DEPARTMENT OF EDUCATION SCHOOLS DIVISION OF NEGROS ORIENTAL REGION VII Kagawasan Ave., Daro, Dumaguete City, Negros Oriental ADJUSTING ENTRIES AND ADJUSTED TRIAL BALANCE FOR SERVICE BUSINESS for Fundamentals of Accountancy, Business and Management 1 Senior High School (ABM) Quarter 2 / Week 1 SELF LEARNING KIT Property of Schools Division of Negros Oriental | Irmds.depednodis.net | (035) 225 2376 / 225 2838FOREWORD This Self-Learning Kit for Fundamentals of Accountancy, Business and Management 1 is designed specifically for ABM students in the Senior High School. This is about understanding the use of accounting in negotiating problems in business operations. In this SLK, preparing for adjusting entries and the adjusted trial balance is being focused. It is aligned with the K to 12 Curriculum of the Department of Education following the prescribed MELCs (Most Essential Learning Competencies. This is designed to be more comprehensive for learners even in studying at home. What happened? This part contains review of prior knowledge that has a great contribution to the focused topic of this module. This also contains preliminary activities that will awaken the prior knowledge of the learners and will motivate them to learn. What I Need To Know? (Discussion) This section discusses the adjusting journal entries, its types, how to prepare them and at the same time its inclusion to the accounting worksheet which has a great contribution in the preparation of the adjusted trial balance. What I have Learned? (Evaluation/Post Test) The exercises found in this section are guaranteed to develop accounting skills, analyses, and to check the understanding of the learners about the topic in this module.OBJECTIVES K. Identify and define adjusting entries and its types S. Journalizing, posting adjusting entries and preparing adjusted trial balance; and A. Reflect on the importance of the rules in journalizing and posting adjusting entries. . WHAT HAPPENED PRE-TEST Create the Unadjusted Trial Balance of ABC Computer Repair Shop. for December 2020 using the following balances for each account. Write your answers on your activity sheets/notebook. Accounts Receivable P 10,000.00 Computer Equipment 250,000.00 Rent Expense 500.00 Prepaid Rent 3,000.00 Cash 101,150.00 Accounts Payable 2,800.00 Service Income 35,850.00 ABC, Capital 350,000.00 ABC, Drawing 15,000.00 Utilities Expense 5,500.00 Prepaid Insurance 4,000.00|. WHAT | NEED TO KNOW DISCUSSION This time, let us talk about number 6 of the accounting cycle which is Adjusting Trial Balance 5. Worksheet Adjusting entries, or adjusting journal entries (AJE), are made to update Journal Entries. 7. Financial Statements: 8, Cesng the Books What are adjusting/adjusting journal entries? the accounts and bring them to their correct balances. The preparation of adjusting entries is an application of the accrual concept of accounting and the matching principle. The accrual concept states that income is recognized when eamed regardless of when collected and expense is recognized when incurred regardless of when paid. The matching principle aims to align expenses with revenues. Expenses should be recognized in the period when the revenues generated by such expenses are recognized. When to prepare the adjusting entries? In what step of the Accounting cycle you can see these adjusting entries? Why is there a need for Adjusting Entries? The main purpose of adjusting entries is to update the accounts to conform to the accrual concept. At the end of the accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a need to update the accounts.If adjusting entries are not prepared, some income, expense, asset, and liability accounts may not reflect their rue values when reported in the financial statements. For this reason, adjusting entries are necessary. Types of Adjusting Entries Generally, there are 4 types of adjusting entries. Adjusting entries are prepared for the following: 1. Accrued Income Accrued income (or accrued revenue) refers to income already earned but has not yet been collected. When a company has performed services or sold goods to a customer, it should be recognized as income even if the amount is still to be collected at a future date. If no journal entry was ever made for the above, then an adjusting entry is necessary. The adjusting entry to record accrued revenue is: mmm dd_ Receivable account* X.XXXXK Income account** XXXX.XK *Appropriate receivable account such as Accounts Receivable, Rent Receivable, Interest Receivable, etc. “Income account such as Service Revenue, Rent Income, Interest Income, etc. 2. Accrued Expense Accrued