College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)300-5456 Local 137

Specific Leaning Outcome Week 6-7(SLO) Sept. 21 to Oct. 3, 2020: At the end of the unit, you
are expected to:
e. Identify the basic adjusting entries.
f. Prepare adjusting entries .

BIG PICTURE IN FOCUS: SLO (e Identify the basic adjusting entries. SLO (f) Prepare adjusting
entries.

METALANGUAGE
Accountants use adjusting entries to apply accrual accounting to transactions that cover more
than one accounting period. This section, provides the essential terms that you will encounter in
the study of adjusting entries. These terms are very important for you to demonstrate SLO e & f.
Be sure to fully understand these terms and how these terms are being used in making the
adjusting entries.

1. ACCRUAL – means the recognition of an “expense already incurred but unpaid”, or revenue
earned but uncollected”.
1.a Accrued Income – refers to income already earned by the entity but not collected
yet at the end of the accounting period (when the adjusting entries are required).
Therefore, it gives rise to a trade or non-trade receivable.
1.b Accrued Expenses – refers to expenses already incurred by the entity but not paid
yet at the end of the accounting period (when the adjusting entries are required).
Therefore, it gives rise to a non-trade payable.

2. DEFERRAL – is the postponement of the recognition of “an expense already paid but not yet
incurred” (opposite of accrued expense), or of “revenue already collected but not yet earned
(opposite of accrued income).

2.a Pre-collected Income(deferred Income) – refers to cash received but before

services is rendered or goods are delivered. (account title use is unearned revenue for
service concern or customers’ deposit for merchandising)

2.b Prepaid Expenses (Deferred Expense) – refers to expenses paid in advance a

portion of which or the entire amount has not expired or consumed at the end of the
reporting or accounting period. The expenditures that are normally paid in advance are
rentals, insurance, advertising, supplies, and taxes.
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Phone No.: (082)300-5456 Local 137
3. Depreciation – is the expired allocated cost of tangible assets. These assets such as buildings,
machineries, motor vehicles, furniture, equipment and other similar items are long-lived
assets, that help the business entity generate income and are useful for more than a year.
The cost of the asset is allocated over its estimated useful life. The allocated cost which is
charged to operations is called depreciation.

4. Uncollectible Accounts (Doubtful Accounts) – refers to an estimated amount of receivable

that is doubtful of collection. This is allowed in accounting to show a better matching of
income and expenses. This is computed based on credit sales/revenue for the period or the
outstanding accounts receivable balance.

5. Solvency – is the ability of a company to meet its long-term debts and financial obligations.
Solvency demonstrates a company’s ability to continue operations into the foreseeable future
(article in Corporate Finance and Accounting by Adam Hayes dtd. 4.29.2019).

6. Liquidity – this is the ability of the company to pay its short-term obligations on time or as it
becomes due and demandable.

7. Profitability is the ability of the company to use its resources to generate revenues in excess
of its expenses. In other words, this is a company's capability of generating profits from its
operations.

8. Reversing Entry (RE)– is a journal entry which is the exact opposite of a related adjusting
entry made at the end of the accounting period- This is a technique in bookkeeping to simplify
the recording of regular transactions in the next accounting period. RE is normally prepared
at the beginning of the next accounting period. Therefore this is the first entry that should
appear in the general journal.

9. Salvage Value – refers to the estimated amount that the asset can probably be sold for at the
end of its estimated useful life.

ESSENTIAL KNOWLEDGE
Why is adjusting entries necessary?
Adjusting entries are needed in order to measure properly the profit for the period and to bring
related asset and liability accounts to correct balances for the financial statements to be fairly
stated. Without adjusting entries, the financial statements may not fairly show the solvency,
liquidity and profitability of the entity in the statement of financial position and income
statement.
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When is adjusting entries being prepared?

Normally adjusting entries are prepared at the end of the accounting period. If the balance sheet
date ends on December 31, (calendar year) then adjusting entries are dated Dec. 31 or ends any
month of the year (if Fiscal year).

