ADJUSTING THE RECORDS

CHAPTER14
BOOKKEEPING NCIII TRAINING COURSE
PPT Presentation of Ma. Alma Daza Jambalos
TOPIC OVERVIEW
ADJUSTING THE RECORDS

 Gradual changes in financial position and performance

 Items requiring adjustments
 Preparation of adjusting entries
JOURNALIZIN TRANSACTION OBSERVABLE
G STAGE S AND EVENTS CHANGE

SILENT OR LIABILI
ASSETS TIES
GRADUAL
CHANGE
EQUITY INCOME

EXPENS
ACCRUALS OF INCOME AND EXPENSES BAD DEBTS
ES
DEPRECIATIO EXPIRATION OF USAGE OF
N PREPAYMENTS SUPPLIES

To bring the balances of ADJUSTING To prepare accurate

accounts up-to-date ENTRY financial statements
 APPLICATION OF ADJUSTING ENTRIES

ACCRUAL BASIS MATCHING

Income is recognized when
PRINCIPLE
Aims to align expenses with
earned regardless of when revenues. Expenses should be
collected. Expense is recognized in the period when
recognized when incurred the revenues generated by such
regardless of when paid. expenses are recognized.
 ACCRUALS OF INCOME AND
EXPENSES
ACCRUAL OF INCOME
Illustration

A client gave the business a ₱100,000 promissory note which pays

12% interest per annum on September 1, 2017. The note shall mature
in 6 months on March 1, 2018.

Prepare the adjusting entry on December 31, 2017.

 ACCRUALS OF INCOME AND
ACCRUAL OF INCOME EXPENSES
Illustration

A client gave the business a ₱100,000 promissory note which pays 12% interest per annum on
September 1, 2017. The note shall mature in 6 months on March 1, 2018. Prepare the adjusting
entry on December 31, 2017.

Entire term of the note (6 months)

Sept Oct Nov 1 Dec 1 Jan 1 Feb

Term for accrued interest Remaining Term

(4 months) (2 months)

From Sept 1, 2017 to Dec 31, 2017 ₱100,000 x 12%/12mons x 4mons = ₱4,000
Jan 1, 2018 to Mar 1, 2018 ₱100,000 x 12%/12mons x 2mons = ₱2,000
Total interest from Sept 1 to Mar 1, 2018 ₱6,000

The ₱4,000 earned in 2017 must be booked to properly reflect the income in Year 2017.
 Adjusting Entries on December 31, 2017:
ACCRUED INTEREST INCOME
 Dec 31 Accrued Interest Income ₱4,000  
Dec 31 ₱4,000 Mar 1 ₱4,000
    Interest Income   ₱4,000
    To record accrual of interest income    

Note: The accrued interest income is an asset as of December 31, 2017.

INTEREST INCOME
Dec 31 ₱4,000
To record the collection of the interest on March 1, 2018 Mar 1 2,000
Mar 1 Cash ₱6,000  
    Accrued Interest Income   ₱4,000
Interest Income 2,000
    To record collection of interest    
PRACTICE 0.1

On November 1, 2016, Superman Store received a 90-day note from a

customer amounting to ₱120,000, 6% interest.

Record the interest due on the note at the end of December 31, 2016
PRACTICE 0.2

Batman Company rented out office equipment to a lessee. On

December 31, 2016, the unrecorded rent income earned was ₱15,000.

Prepare adjusting entry on December 31, 2016.

 ACCRUALS OF INCOME AND
ACCRUALS OF EXPENSES EXPENSES
Illustration

The business pays ₱24,000 semi-monthly salaries to its employee every 18 th and 3rd of the
month. What adjustment would be needed by December 31, 2017

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

₱24,000 salaries expense

12 days 3 days

₱ 19,200 ₱ 4,800
Analysis
Dec 19, 2017 to Dec 31, 2017 ₱24,000 x 12 days/15 days = ₱19,200
Jan 1, 2018 to Jan 3, 2018 ₱24,000 x 3 days/ 15 days = 4,800
Salaries Expense from Dec 19, 2017 to Jan 3, 2018 ₱24,000
 Adjusting Entries on December 31, 2017:
ACCRUED SALARIES EXPENSE
 Dec 31 Salaries Expense ₱19,200  
Dec 31 ₱19,200 Jan 3 ₱19,200
    Accrued Salaries Expense   ₱19,200
    To record the accrual of salaries exp    

Note: The accrued interest income is an asset as of December 31, 2017.