expenses refer to expenses that are already incurred but have not yet been paid. If a company incurred, used, or consumed alll or part of an expense, that expense or part of it should be properly recognized even if it has not yet been paid. If such has not been recognized, then an adjusting entry is necessary.The pro-forma adjusting entry to record an accrued expense mmm dd Expense account* X XXX XX, Liability account** XXX IK “Appropriate expense account (such as Utilities Expense, Rent Expense, Interest Expense, etc.) **Appropriate liability account (Utilities Payable, Ren! Payable, Interest Payable, Accounts Payable, etc.) 3. Deferred Income Unearned revenue, also known as uneamed income, deferred revenue, or deferred income, represents revenue already collected but not yet eared, Unearned revenues are considered liabilities since these are advance payments from your customers wherein services are not yet rendered At the end of the period, uneamed revenues must be checked and adjusted if necessary. The adjusting entry for unearned revenue depends upon the journal entry made when it was initially recorded There are two ways of recording unearned revenue: (1} the liability method, and (2) the income method. Under the liability method, a liability account is recorded when the amount is collected. The common accounts used are: Unearned Revenue, Deferred Income, Advances from Customers, etc. 4, Prepaid Expense Prepaid expenses or prepayments represent payments made for expenses which have not yet been incurred. In other words, these are “advanced payments" by a company for supplies, rent, utilities and others that are still to be consumed. Since these are prepayments they are not recorded as expenses. Rather, they are classified as current assets since they are readily available for use.5, Depreciation When a fixed asset is acquired by a company, it is recorded at cost (generally, cost is equal to the purchase price of the asset). This cost is recognized as an asset and not expense. The cost is to be allocated as expense to the periods in which the asset is used. This is done by recording depreciation expense. There are two types of depreciation - physical and functional depreciation. Physical depreciation results from wear and tear due to frequent use and/or exposure to elements like rain, sun and wind. Functional or economic depreciation happens when an asset becomes inadequate for its purpose or becomes obsolete. In this case, the asset decreases in value even without any physical deterioration. There are several methods in depreciating fixed assets. The most common and simplest is the straight-line depreciation method. Under the straight line method, the cost of the fixed asset is distributed evenly over the life of the asset. How to Record Depreciation Expense Depreciation is recorded by debiting Depreciation Expense and crediting Accumulated Depreciation. This is recorded at the end of the period (usually, at the end of every month, quarter, or year). 6. Doubtful Accounts or Bad Debts, and other allowances Companies provide services or sell goods for cash or on credit. Allowing credit tends to encourage more sales. However, businesses that allow credit are faced with the risk that their receivables may not be collected, Accounts receivable should be presented in the balance sheet at net realizable value, i.e. the most probable amount that the company will be able to collect.Net realizable value for accounts receivable is computed like this: Accounts Receivable (Gross Amount) P100,000 Less: Allowance for Bad Debts 3,000 Accounts Receivable (Net Realizable Value) P 97,000 Allowance for Bad Debts (also often called Allowance for Doubtful Accounts) represents the estimated portion of the Accounts Receivable that the company will not be able to collect Take note that this amount is an estimate. There are several methods in estimating doubtful accounts. The estimates are offen based on the company’s past experiences. To recognize doubtful accounts or bad debts, an adjusting entry must be made at the end of the period. The adjusting entry for bad debts looks like this: Dec 31 Bad Debts Expense 001 Allowance for Bad Debts OX, Bad Debts Expense or Doubtful Accounts Expense: An expense account; hence, it is presented in the income statement. It represents the estimated uncollectible amount for credit sales/revenues made during the period Allowance for Bad Debts or Allowance for Doubtful Accounts: A balance sheet account that represents the total estimated amount that the company will not be able to collect from its total Accounts Receivable. What is the difference between