also an understatement of liability. The expense
and the liability can be recognized by preparing an
adjusting journal entry debiting the expense
account and crediting the liability account.
Illustration: (Accrued Interest Expense)
Normally, interest on notes payable is paid
together with the principal at the date of
maturity. When the term of the note payable
covers two or more acctg periods, the interest on
such note must be allocated among the periods
covered. At the end of the accounting period, the
total interest already incurred because of the note
during the current period is considered an interest
expense for the period. Such interest expense can
be recognized by preparing and adjusting journal
entry which is to debit interest expense and a
credit on accrued interest payable.