What are the effects of omitting adjustments? (take note of its dual effect)
When an accountant failed to include the proper adjusting entries, the resulting financial
statements will not accurately reflect the financial position and the performance of the entity.

1. Failure to recognize accrued expenses – Net profit is overstated ( w/c will also result to
overstatement of owner’s equity) and the liability is understated.
2. Failure to recognize accrued income – net profit is understated (w/c will also result to
understatement of owner’s equity) and the asset is understated.
3. Failure to recognize the expired/used portion of prepaid expenses – net profit is
overstated ( w/c will also result to overstatement of owner’s equity) and asset is
overstated.
4. Failure to recognize the earned/income portion of deferred income – net profit is
understated (w/c will also result to understatement of owner’s equity) and overstatement
of liability.
5. Failure to recognize depreciation – asset is overstated, expense is understated (w/c will
resulted to overstatement of owner’s equity).
6. Failure to recognize doubtful accounts – asset is overstated, expense is understated (w/c
will resulted to overstatement of owner’s equity).

ILLUSTRATION

Accrued Expense

Under Accrual Accounting expense is recognized in the accounting period in which goods and
services are used up (incurred) to produce revenue and not when the entity pays for those goods
and services. Simply means the entity shall recognize the expense on the period in which it is
incurred or used up. When at the end of the accounting period there are expenses incurred but
unpaid these comprise the accrued expenses. Example: Unpaid salaries, taxes, utilities (light,
water & telephone), rent (though in many times rent are usually prepaid), SSS, Phil Health and
HDMF contributions and many more.
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Phone No.: (082)300-5456 Local 137
PRO-FORMA ENTRY TO RECORD ACCRUED EXPENSES:
Expense (Specific Account Title). XXX
Liability (Specific Account Title). XXX

Illus. 1. On Dec. 31, 2019, the company has unpaid salaries of P20,000. Adjusting
Journal entry (AJE) is :
Salaries Expense. P 20,000
Salaries Payable or Accrued Salaries P 20,000
Unpaid salaries on Dec. 31, 2019

Illus. 2 At the end of the year the following expenses were still unpaid. light
P 5,000; water P1,200 and telephone P1,000.
Adjusting Journal entry (AJE) is: Light
and Water Expense P6,200
Communication Expense. 1,000
Accrued Expenses. P7,200
Unpaid expenses at the end of the year.
(This is another way of presenting accrual of expenses, you can lump it in one account title
“Accrued Expenses” for as long as you can generate the breakdown in your record.)

Illus. 3 A 90-day 12% interest bearing note issued by the company for P50,000 dated Nov. 1,
2019, interest is paid upon maturity. Assume balance sheet date is Dec. 31, 2019.

Let us analyze the problem:

a. When is the maturity date of the note ?(when will it be paid) Answer: 90 days after the
date of issuance which means Jan. 30, 2020.
b. How much is the maturity value of the note? Answer: Principal (P50,000) plus interest
(P1,500) = P51,500, which means on maturity date (Jan. 30, 2020) the issuer has to pay
the payee P51,500.

Formula to compute interest : Principal x rate x time = P50,000 x.12 x 90/360 (ordinary
interest) equals. P 1,500.

c. Was the interest of P1,500 paid at end of accounting period Dec. 31, 2019? Answer: No
because it will be paid together with the principal on Jan. 30, 2020.
d. Was there an interest incurred but not paid at the end of the accounting period?
Answer : Yes, the interest from Nov. 1, 2019 to Dec. 31, 2019 equivalent to 60 days.
Computed as follows: Px R x T= 50,000 x.12 x 60/360 = P1,000, therefore the total interest
of P1,500, P1,000 belongs to Nov. 1 to Dec. 31 2019 and P500 belong to Jan. 1-30, 2020.
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So that interest of P1,000 is the accrued portion that should be recognized as an adjusting
entry on Dec. 31, 2019.
e. What is the adjusting journal entry (AJE)?
Interest Expense. ….. P 1,000
Interest Payable. P1,000
Unpaid interest of the note issued on Nov. 1, 2019