Bad Debts Expense and Allowance for Bad Debts? Bad Debts Expense is an income statement account while the latter is a balance sheet account. Bad Debts Expense represents the uncollectible amount for credit sales made during the period. Allowance for Bad Debts, on the other hand, is the uncollectible portion of the entire Accounts Receivable. You can also use Doubtful Accounts Expense and Allowance for Doubtful Accounts in lieu of Bad Debts Expense and Allowance for Bad Debts.However, itis a good practice to use a uniform pair. Some say that Bad Debts have a higher degree of uncollectibility than Doubtful Accounts. In actual practice, however, the distinction is not really significant. Composition of an Adjusting Entry Adjusting entries affect at least one nominal account and one real account A nominal account is an account whose balance is measured from period to period. Nominal accounts include all accounts in the Income Statement, plus owner's withdrawal. They are also called temporary accounts or income statement accounts. Examples of nominal accounts are: Service Revenue, Salaries Expense, Rent Expense, Utilities Expense, Mr. Gray Drawing, etc. Areal account has a balance that is measured cumulatively, rather than from period to period. Real accounts include all accounts in the balance sheet. They are also called permanent accounts or balance sheet accounts. Real accounts include: Cash, Accounts Receivable, Rent Receivable, Accounts Payable, Mr. Gray Capital, and others. All adjusting entries include at least a nominal account and a real account.LET'S DO THIS! Going back to the previous topic on posting and preparation of the Unadjusted Trial Balance, we have this: Gray Electronic Repair Services Unadjusted Trial Balance December 31, 2020 Account title Debit Credit Cash 7,480.00 Accounts Receivable 3,400.00 Service Supplies 1,500.00 Fumiture and Fixtures 3,000.00 Service Equipment 16,000.00 Accounts Payable 97,000.00 Loans Payable 12,000.00 Mr. Gray, Capital 13,200.00 Mr. Gray, Drawing 7,000.00 Service Revenue 9,550.00 Rent Expense 1,500.00 Sslaries Expense 3,500.00 Taxes and Licenses 370.00 Totals 43,750.00 43,750.00 As you can see, Gray Electronic Repair Services has a total balance of P43,750 for debit and credit columns. This is not yet the final source of our financial statements since there are still possible adjustments to some of the accounts. Let us use the same example while we discuss the 5 types of adjusting entries. In our previous set of transactions, assume this additional information: 1. Accrued Income On December 31, 2020, Gray Electronic Repair Services rendered P300 worth of services to a client. However, the amount has not yet been collected It was agreed that the customer will pay the amount on January 15, 2021. The transaction was not recorded in the books of the company as of 2020. 10In this case, we should make an adjusting entry in 2020 to recognize the income since it has already been earned. The adjusting entry would be: Dec 31 Accounts Receivable 300.00 Service Revenue 300.00 Accounts Receivable Service Revenue 3,400.00 9,550.00 Adj 300.00 adj 300.00 3,700.00 9,850.00 2. Accrued Expense For the month of December 2020, Gray Electronic Repair Services used a total of P1,800 worth of electricity and water. The company received the bills on January 10, 2021. When should the expense be recorded, December 2020 or January 20212 Answer - in December 2020. According to the accrual concept of accounting, expenses are recognized when incurred regardless of when paid. The amount above pertains to utilities used in December. Therefore, if no entry was made for it in December then an adjusting entry is necessary. Dec 31 Utilities Expense 1,800.00 Utilities Payable 1,800.00 Utilities Payable Utilities Expense Debit | Credit Debit | Credit 1,800.00 adj adj 1,800.00 ceaIn the adjusting entry above, Utilities Expense is debited to recognize the expense and Utilities Payable to record a liability since the amount is yet fo be paid. 3. Deferred Income Suppose on January 10, 2021, ABC Company made P30,000 advanced collections from its customers. If the liability method is used, the entry would be: (not related with Gray electronics) Jan 10 Cash 30,000.00 Unearned Revenue 30,000.00 Cash Unearned Revenue (liability) Debit Credit Debit Credit 30,0000.00 30,000.00 Take note that the amount has not yet been eared, thus it is proper to record it as a liability. Now, what if at the end of the month, 20% of the unearned revenue has been rendered? This will require an adjusting entry. The adjusting entry will include: (1) recognition of P6,000 income, i.e. 20% of