SALARIES EXPENSE
Dec 31 ₱19,200
To record the payment of salaries on January 3, 2018 Jan 3 4,800
Jan 3 Accrued Salaries Expense ₱19,200  
  Salaries Expense 4,800 
Cash ₱24,000
    To record the collection of interest    
PRACTICE 0.3

On August 1, 2016, SMX Company issued a 180-day note to a

supplier amounting to ₱600,000, 15% interest. Prepare adjusting
entry on December 31, 2016.
PRACTICE 0.4

On December 31, 2016, Acosta Company has unpaid and unrecorded

salaries of ₱25,000. Prepare the adjusting entry on December 31,
2016.
 EXPIRATION OF PREPAYMENTS

Alternative method of recording prepayments:

1. Assets Method – the prepayment is initially recorded upon payment as an asset, “Prepaid expense” or “Deferred
expense”. At the end of the reporting period, the expired portion is computed and adjusted as expense.

Date of Transaction End of period adjustment

Prepaid Expense xx Expense xx

  Cash xx   Prepaid Expense xx

2. Expense Method – the prepayment is initially recorded upon payment as an expense. At the end of the reporting
period, the unexpired portion is computed and is adjusted as an asset.

Date of Transaction End of period adjustment

Expense xx Prepaid Expense xx

  Cash xx   Expense xx
EXPIRATION OF PREPAYMENTS
Illustration

On October 1, 2016, the business paid ₱100,000 for the rental of an office space covering
October 1, 2016 to September 30, 2017.

Entire term of the ₱100,000 rent expense

3 months 9 months

Breakdown of rental expense:

October 1, 2016 to Dec 31, 2016 ₱100,000 x 3 mos /12 months = ₱ 25,000
January 1, 2017 to Sept 30, 2017 ₱100,000 x 9 mos/ 12 months = 75,000
Rent Expense for Oct 1, 2016 to Sept 30, 2017 ₱100,000
 EXPIRATION OF PREPAYMENT
Under Asset Method

In the asset section of the Balance Sheet:

Date of transaction: PREPAID RENT

Oct 1 ₱100,000 Dec 31 ₱25,000
 Oct 1 Prepaid Rent ₱100,000  
    Cash   ₱100,000
    To record the prepayment of rental    

In the Income Statement:

Adjusting Entry: RENT EXPENSE
Dec 31 Rent Expense ₱25,000   Dec 31 ₱25,000

Prepaid Rent ₱25,000

To record the unexpired portion of
       
prepaid rent

Note: Under the asset method, the expired portion (expense) is set-up in the adjustment process.
 EXPIRATION OF PREPAYMENT
Under Expense Method

In the asset section of the Balance Sheet:

Date of transaction: PREPAID RENT

Oct 1 ₱75,000
 Oct 1 Rent Expense ₱100,000  

    Cash   ₱100,000
    To record the prepayment of rental    

In the Income Statement:

Adjusting Entry: RENT EXPENSE
Dec 31 Prepaid Rent ₱75,000   Oct 1 ₱100,000 Dec 31 75,000

Rent Expense ₱75,000

To record the unexpired portion of
       
prepaid rent

Note: Under the expense method, the unexpired portion (asset) is set-up in the adjustment process.
Either method is essentially come up with the same asset and expense figures as of Dec 31, 2016.
 EXPIRATION OF PREPAYMENT
PRACTICE 0.5

On May 1, 2016, the business paid ₱24,000 for a one year fire
insurance of its building. The business reports at the end of every
calendar year.

Give the adjusting entries assuming the company uses:

1. Asset method
2. Expense method
 EXPIRATION OF PREPAYMENT
PRACTICE 0.6

On August 1, 2016, Bourdain Company purchased a two-year

insurance policy for ₱28,800.

Give the adjusting entries for December 2016 assuming the company
uses:
1. Asset method
2. Expense method
 USAGE OF SUPPLIES
USAGE OF SUPPLIES
Illustration

On May 1, 2016, the business purchased a total of ₱20,000 office supplies. At

the end of the current year (Dec 31, 2016), supplies worth ₱4,000 still remained
unused. There were ₱7,000 unused supplies at the end of the prior year (Dec 31,
2015).

