L5: Adjustments (Part 2)

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SUBJECT - CODE

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Module No. 1 SCHOOL NAME

 LEARNING OBJECTIVES

⚫ Deferred revenues
⚫ Depreciation
⚫ Accruals

Module No. 1 Title of Your Presentation

 What are Deferred revenues?

Deferred revenues are advance payments of future services. Basically, a company

receives money and has the obligation to perform services in the future. There are two
methods used in recognizing deferred revenues:

(a) Liability method

This method is more preferred than income method. The company has not performed
any services, thus no income should be recorded. Rather a liability should be
recognized.

(b) Income method

This method anticipates that the received cash will be performed within the accounting
period. To minimize adjustments, this method is used for convenience purposes.
 Deferred revenue: On January 15, 2020, the company received P50,000 from customers for
services to be performed within 2 months. At the end of the month, P20,000 of the unearned
services were already complete.

LIABILITY method INCOME method

Initial entry: Initial entry:
1/15 Cash 50,000 1/15 Cash 50,000
Unearned service revenue 50,000 Service revenue 50,000

Adjusting journal entry: Adjusting journal entry:

1/31 Unearned service revenue 20,000 1/31 Service revenue 30,000

Service revenue 20,000 Unearned service revenue 30,000
 Depreciation

Depreciation is an expense directly attributed to depreciable assets such as buildings, equipment, and
furniture and fixtures.

Depreciable assets are assets that are expected to decrease value in the future. Companies estimates the
useful life of depreciable assets and its expected recoverable value upon full depreciation.

Thus, the decrease in value of depreciable assets are recognized throughout its useful life. For basic
depreciation, we will use Straight-line method presented as:

Annual depreciation = (Cost of depreciable asset – Salvage value) / Useful life in years

The pro-forma adjusting journal entry for depreciation is:

Depreciation expense XX
Accumulated depreciation XX
Depreciation: On January 1, 2020 the company purchased equipment on account worth
P100,000 with a useful life of 3 years and estimated salvage value of P28,000.

To recognize the depreciation at the end of January, the computation for depreciation will be:

Annual depreciation = (Cost of depreciable asset – Salvage value) / Useful life in years
= (P100,000 – 28,000)/3
= P24,000

Monthly depreciation = Annual depreciation/12

= P24,000/12
= P2,000

Adjusting journal entry at January 31, 2020:

1/31 Depreciation expense 2,000

Accumulated depreciation 2,000
 Accrued income

Accrued income refers to income The pro-forma adjusting journal entry

that has not yet been collected but for accrued income is:
already earned.
(a) For interest to be recognized from notes
A period-end accrued income usually receivable
debits a receivable and credits income.
Interest receivable/ Accrued interest income XX
Common accrued income at the end of Interest income XX

the period are: (b) For unrecognized credit service revenue

1. Interest to be recognized from notes
Accounts receivable XX
receivable
Service revenue XX
2. Unrecognized credit service revenue
Accrued income: On January 1, 2020, the company received a one-year promissory
note amounting P120,000 with annual interest of 8%.

The simple computation for interest is:

Interest = Principal x time x annual rate
= P120,000 x 1/12 x .08
=P800

Adjusting journal entry at January 31, 2020:

1/31 Interest receivable 800

Interest income 800
 Accrued expense

Accrued expenses are expenses that The pro-forma adjusting journal entry for accrued
has not yet been paid but already expense is:
incurred.
(a) For interest to be recognized from notes
payable or loans payable
A period-end accrued expense usually
debits an expense and credits a liability. Interest expense XX
Interest payable XX
Common accrued expense at the end of
the period are: (b) For unrecognized salaries expense
1. Interest to be recognized from
notes payable or loans payable Salaries expense XX
2. Unrecognized salaries expense Salaries payable XX
Accrued expense: On January 1, 2020, the company issued a one-year promissory note amounting
P60,000 with annual interest of 5%.

Interest = Principal x time x annual rate

= P60,000 x 1/12 x .05
=P250

Adjusting journal entry at January 31, 2020:

1/31 Interest expense 250

Interest payable 250
 SUMMARY

Module No. 1 Title of Your Presentation