P30,000, and (2) decrease in liability (uneamed revenue) since some of it has already been rendered. The adjusting entry would be: Jan 31 Unearned Revenue 6,000.00 Service Income 6,000.00 Unearned Revenue (liability) Service Income Debit Credit Debit | Credit 30,000.00 6,000.00 adj Adj 6,000.00 24. Prepaid Expenses Recalling the example that we had with Gray Electronic Repair Services, we had the journal entry below recording the purchase of Service Supplies in the amount of P1,500.00. Dec 7 Service Supplies 1,500.00 Cash 1,500.00 Take note that the amount has not yet been incurred or used, thus it is proper to record it as an asset not as an expense. Suppose at the end of the month, 60% of the supplies have been used. Thus, out of the P1,500, P900 worth of supplies have been used and P600 remain unused. The P900 must then be recognized as expense since it has already been used. In preparing the adjusting entry, our goal is to transfer the used part from the asset initially recorded into expense - for us to arrive at the proper balances shown in the illustration above. The adjusting entry will include: (1) recognition of expense and (2) decrease in the asset initially recorded (since some of it has already been used). The adjusting entry would be: Dec 31 Service Supplies Expense 900.00 Service Sup) 900.00 Service Supplies Service Supplies Expense Debit Credit Debit Credit 1,500.09] Adj 900.00 900.00 adj Bal 600.00 BThe "Service Supplies Expense” is an expense account while "Service Supplies’ is an asset. After making the entry, the balance of the unused Service Supplies is now at P600 (P1,500 debit and P900 credit). Service Supplies Expense now has a balance of P900. Now, we've achieved our goal. 1. Depreciation Gray electronic Repair Services acquired their service equipment for P16,000 at the beginning of 2020, Assume that the equipment can be used for 4 years, The entire amount of P16,000 shall be distributed over four years, hence a depreciation expense of P4,000 each year. Straight-line depreciation expense is computed using this formula: Depreciable Cost - Residual Value Estimated Useful Life Depreciable Cost: Historical or un-depreciated cost of the fixed asset Residual Value or Scrap Value: Estimated valve of the fixed asset at the end of its useful life Useful Life: Amount of time the fixed asset can be used (in months or years) In the above example, there is no residual value. Depreciation expense is computed as: = P16,000 - PO 4 years = P4,000 / year What if the equipment has an estimated residual value of P4,000 after 4 years? The depreciation expense then would be computed as: = P16,000 - P4,000 4 years =P12,000 4 years = P3,000 / year 14The entry to record the P4,000 depreciation every year would be: Dec 31 Depreciation Expense 4,000.00 Accumulated Depreciation 4,000.00 Accumulated Depreciation - Service Equipment Depreciation Expense Debit Credit Debit | Credit 4, og 000.00 os aaj 4,000.00 Depreciation Expense: An expense account; hence, it is presented in the income statement. It is measured from period to period. In the illustration above, the depreciation expense is P4,000 for 2020, P4,000 for 2021, P4,000 for 2022, etc. Accumulated Depreciation: A balance sheet account that represents the accumulated balance of depreciation. It is continually measured; hence the accumulated depreciation balance is P4,000 at the end of 2020, P8,000 in 2021, P12,000 in 2022, and P16,000 in 2023. Accumulated depreciation is a contra-asset account. It is presented in the balance sheet as a deduction to the related fixed asset. Here's a table illustrating the computation of the carrying value of the equipment. 2020 892021 2022 = 2023 Equipment - Historical Cost P16,000 P16,000 P16,000 P16,000 Less: Accumulated Depreciation 4,000 8,000 12,000 16,000 Equipment - Carrying Value “PTZ000 PF B00 FP 4,000 PO 15Notice that at the end of the useful life of the asset, the carrying value is equal to the residual valve. if equipment is acquired within the period, then, divide the annual depreciation by 12 months and multiply the product to the number of months the equipment was used within that year. Annual Depreciation cost + 12 months = monthly depreciation cost P4,000 + 12 months = P333.33 So, if the equipment was acquired November of 2019 then its depreciation for the year 2019 is equal to P666.67 (P333.33 x 2 months) only and shall have a life value until October 2023 ony. 2. Doubtful Accounts or Bad Debts Gray Electronic Repair Services estimates that P100.00 of its credit revenue for the period will not be collected. The entry at the end of the period would be: Dec 31 Bad