The supplies expense for the year 2016 shall be computed as:

Beginning supplies ₱ 7,000

Add: Supplies purchased 20,000
Supplies available for use ₱ 27,000
Less: Ending Supplies 4,000
Supplies Used ₱ 23,000
 USAGE OF SUPPLIES
Under Asset Method

In the asset section of the Balance Sheet:

Journal Entry upon purchase: OFFICE SUPPLIES

Dec 31-15 ₱7,000 Dec 31-2016 ₱23,000
 May 1 Office Supplies ₱20,000  
May 1, 2016 20,000
    Cash   ₱20,000
    To record purchase of office supplies    

In the Income Statement:

Year-end Adjusting Entry: OFFICE SUPPLIES EXPENSE
Dec 31 Office Supplies Expense ₱23,000   Dec 31 ₱23,000

Office Supplies ₱23,000

    To record the used portion of supplies    

Note: Under the asset method, the expired portion (expense) is set-up in the adjustment process.
 USAGE OF SUPPLIES
Under Expense Method

In the asset section of the Balance Sheet:

Journal Entry upon payment: OFFICE SUPPLIES

Dec 31, 2016 4,000
 May 1 Office Supplies Expense ₱20,000  

    Cash   ₱20,000
    To record the purchase of supplies    

In the Income Statement:

Adjusting Entry: OFFICE SUPPLIES EXPENSE
Dec 31 Office Supplies ₱4,000   Dec 31-15 ₱7,000 Dec 31, 2016 4,000
May 1, 2016 20,000
Office Supplies Expense ₱4,000
    To record the used portion of supplies    

Note: Under the expense method, the unexpired portion (asset) is set-up in the adjustment process.
Either method is essentially come up with the same asset and expense figures as of Dec 31, 2016.
 USAGE OF SUPPLIES
PRACTICE 0.7

On April 1,2016, Lee Bron Trading purchased a total of ₱20,000

various office supplies. On December 31, 2016, supplies worth
₱8,000 still remained unused. There were ₱12,000 unused supplies
on December 31,2015.

Give the adjusting entries assuming the company uses:

1. Asset method
2. Expense method
EARNING OF DEFERRALS
Deferrals or income received or collected in advance are not earned by the business upon receipts. This is earned by the
business as it renders its part on the contract or as time passes.

1. Liability Method – the advanced income is initially recorded as a liability as unearned income or deferred income
upon receipts. Eventually, the realized or earned portion by the business is recorded as income by an adjusting entry.

Date of Transaction End of period adjustment

Cash xx Unearned Income xx

  Unearned Income xx   Income xx

2. Income Method – the advanced income is initially recorded as an income upon receipt. Eventually, the unearned
portion is recorded as a liability by an adjusting entry.
Date of Transaction End of period adjustment

Cash xx Income xx
  Income xx   Unearned Income xx
EARNING OF DEFERRALS
Illustration

On July 1, 2016, the business received ₱200,000 advanced rental from the lessee. The advanced
rent covers two years from July 1, 2016 to June 30, 2018. The business reports financial
statements every December 31.

Entire term of the ₱200,000 rent income

6 months 18 months

₱ 50,000 ₱ 150,000

The rent income shall be broken as follows:

July 1, 2016 to Dec 31, 2016 ₱200,000 x 6 mos /24 months = ₱ 50,000
January 1, 2017 to Sept 30, 2017 ₱200,000 x 18 mos/24 months = 150,000
Total one-year rent income ₱200,000
 DEFFERALS
Under Liability Method

In the asset section of the Balance Sheet:

Journal Entry upon collection of cash: UNEARNED RENT INCOME

Dec 31 ₱50,000 July 1 ₱200,000
 July 1 Cash ₱200,000  
    Unearned Income   ₱200,000
    To record the receipt of advance rental    

In the Income Statement:

Year-end Adjusting Entry: RENT INCOME
Dec 31 Unearned Rent Income ₱50,000   Dec 31 ₱50,000

Rent Income ₱50,000

    To record unearned portion of rental    
 DEFERRALS
Under Income Method

In the asset section of the Balance Sheet:

Journal Entry upon collection of payment: UNEARNED RENT INCOME

Dec 31, 2016 150,000
 July 1 Cash ₱200,000  

    Rent Income   ₱200,000

    To record the receipt of advance rental    

In the Income Statement:

Adjusting Entry: RENT INCOME

Dec 31 Rent Income ₱150,000   Dec 31, 2016 150,000 July 1 200,000

Unearned rent income ₱150,000

    To record unearned portion of rental    
 DEFERRALS
PRACTICE 0.8

The business received ₱90,000 advanced payment from a client for

janitorial services to be provided between September 1, 2016 to
February 28, 2017.