Illus. 4 ABC company pays the salaries of employees on a weekly basis. Monday to Saturday
is paid on Saturday. The daily payroll for 10 employees is P5,000. December 31, falls on
Thursday.
How many days are accrued salaries? Answer: (4 days) Monday to Thursday are the accrued
salaries because these salaries will be paid on Saturday which is beyond the end of the
accounting period (Dec. 31, 2019).
a. How much is the accrued salaries? Answer: 4 days x P5,000= P20,000
b. What is the adjusting entry?
Adjusting journal entry (AJE)
Salaries Expense. P20,000
Salaries Payable P20,000
Unpaid salaries at the end of Dec. 31, 2019

Accrued Income
Under Accrual Accounting revenue or income is recognized in the accounting period when goods
are delivered or services are rendered or performed. Simply means the entity shall recognize the
revenue on the period in which it is earned regardless whether or not cash is received. When at
the end of the accounting period there are revenue earned but not collected this is an accrued
income or revenue that requires and adjusting entry. Example: Uncollected services already
performed or rendered (Accounts Receivable), interest already earned but no collected (Interest
Receivable), rent earned but not collected (Rent Receivable), commission earned but not
collected yet (Commission Receivable) and many more related accounts.

PRO-FORMA ENTRY TO RECORD ACCRUED INCOME:

Asset (Specific Account Title). XXX
Income (Specific Account Title). XXX
Illus. 5 At the end of the accounting period a consulting company has already completed an
engagement but was not billed yet on Dec. 31, 2019 (end of the accounting period) amounting to
P60,000.
Adjusting journal entry (AJE)
Accounts Receivable . . . . . . P60,000
Consultancy Fees . . . . . . . . . P60,000
Unbilled consultancy services (note: subject to reversing entries)
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Illus. 6 Accrued rent income amounting to P5,000
Adjusting journal entry (AJE)
Rent Receivable . . . . . . P5,000
Rent Income . . . . . . . . . P5,000
Uncollected rental as the end of the period (note: subject to reversing entries)

Illus. 7 A 60-day 12% interest bearing note received by the company for P30,000 dated Dec. 15,
2019, interest is collected upon maturity. Assume balance sheet date is Dec. 31, 2019.

Let us analyze the problem:

a. When is the maturity date of the note ?(when will it be collected) Answer: 60 days after
the date of issuance which means Feb. 13, 2020.
b. How much is the maturity value of the note? Answer: Principal (P30,000) plus interest
(P600) = P30,600 which means on maturity date (Feb. 13, 2020) the payee has to collect
from the issuer P30,600.
c. Was the interest of P600 paid at end of accounting period Dec. 31, 2019? Answer: No
because it will be paid together with the principal on Feb. 13, 2020.
d. Was there an interest earned but not collected at the end of the accounting period?
Answer : Yes, the interest from Dec. 15, 2019 to Dec. 31, 2019 equivalent to 16 days.
Computed as follows: Px R x T= 30,000 x.12 x 16/360 = P160 therefore the total interest
of P600, P160 belongs to Dec. 15 to Dec. 31 2019 and P440 belong to Jan. 1- to Feb. 13,
2020. So that interest of P160 is the accrued portion that should be recognized as an
adjusting entry on Dec. 31, 2019.
e. What is the adjusting journal entry (AJE)?
Interest Receivable . . . . . .P 1,000
Interest Income . . . . . . .. P1,000
Uncollected interest of the note received on Dec. 15, 2019.
( note: subject to reversing entry)

WHAT IS THE DIFFERENCE BETWEEN THE NOTE IN ILLUS. NO. 3 IN ACCRUED EXPENSES AND
ILLUS. 7 UNDER ACCRUED INCOME?
ANSWER: The 90-day note is a payable while the 60-day note is a receivable.

REMINDER: ALL ABOVE ADJUSTMENTS ARE SUBJECT TO REVERSING ENTRY AT THE BEGINNING
OF THE NEXT ACCOUNTING PERIOD.

Prepaid Expenses
Some expenses are customarily paid in advance (which is the opposite of accrued expense)
and may benefit more than one period. These expenditures are generally debited to an asset
account (though some authors prefer expense approach). At the end of the accounting
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period, the estimated amount that has expired during the period or that has benefited the
period is transferred from the asset account to an expense account thru preparation of
adjusting journal entries (AJE).