Debts Expense 100.00 Allowance for Bad Debts 100.00 Bad Debts Expense Allowance for Bad Debts Debit | Credit Debit [Credit Adj 100.00 100.00 adj Accounts Receivable (Gross Amount) P 3,400 Less: Allowance for Bad Debts 100 16If the Accounts Receivable - Net Realizable Value P 3,300. company’s Accounts Receivable amounts to P3,400 and its Allowance for Bad Debts is P100, then the Accounts Receivable shall be presented in the balance sheet at P3,300 - the net realizable value. What's next Alter posting the adjusting entries, next will be posting it to the worksheet and create the Adjusted Trial Balance. Here is the worksheet for Gray Electronic Repair Services. GRAY ELECTRONICS REPAIR SERVICES WORKSHEET DECEMBER 31, 2019 ADJUSTED TRIAL ACCOUNTILES TRIAL BALANCE ADJUSTMENTS BALANCE Debit ‘Credit Debit | Creait Debit Credit} Cash 7,480.0 7,480.00] Accounts Receivable 3,400.0 300.0 3,700.09) ‘Allowance for Bad T0008 00.09] Debts Service Supplies 1,500.06 9700.06 600.0 Fumiture ond Fixture 3,000.0 3,000.09) Service Eauioment 14,000.01 14,000.01 ‘Accumulated Depreciation ~ Service 4,000.00 4,000.00 9,000.0 9,000.09} Uiliiies Payable 7,800.00 1,800.09] Loans Payable 2,000.0 12,000.09) Mr, Gray, Capital 3,200.0 13,200.09] Mr. Gray, Drawing 7,000.0 7,000.00] Service Revenue 9,550.0 300.0 9,850.09) Rent Expense 1,500.0 1,500.09) Salaries Expense 3,500.0 3,500.0 Taxes and Licenses 370.0 370.0 v7Utilities Expense 800.00 1,800.00 Service Supplies Expense 9700.00 300.00 Depreciation Expense 4,000.00 4,000.00 Bad Debts Expense 100.00 100.00 TOTALS 43,750.00 | 43,750.00] 7,100.00 49,250.00 | 49,950.00] 18Il WHAT HAVE | LEARNED POSTTEST: Prepare the journal entries to record the following adjustment information of September 30, 2019 and at the same time the Adjusted Trial Balance. Write your answer in a two-column journal and in an 8-column worksheet. Speedy Ironing Services Unadjusted Trial Balance September 30, 2020 Debit Creait Cash 23,450.00, Accounts Receivable 2,000.00 Prepaid Advertising 600.00 Ironing Supplies 100.00 Ironing Equigment 600.00 Accounts Payable 150.00 Unearned Ironing Revenue 100.00 Capital, Linda Santos 5,000.00 Withdrawals, Linda Santos 300.00 lroning Revenue 7,000.00 Rent Expense 5,000.00 Telephone Expense 200.00 32,250.00 50.00 a. One month of scheduled advertising appeared in the school newspaper in the amount of P150. An inventory of Ironing supplies revealed approximately P50 onhand c. Depreciation was taken on equipment with a useful life of 5 years. Ironing equipment costs P600. d. On Thursday, October 1, Linda would pay her first employee, who worked Tuesday and Thursdays, P120 for the week. €. Ironing services for one of the two students who had paid in advance had been performed as of 9/30/2019. f. On Tuesday, September 29, services had been finished for 2 students who promised to pay P50 each on 10/5/2019 a 19REFERENCES n.d.hitps://www.accountingverse.com/accou nting- basics/accounting-ledger.htmI. n.d. https://www.accountingtools.com/articles. n.d. http://www. businessdictionary.com/definition/service-business.html n.d, Teaching Guide for Senior High Fundamentals of Accountancy, Business, and Management 1. Quezon City: Commision on Higher Education. 20DEPARTMENT OF EDUCATION ‘SCHOOLS DIVISION OF NEGROS ORIENTAL, SENEN PRISCILLO P, PAULIN, CESO V Schools Division Superintendent JOELYZA M. ARCILLA, ED Assistant Schools Division Superintendent MARCELO K. PALISPIS, EaD Assistant Schools Division Superintendent NILITAL. RAGAY, EdD OIC - Assistant Schools Division Superintendent CID Chief ROSELA R. ABIERA Education Program Supervisor - (LRMS) ELISA L. BAGUIO, EaD Division Education Program Supervisor - MATHEMATICS MARICELS. RASID Librarian TI (LRMDS) ‘ELMAR. CABRERA PDO Il (LRMDS) CHONA V. BONTIGAO Writer IVANNE RAYA. GIDOR Layout Artist ALPHA QA TEAM, GILS, DAEL. ‘MARIA SOLEDAD M, DAYUPAY ‘MARIA ACENITH D PASTOR ‘JER LIZAT, INGUITO BETA QA TEAM RICKLBOBEN V. BAYKING LITTIEBETHS. BERNADEZ GILS. DAB ‘MARIA SOLEDAD M. DAYUPAY ‘MARIA ACENITH D PASTOR SBE LIZAT, INGUITO MERCYDITHA D. ENOLPE RONALD G, TOLENTINO ENHANCEMENT TEAM ROSITA A. LOZANO, ‘MARIA SOLEDAD M. DAYUPAY DISCLAIMER ‘The infomation, ati and assessmens used nthe maori re designed fo provide acco leming modelty othe Teachers and leamere of the Division of Negros Onenta. Te contnts of this module are careful reeearched, chosen, and evaluated comply min he atleaming competences. The wntars and evalater wer leary euctd ogee eed fo nformation and ivstrations used fo subetantate ths ‘atria Ailcntert is sujet fo copyright and may rl be mprosiced in any form withou expressed writen consent frm he dso, 21