Give the adjusting entries assuming the company uses:

1. Liability method
2. Income method
 DEFFERALS
PRACTICE 0.9

Kris Mocha Inc. is engaged in constructing and renting out office

space to various businesses. On February 28, 2016, one tenant gave
₱96,000 cash for three years’ rent.

Give the adjusting entries assuming the company uses:

1. Liability method
2. Income method
 DEPRECIATION
a reduction in the value of an asset with the passage of time, due in
particular to wear and tear.

Utility Value - the ability of the asset to yield

service

decreases when: Accumulated Depreciation

 being used An asset with credit balance (contra-asset).
 Obsolete This is the total depreciation on a tangible
 Inadequate asset accumulated up to specified date.
 Replaced by a new
invention
 Unable to meet production Book Value or Carrying Value
demand The cost of the asset less the accumulated
depreciation
Three factors considered in determining depreciation:

COST
The purchase price of the depreciation
DEPRECIATION EXPENSE
asset is the allocation of plant, asset cost over its estimated
useful life. This is the expense allotted for the wear and
tear of property, plant, and equipment due to passage of
SALVAGE VALUE time.
Estimated value of the asset at the end of
its useful life

ESTIMATED USEFUL LIFE Formula for computing Depreciation Expense:

An estimation of the number of years an Cost – Salvage Value
asset can be useful to the entity. Depreciation Expense =
Estimated Useful Life
COMMON METHODS OF ESTIMATING
DEPRECIATION
1. Straight Line method
2. Production output or work-hours method
3. Sum-of-the-year’s digit method (SYD)
4. Declining balance method
DEPRECIATION
ILLUSTRATION

On January 1, 2016, Dumeng Constructions purchased an equipment with a cost of ₱100,000 and expects
a ₱25,000 salvage value after its 5 year useful life. The business uses straight line method of depreciating
the equipment
Required: Compute for the net book value as of December 31, 2016
Prepare for adjusting entry on December 31, 2016

Straight Line Method

Depreciation Expense =
Depreciation Expense =
Depreciation Expense =
Cost – Salvage Value
The depreciable cost of the asset is
Estimated Useful Life
simply spread over as expense over
the useful life. This method results in
₱100,000 – ₱25,000 uniform depreciation expense
5 years throughout the life of the property.
₱ 15,000 per year

Net Book Value = Cost of the Asset – Accumulated Depreciation

Net Book Value = ₱100,000 – ₱15,000
Net Book Value = ₱ 85,000
DEPRECIATION
ILLUSTRATION

Straight Line Method Depreciation

ACCUMULATED
YEAR DEPRECIATION EXPENSE BOOK VALUE
DEPRECIATION
2016 ₱15,000 ₱15,000 ₱85,000
2017 ₱15,000 ₱30,000 ₱70,000
2018 ₱15,000 ₱45,000 ₱55,000
2019 ₱15,000 ₱60,000 ₱40,000
2020 ₱15,000 ₱75,000 ₱25,000

Adjusting Entry for 2016:

Dec 31 Depreciation Expense ₱15,000  

Accumulated Depreciation ₱15,000

    To provide depreciation for building    
DEPRECIATION
ILLUSTRATION

Momo Land Co. acquires a building on January 1, 2016 at the cost of ₱5,000,000. The building has an
estimated useful life of 40 years and an estimated salvage value of ₱1,000,000. The business uses straight
line method in depreciating the building.
Required: Compute for the net book value as of December 31, 2016
Prepare for adjusting entry on December 31, 2016

Cost – Salvage Value

Depreciation Expense =
Estimated Useful Life

₱5,000,000 – ₱1,000,000
Depreciation Expense =
40 years
Depreciation Expense = ₱ 100,000 per year