Illus. 8 On Oct. 1, 2019, the company paid a one year insurance premium for the warehouse
amounting to P12,000. The insurance shall cover the period from Oct. 1 to Sept. 30, 2020.
Assuming the company’s accounting period ends of Dec. 31, 2019.

Let us analyze the problem:

a. If we are going to allocate the insurance payment of P12,000 into monthly premium how
much is the monthly premium? Answer: P1,000, just divide P12,000 by 12 months (1
year).
b. Was there an expired portion of the insurance premium at the end of the accounting
period? and how much? Answer: Yes , P3,000, that is from Oct. 1 to Dec. 31, 2019.
Therefore, P9,000 has not expired yet.
c. Was the amount paid already recorded? Answer: Yes, it was recorded when payment
was made on Oct. 1, 2019, therefore it is already part of the unadjusted trial balance.
d. What is the adjusting journal entry to transfer the expired portion to the expense
account?

It is important to note that the adjusting entry of prepayment shall depend on the original
entry. (means the entry made upon payment of the account)

If Original Entry made: Asset Approach Adjusting Journal Entry

Oct. 1, 2019 Prepaid Insurance P12,000 Insurance Expense P3,000
Cash P12,000 Prepaid insurance P3,000
Payment of 1 yr insurance premium recognized the expired portion
( not subject to reversing entries)
Explanation:
In the adjustment, you will recognize the expired or the used portion because at the end of
the accounting period the entire amount of prepaid insurance of P12,000 is no longer an asset
but a portion of it (P3,000) has been used therefore it has to be transferred to an expense
account. To transfer it an adjusting entry recognizing the expense must be done. Without the
adjusting entry, the prepaid insurance account (asset) is overstated, while the expense
account (insurance expense) is understated thereby overstating the net profit which will
eventually overstate the owner’s equity. (refer to effect of omitting adjustments)

ALTERNATIVE APPROACH
In the previous illustration, the company uses the asset approach in recording the payment
of insurance premium of P12,000. The company can also use the expense approach in
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recording the transaction .( remember to comply with the consistency principle the company
has to use only one method consistently through-out the recording process, it is either asset
approach or expense approach)

If Original Entry made: Expense Approach Adjusting Journal Entry

Oct. 1, 2019 Insurance Expense P12,000 Prepaid Insurance P9,000
Cash P12,000 Insurance Expense P3,000
Payment of 1 yr insurance premium recognized the unexpired portion
(subject to reversing entries)
Explanation:
In the adjustment, you will recognize the unexpired portion because at the end of the
accounting period the entire amount of insurance expense of P12,000 is no longer an expense
but a portion of it (P9,000) has not expired, therefore it has to be transferred to an asset
account. To transfer it an adjusting entry recognizing the asset must be done. Without the
adjusting entry, the insurance expense account is overstated thereby understating the net
profit, which will eventually understate the owner’s equity and the prepaid insurance
account (asset) is also understated. (refer to effect of omitting adjustments)

Illus. 9 The company bought various supplies for office use amounting to P35,000 in cash. At
the end of the year, it was determine that the total amount of supplies on hand is only P5,000.
If Original Entry made: Adjusting Journal Entry
Oct. 1, 2019 Supplies P35,000 Supplies Expense P30,000
Cash P35,000 Supplies P30,000
Purchase of various supplies in cash recognized the expired portion
( not subject to reversing entries)
Explanation:
In the adjustment, you will recognize the used portion because at the end of the accounting
period the value of supplies on hand is P5,000 no longer P35,000, a portion of it (P30,000) has
been used therefore it has to be transferred to an expense account. To transfer it an adjusting
entry recognizing the expense must be done. Without the adjusting entry, the supplies
account (asset) is overstated, while the expense account (supplies expense) is understated
thereby overstating the net profit which will eventually overstate the owner’s equity. (refer
to effect of omitting adjustments).
What would be the adjusting entry if the company opted to use the alternative approach?
(Expense approach)
If Original Entry made: Adjusting Journal Entry
Oct. 1, 2019 Supplies Expense P35,000 Supplies P5,000
Cash P35,000 Supplies Expense P5,000
Purchase of various supplies in cash recognized the unused portion
(subject to reversing entries)
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Pre-collected Revenue (Deferred Revenue)
There are times when an entity receives cash for the services not performed yet or goods not
delivered yet (for buy and sell activity). When this situation happen, the entity has the
obligation to render the services or deliver the goods, therefore a liability exist upon
acceptance of the cash, because the services has not been rendered yet, or the goods has not
been delivered. For example a machine shop normally ask for a deposit for repairing a motor
vehicle. This deposit represents a liability on the part of the machine shop because no services
being rendered yet. If the entity fails to repair the vehicle then the entire amount of deposit
must be returned to the customer. But when the entity has completed the services then this
liability is settled therefore we have to transfer it to the income account.

Illus. 10 On Dec. 1 2019 Bato company receives cash of P120,000 for a 5 months contract for
cleaning a warehouse which shall start on Dec. 1. Assume the company’s accounting period ends
on Dec. 31, 2019.

Let us analyze the problem:

a. What is the duration of the contract? Answer: 5 months
b. If we allocate the P120,000 for 5 months, how much is the monthly allocation? Answer
P24,000 (P120,000/5 months)
c. Of the P120,000, how much do you think is earned as at Dec. 31, 2019? Answer: P24,000
only one month from Dec. 1 to Dec. 31.
d. If no adjusting entry is prepared at the end of the accounting period, what account do you
think is understated or overstated? Answer: it depends on the method use by the entity.
(Liability or Income approach)
e. Was the amount collected already recorded? Answer: Yes on Dec. 1, 2019, therefore it is
already part of the unadjusted trial balance.
f. What is the adjusting entry?

If Original Entry made: Liability Approach Adjusting Journal Entry

Dec. 1, 2019 Cash P120,000 Unearned Income P24,000
Unearned Income P120,000 Service Income P24,000
Collected cash for 5 months contract. recognized the earned portion
( not subject to reversing entries)
Explanation:
In the adjustment, you will recognize the earned portion because at the end of the accounting
period the entire amount of Unearned Income of P120,000 is no longer a liability but a portion
of it (P24,000) has been earned therefore it has to be transferred to an income account. To
transfer it an adjusting entry recognizing the income must be done. Without the adjusting
entry, the Unearned Income (liability) is overstated, while the service income account
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(revenue) is understated thereby understating the net profit which will eventually understate
the owner’s equity. (refer to effect of omitting adjustments)

ALTERNATIVE APPROACH
In the previous illustration, the company uses the liability approach in recording the cash
receive amounting to P120,000. The company can also use the income approach in recording
the transaction .( remember to comply with the consistency principle the company has to use
only one method consistently through-out the recording process, it is either liability approach
or income approach).

If Original Entry made: Income Approach Adjusting Journal Entry

Dec. 1, 2019 Cash . . . . . P120,000 Service Income P96,000
Service Income . . P120,000. Unearned Income P96,000
Collected cash for 5 months contract. Recognize the unearned portion
(subject to reversing entries)
Explanation:
In the adjustment, you will recognize the expired or the earned portion because at the end of
the accounting period the entire amount of service income of P120,000 is no longer an income
but a portion of it (P96,000) has not been earned yet therefore it has to be transferred to a
liability account. To transfer it an adjusting entry recognizing the liability must be done.
Without the adjusting entry, the service income is overstated, while the unearned income
account (liability) is understated thereby overstating the net profit which will eventually
overstate the owner’s equity. (refer to effect of omitting adjustments)

Illus. 11 A 150-day 12% interest bearing note was received by the company for P100,000 dated
Nov. 15, 2019. Cash was also received for the Interest of the note for 150 days. Assume balance
sheet date is Dec. 31, 2019.