Net Book Value = Cost of the Asset – Accumulated Depreciation

Net Book Value = ₱5,000,000 – ₱100,000
Net Book Value = ₱4,900,000
PRACTICE 0.10
Given the following cases: prepare the adjusting journal entries on December 31, 2016. Presented below are
the non-current assets of Pokemon Inc. Show your computation for each property in good form

ESTIMATED USEFUL
ACQUISITION DATE PROPERTY COST (₱) SALVAGE VALUE (₱)
LIFE

Oct 31, 2010 Building 20,000,000 1,500,000 20 years

June 1, 2015 Furniture 51,000 3,000 12 years

Sept 1, 2016 Machinery 108,000 8,000 20 years

July 1, 2016 Equipment 440,000 40,000 5 years

BAD DEBTS
The uncollectible portion of the receivables from
customer or clients
PROVISION FOR BAD DEBTS
The estimate of uncollectible receivables
BAD DEBT EXPENSE
refers to the loss that a company experiences
because it sold goods or provided services and
did not require immediate payment. The loss
occurs when the customer does not pay the
amount owed.
This is generally classified as selling or
administrative expense and is found on the
income statement.
TWO METHODS IN RECORDING BAD DEBTS EXPENSE
1. Direct Write-Off Method
 Recognizes the bad debts only when it is certain that the
account will not be collected anymore
 Credits to decrease directly the accounts receivable
2. Allowance for Doubtful Accounts Method
 Recognizes the bad debts every accounting period with
anticipation of doubtful accounts based on the
company’s experience
 Credits to decrease indirectly the accounts receivable by
using contra asset account which is the allowance for
bad debts
UNDER THE DIRECT WRITE-OFF
METHOD
RECORDING BAD DEBT EXPENSE

1. The bad debt expense is recorded when a specific account is ascertained or proven to be
uncollectible (which may not occur in the period of sale)

2. This method is theoretically undesirable because it is

a. Makes no attempt to match revenues and expense
b. Does not result in receivables being stated at net realizable value in the statement of
financial position.

Net realizable value is the net expected amount to be collected from receivable after adjusting for expected
unrecoverable accounts.
DIRECT WRITE-OFF METHOD
ILLUSTRATION

In 2016, the business made ₱400,000 service income from various clients. ₱100,000 of which is
on account wherein 2% is expected to be non-collectible. In 2017, ₱1,400 were actually proven
to be non-collectible.

Journal Entry in 2016 – None.

Journal Entry in 2017

DATE PARTICULARS DEBIT CREDIT
Dec 31 Bad debt expense ₱1,400  

    Accounts receivables   ₱1,400

    To write off the uncollectible account    

This method is employed for taxation purposes, this method is also called the Tax Method of recording bad debts.
ALLOWANCE METHOD

Allowance Method recognizes bad debts every accounting period based on an estimate of accounts
uncollected as experienced in the previous years by the company.

The following methods are used in estimating bad debts:

1. Providing a certain percentage of sales as bad debts

2. Increasing the allowance by a certain percentage of accounts receivable
3. Increasing the allowance to a certain percentage of accounts receivable
4. Aging the accounts receivable (advance accounting topic)

Net realizable value = Accounts Receivable less Allowance for bad debts
ALLOWANCE FOR BAD DEBTS
Illustration 1. It is the policy of the company to provide for bad debts
based on 1% gross sales:
LEE BRON MART
TRIAL BALANCE Computation:
MAY 30, 2015
Beginning Allowance ₱ 7,500
ACCOUNT TITLES DEBIT CREDIT
Additional Provision (.01x ₱500,000) 5,000
ACCOUNTS RECEIVABLE 300,000 Ending Allowance ₱12,500
ALLOWANCE FOR BAD DEBTS 7,500
SALES 500,000 Balance Sheet Presentation:
SALES RETURN AND ALLOWANCES 15,000 Accounts Receivable ₱ 300,000
SALES DISCOUNT 9,000 Less: Allowance for Bad Debts 12,500
Net Realizable Amount ₱287,500

Income Statement Presentation:

Bad Debt Expense ₱ 5,000
Adjusting Journal Entry in 2015
DATE PARTICULARS DEBIT CREDIT