Let us analyze the problem:

a. When is the maturity date of the note ?(when will it be collected) Answer: 150 days after
the date of issuance which means April 14, 2020.
b. How much is the maturity value of the note? Answer: Only the principal of P100,000,
because the interest was collected when the note was received on Nov. 15, 2019.
c. How much was the interest for 150 days? Answer: P5,000 (P100,000 x .12 x 150/360)
d. Was the interest collected already earned at the end of the accounting period? Answer:
No, only a portion of it was earned (Nov. 15 to Dec. 31 2019 or 46 days only)

There will be two entries on Nov. 15, 2019, to record the receipt of the note and to record
cash received for the 150 days interest as follows: (Assume note is derived from service
income). Nov. 15, 2019
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1. Notes Receivable . . . . . . P100,000
Service Income . . . . . . . . . . . P100,000
Receipt of note dated Nov. 15, 2019

If original entry made: Liability Approach Adjusting journal entry:

2. Cash . . . . . . . . . P5,000 Unearned Interest…. P1,533
Unearned Interest . . . . . P5,000. Interest Income. P1,533
Cash received for 150 days interest recognized the earned portion
(P100,000 x.12 x 46/360)
The same explanation shall apply in the previous example.

ALTERNATIVE APPROACH

If original entry made: Income Approach Adjusting journal entry:

Cash . . . . . . . . . P5,000 Interest Income…. P3,467
Interest Income. . . . . P5,000. Unearned Interest P3,467
Cash received for 150 days interest recognized the earned portion
(P100,000 x.12 x 104/360)

Note: Out of 150 days, only 46 days was earned at the end of the accounting period, hence
the remaining 104 days is unearned.

Note: The difference of the note illustrated in accrual and deferral. In accrual, the interest is
either collected or paid upon maturity while in deferral the interest is either paid or collected
in advance.

Provision for Depreciation

When an entity acquires long-lived assets such as building, service vehicles, computers,
equipment or furniture, it is basically buying or prepaying for the usefulness of that asset.
These assets help generate income for the entity, therefore a portion of the cost of the assets
should be reported as expense in each accounting period. Proper accounting requires the
allocation of the cost of the asset over its estimated useful life, that portion of the cost
allocated to any of the accounting period is called depreciation. There are varied methods of
estimating or computing the depreciation (other methods shall be taken up in the higher
accounting courses). This subject shall only discuss the straight line method.

FORMULA IN THE COMPUTATION OF DEPRECIATION USING THE STRAIGHT LINE METHOD

Depreciation = Cost minus Salvage value over the estimated useful life (C-SV/L)
Bear in mind, that the salvage value is not included in the computation of depreciation. In
case, the asset has no salvage value then the formula is cost divided by its estimated useful
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life. Always remember that the allocation cost is based on estimates that the management
believes that the asset shall be useful.

Illus. 12 Let us assume that ABC company acquire a building on Jan. 1, 2019 for P1,000,000 with
an estimated salvage value of P100,000 at the end of its estimated useful life of 20 years. How
much is the depreciation expense at the end of Dec. 31, 2019? and Dec. 31, 2020? Answer:
P45,000 in 2019, and P45,000 in 2020 (P900,000/20 years)

Adjusting journal entry Adjusting journal entry

Dec. 31, 2019 Dec. 31, 2020
Depreciation Expense. P45,000 Depreciation Expense … P45,000
Accumulated Depreciation- Building P45,000 Accumulated Depreciation Bldg P45,000
Provide depreciation for the building Provide depreciation for the building

Take note that the depreciation expense is the same for 20 years however, in the presentation
the depreciation expense appears in the income statement and the accumulated depreciation
appears in statement of financial position as a reduction to the cost of the building presented on
a cumulative mode.

Presentation in Statement of Financial Position Dec. 31, 2019 Non-current

Asset:
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000
Less: Accumulated Depreciation . . . . . . . . . . . 45,000
Net Book value or carrying value . . . . . . . . . . P 955,000

Presentation in Statement of Financial Position Dec. 31, 2020 Non-current

Asset:
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000
Less: Accumulated Depreciation . . . . . . . . . . . 90,000
Net Book value or carrying value . . . . . . . . . . P 910,000

Therefore, at the end of its life on Dec. 31, 2038, the total accumulated depreciation is P900,000
so the book value is P100,000 which is the salvage value not included in the computation. But
every year the amount of depreciation that will appear in the income statement is P45,000.

Presentation in Statement of Financial Position Dec. 31, 2038 Non-current

Asset:
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,000,000
Less: Accumulated Depreciation . . . . . . . . . . . 900,000
Net Book value or carrying value . . . . . . . . . . P 100,000
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Illus. 13 Let us assume that ABC company acquires a computer equipment on May 1, 2019 for
P45,000 with an estimated life of 5 years without a salvage value. How much is the depreciation
expense at the end of Dec. 31, 2019? and Dec. 31, 2020?
Answer: P6,000 in 2019 and P9,000 in 2020 computed as follows:
Dec. 31, 2019 = P45,000/5 years x 8months/12 =P6,000 because the asset was acquired on May
1, 2019 not Jan. 1, so it becomes useful to the company starting May 1. However in Dec. 31,
2020 the amount of depreciation is P9,000 (P45,000/5yrs) full depreciation in 2020.

Adjusting journal entry Adjusting journal entry

Dec. 31, 2019 Dec. 31, 2020
Depreciation Expense. P6,000 Depreciation Expense … P9,000
Accum .Depreciation- Computer P6,000 Accum. Depreciation- Computer P9,000
Provide depreciation for the computer Provide depreciation for the computer
Presentation in Statement of Financial Position Dec. 31, 2019 Non-current Asset:
Computer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 45,000
Less: Accumulated Depreciation . . . . . . . . . . . 6,000
Net Book value or carrying value . . . . . . . . . . P 39,000

Presentation in Statement of Financial Position Dec. 31, 2020 Non-current

Asset:
Computer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P. 45,000
Less: Accumulated Depreciation . . . . . . . . . . . 15,000
Net Book value or carrying value . . . . . . . . . . P 30,000

Therefore, at the end of its life on April 30, 2024, (but presentation is Dec. 31, 2024) the total
accumulated depreciation is P45,000 so the book value is zero. But every year the amount of
depreciation that will appear in the income statement is P6,000 in 2019; P9,000 until 2023; but
on the last year 2024 is only P3,000 applicable to the computer only (note there might be other
depreciable assets).

Presentation in Statement of Financial Position Dec. 31, 2024 Non-current

Asset:
Computer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 45,000
Less: Accumulated Depreciation . . . . . . . . . . . 45,000
Net Book value or carrying value . . . . . . . . . . P -0-

Provision for Uncollectible Accounts or Doubtful Accounts

When an entity allows customers or clients to avail of the services or goods on credit this
transaction gives rise to an accounts receivable. Some of these accounts will never be collected
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(therefore should be written off) or doubtful of collection at the end of the accounting period. In
practice, an expense is recognized for the estimated uncollectible accounts (doubtful accounts)
in the current period, rather than when the specific accounts actually become uncollectible
(worthless). This practice shows a better matching of income and expenses. The estimated
uncollectible accounts may be based on credit sales for the period or on the accounts receivable
balance. In practice, uncollectible accounts normally happen on business engaged in buying and
selling (though there are service concern who also experience uncollectible accounts example
schools). Estimation based on credit sales will be illustrated once we discuss the merchandising
concern. For this topic, let us limit our discussion based on the accounts receivable.

Illus 14. Let us assume that the company estimates uncollectible accounts based on 5% of the
accounts receivable amounting to P 150,000. In the previous year the balance of the allowance
for uncollectible accounts (doubtful accounts) is P5,000. Therefore, in the current year the
company shall provide an additional doubtful account expense of P2,500. The requirement for
the allowance is P7,500 (P150,000 x .05) so P7,500 less the previous balance of P5,000, by making
this adjusting entry.

Doubtful accounts. . . . . . P2,500

Allowance for doubtful accounts. P2,500
Provision for the allowance for doubtful accounts

Note: The account title doubtful accounts has many names, such as Bad debts, uncollectible
account expense. For this topic I will consistently use doubtful accounts and allowance for
doubtful accounts.