Dec 31 Bad debt expense ₱5,000  

    Allowance for Bad Debts   ₱5,000

    To record estimated bad debt expense    
ALLOWANCE FOR BAD DEBTS
Illustration 2. It is the policy of the company to recognize bad debts
based on 1% of net sales:
LEE BRON MART
TRIAL BALANCE Computation:
MAY 30, 2015
Beginning Allowance ₱ 7,500
ACCOUNT TITLES DEBIT CREDIT
Additional Provision (.01x ₱476,000) 4,760
ACCOUNTS RECEIVABLE 300,000 Ending Allowance ₱12,260
ALLOWANCE FOR BAD DEBTS 7,500
SALES 500,000 Balance Sheet Presentation:
SALES RETURN AND ALLOWANCES 15,000 Accounts Receivable ₱ 300,000
SALES DISCOUNT 9,000 Less: Allowance for Bad Debts 12,260
Net Realizable Amount ₱287,740

Income Statement Presentation:

Bad Debt Expense ₱ 5,000
Adjusting Journal Entry in 2015
DATE PARTICULARS DEBIT CREDIT

Dec 31 Bad debt expense ₱4,760  

    Allowance for Bad Debts   ₱4,760

    To record estimated bad debt expense    
ALLOWANCE FOR BAD DEBTS
Illustration 3. It is the policy of the company to increase the allowance
by 1% of accounts receivable:
LEE BRON MART
TRIAL BALANCE Computation:
MAY 30, 2015
Beginning Allowance ₱ 7,500
ACCOUNT TITLES DEBIT CREDIT
Additional Provision (.01x ₱300,000) 3,000
ACCOUNTS RECEIVABLE 300,000 Ending Allowance ₱10,500
ALLOWANCE FOR BAD DEBTS 7,500
SALES 500,000 Balance Sheet Presentation:
SALES RETURN AND ALLOWANCES 15,000 Accounts Receivable ₱ 300,000
SALES DISCOUNT 9,000 Less: Allowance for Bad Debts 10,500
Net Realizable Amount ₱289,500

Income Statement Presentation:

Bad Debt Expense ₱ 3,000
Adjusting Journal Entry in 2015
DATE PARTICULARS DEBIT CREDIT

Dec 31 Bad debt expense ₱3,000  

    Allowance for Bad Debts   ₱3,000

    To record estimated bad debt expense    
ALLOWANCE FOR BAD DEBTS
Illustration 4. It is the policy of the company to provide for bad debts
based on aging schedule of which ₱8,000 of accounts will
LEE BRON MART prove uncollectible.
TRIAL BALANCE
MAY 30, 2015 Computation:
ACCOUNT TITLES DEBIT CREDIT Required Allowance based on Aging ₱ 8,000
ACCOUNTS RECEIVABLE 300,000 Allowance Beginning 7,500
ALLOWANCE FOR BAD DEBTS 7,500
Provision for Bad Debts ₱ 500
SALES 500,000
Balance Sheet Presentation:
SALES RETURN AND ALLOWANCES 15,000
Accounts Receivable ₱ 300,000
SALES DISCOUNT 9,000
Less: Allowance for Bad Debts 8,000
Net Realizable Amount ₱292,000

Income Statement Presentation:

Bad Debt Expense ₱ 500
Adjusting Journal Entry in 2015
DATE PARTICULARS DEBIT CREDIT

Dec 31 Bad debt expense ₱ 500  

    Allowance for Bad Debts   ₱ 500

    To record estimated bad debt expense    
PRACTICE 0.11

The company estimates that 5% of the Accounts Receivable will be uncollectible. The
total credit sales for the year were ₱2,000,000, accounts receivable was ₱400,000. The
company wrote off ₱10,000 accounts was deemed to be worthless and the allowance for
bad debts beginning of the year was ₱5,000.

Required:
1. Under the direct write-off method, prepare the journal entry to recognize the bad debts
expense.
2. Under the allowance method, prepare the adjusting entry as of the end of the year.
3. Under the allowance method, compute for the net realizable value as of the end of the year.
PRACTICE 0.12

Accounts Receivable shows the balance of ₱100,000. It is estimated that 8% of this

is uncollectible. Allowance for Bad Debts per general ledger has a balance of ₱1,000.
Give adjusting entry on December 31, 2016 for the provision of the estimated
uncollectible account.