This account shall be presented in the income statement, while allowance in the statement of
financial position.

Analysis:
What happen if the previous balance of the allowance is P7,500 (equal to the estimated
allowance for the current year), are we going to make an entry for the provision? Answer: No
because the requirement has already been satisfied.

What happen if the previous balance of the allowance is a debit balance of P10,000 instead of
credit balance (which is the normal balance for the Allowance for doubtful Accounts (ADA) ) ?
Answer: the provision for the current year should be P17,500.
If the balance before adjustment is. . . . . . . . (P10,000 )negative or debit balance
Required balance should be. ........ 7,500 positive or credit balance
Therefore, doubtful account expense. . . . . P17,500
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Adjusting journal entry:
Doubtful Accounts (DA). . . . . . . P17,500
Allowance for DA. . . . . . . . . . . P17,500
Provision for the allowance for doubtful accounts

Illustrating this on the general ledger:

Balance before adjustment; the required balance which is 5% of the A/R is P7,500; the
amount of doubtful accounts to be recognized so that the required allowance will be satisfied
is P17,500.

Presentation in Statement of Financial Position Dec. 31, 2019 Non-current

Asset:
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . .P. 150,000
Less: Allowance for DA. . . . . . . . . . . 7,500
Net realizable value . . . . . . . . . . P 142,500

HOW TO WRITE-OFF AN ACCOUNT USING THE ALLOWANCE METHOD?

Worthless account are those receivables which is no longer collectible because, either the
customer has died, or bankrupt, or can no longer be located, this receivable is considered
worthless therefore it should be eliminated from the record. The adjusting entry to eliminate
this type of account is:
USING THE DIRECT METHOD
Allowance for DA . . . . XXX Doubtful Account . . . . . XXX
Accounts Receivable . . . . XXX Accounts Receivable . . . XXX
Write-off worthless account Write-off worthless account

The only difference between the two methods is the debit. The allowance method can be
used if there is an allowance account, if none then use the direct method. GAAP prefer the
allowance method. However, BIR prefer the direct method.
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Phone No.: (082)300-5456 Local 137
SUMMARY

Adjusting entries are also posted to the general ledger so that the amount of an account that
appears in the financial statements tally with those in the general ledgers. SELF HELP: You can
also refer to the sources below to help you understand the lesson.

• Ballada, Win & Ballada, Susan (2019), Basic Financial Accounting and Reporting.
Sampalok Manila: Domdane Publisher & Made Easy Books.
• Heintz, James A. (2017). College Accounting 22nd Edition. Australia: Cengage
Learning
• Philips,Fred (2016). Fundamentals of Accounting. McGraw Hill Education
• Warren, Carl S.(2016). Accounting 26th Edition. Australia: Cengage Learning
• Wild, John J. (2016). Fundamentals Accounting Principles. New York NY: McGraw
Hill Education.
 College of Accounting Education
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Phone No.: (082)300-5456 Local 137
QUESTION AND ANSWER PORTION:
Using the table provided list down all your concern/questions that require further clarification.
You may raise this question thru LMS or forum. List down the answer on the opposite side of the
questions/concern raised.
Do you have any questions for clarification?

Question/Issues Answers
1.
2.
3.
4.
5.

KEYWORDS INDEX
1. Deferral 8. Profitability
2. Accrual 9. Pro-forma Entries
3. Depreciation 10. Maturity Value
4. Uncollectible Accounts Expense 11. Maturity Date
5. Salvage value 12. Effects of Omitting adjusting entries
6. Solvency 13. Write-off an account
7. Liquidity 14. Net Realizable Value of A/R

SCHEDULES
Activity Date of Submission Where to Submit/How
Activity 11 Sept. 23, 2020 Blackboard lms
Activity 12 Sept. 24, 2020 Blackboard lms
Activity 13 Sept. 25, 2020 Blackboard lms
Activity 14 Sept. 28, 2020 Blackboard lms
Nutshell Sept. 30, 2020 Blackboard lms
Q&A Sept. 22, and 26, 29, Oct. 1 Collaboration/Zoom/Forum