POA - D. Adjusting Entries

Adjusting Entries – Service
Business
ACC111
Adjusting Entries – Service Business
 Adjusting entries
 are entries made prior to the preparation of financial
statements to update certain accounts so that they
reflect correct balances as of the designated time
 Purpose of adjusting entries

 to take up unrecorded income and expense of the
period
 to split mixed accounts into their real and nominal
elements
 Adjusting entries are subdivided into the following:

 accruals of income and expenses
 recognition of depreciation expense and bad debts
expense
 deferrals of income and expenses (splitting of mixed
accounts)
 Accruals of income and expenses

The term “accrual” (or ‘to accrue’) means to
recognize an:
 income that is already earned but not yet collected
 expense that is already incurred but not yet paid
 Observe the application of the following concepts in

the succeeding illustrations:
 all adjusting entries involve at least one balance
sheet account and one income statement account
 all adjusting entries affect the profit or lost for the
period
Case 1: Accrual of income - interest income Jungkook

Company received a 12%, P100,000, one year, note
receivable on April 1, 2020. The company uses a
calendar year. The principle and interest on the note
are due on April 1, 2021.
 Concepts:
 notes receivable give rise to interest income
 interest income is earned due to passage of time
Case 2: Accrual of income - rent income Jungkook

Company rents out its building to a tenant for a
monthly rent of P50,000. As of December 31, 2020,
the tenant has not yet paid the rent for the month of
December.
 Concepts:
 income is recognized when earned rather than when
collected - accrual basis of accounting
Case 3: Accrual of expense - interest expense

Jungkook Company issued a 12%, P100,000, one
year, note payable on October 1, 2020. The principle
and interest are due on October 1, 2021.
 Concepts:
 Notes payable give rise to interest expense
 interest expenses is incurred due to passage of time
Case 4: Accrual of expense - utilities expense

The cost of electricity used for the month of
December 2020 is P4,000. The electricity bill was
received and paid on January 2021.
 Concepts:
 expenses recognized when incurred/used rather than
when paid - accrual basis of accounting
Case 5: Accrual of expense - salaries expense

Employees are in total salaries of P100,000 on
December 31, 2020. However, the salaries were paid
only on January 2021.
 Recognition of depreciation expense

 Under the concept of systematic and rational
allocation, cost that provide economic benefits over
several accounting periods but cannot be directly
associated with the earning of revenues are
recognized as expense over the periods where the
economic benefits are consumed.
Case 6: Depreciation expense

On January 1, 2020, Jungkook Co. acquired
equipment for P20,000. The business expects to use
the equipment over the next four years.
 The concept of immediate recognition

 under this concept, a cost that produces no future
economic benefits or an asset that ceases to provide
future economic benefits is recognized immediately
as an expense
 Application:
 an account receivable that becomes doubtful of
collection is immediately recognized as expense
Case 7: Bad debts expense

Jungkook Co. has total accounts receivable of P2,000
on December 31, 2020, before any adjustments. Of
the total amount, it was estimated that P500 is
doubtful of collection.
 Classification of Accounts:
 Real accounts (Permanent accounts) - are accounts
that are not closed at the end of the accounting
period. Real accounts include all balance sheet
accounts except the ‘Owner's drawings’ account.
 Nominal accounts (Temporary accounts)- are

accounts that are closed at the end of the accounting
period. It includes all income statement accounts,
drawing account, clearing accounts, and suspense
account.
 A clearing account is an account use temporarily

store amounts that will eventually be transferred to
another account.
 A suspense account is an account used temporarily
to store discrepancies in the accounts pending their
analysis and permanent classification.
 Mixed accounts - accounts that have both real and

nominal account components. These accounts are
subject to adjustments.
 Methods of initial recording of income and expenses

 liability method
 income method
 asset method
 expense method
 Liability method
 under this method, advanced collections of income
are initially credited to a liability account. At the end
of the period, the earned portion is recognized as
income while the unearned portion remains a
liability.
 Income method
 under this method, advanced collections of income
are initially credited to an income account. At the
end of the period, the unearned portion is recognized
as liability while the earned portion remains as
income.
 Asset method
 under this method, prepayments of expenses are
initially debited as an asset account. At the end of
the period, the incurred portion (used up or expired)
is recognized as expense while the unused portion
remains as asset.
 Expense method
 under this method, prepayments of expenses are
initially debited to an expense account. At the end of
the period, the unused portion (not yet incurred or
unexpired) is recognized as asset while the incurred
portion remains as expense.
Jungkook Co. rents out its building to various

tenants. On April 1, 2020, the business receives one-
year rent in advance of P120,000 from one of its
tenant. Rent per month is P10,000.
Jungkook Co. purchase one-year insurance for
P120,000 on October 1, 2020.
Accruals, Depreciation and Bad debts

Use the following information for the next questions:
Entity V is preparing its December 31, 2020 financial
statements. Provide the year-end adjusting entries for
the following:
 Entity V entered into a one-year contract for a

billboard advertising on August 1, 2020. The
monthly rent for the Billboard is P200,000 payable
at the start of each month. Entity V has paid the
rentals for the month of August to November 2020.
 Entity V received a 10%, P180,000, one-year note

receivable from a customer on October 31, 2020.
Both the principle and interest on the note are due
on November 1, 2021.
 Entity V acquired a machine on November 30, 2020

for P420,000. The machine has an estimated useful
life of eight years.
 Entity V has total accounts receivable of P890,000
as of December 31, 2020. Of that amount, P45,000
were estimated to be doubtful of collection.
 Splitting of mixed accounts

 On May 1, 2020, entity V received one-year advance
rent of P480,000 from one of its tenants. The
advance rent covers the month of May 1, 2020 to
April 30, 2021.
Jhope Company uses a calendar year accounting

period. The following were among the transactions
during the year:
 Jhope issued a 14%, P300,000, one-year note
payable on April 1, 2020. Both the principle and
interest on the notes are due at maturity date.
 J hope received billing of P32,000 on December 29,
2020 for utilities used in December 2020. Jhope paid
the bill on January 4, 2021.
 J hope is renting a space for a monthly rental of

P22,000. As of December 31, 2020 Jhope has not
yet paid the December rent.
 Jhope is sub-leasing (renting-out) a portion of the
space (referred to in #3 above) to a tenant for a
monthly rental of P4,000. As of December 31, 2020,
the tenant has not yet paid the rent for the month of
November and December.
 Jhope has total accounts receivable of P400,000 as

of December 31, 2020. Of that amount, 5% is
doubtful of collection and should be expensed.
 Jhope acquired a building on May 1, 2020 for a total
cost of P15M. The building has an estimated useful
life of 20 years. The business records depreciation
only at year end
 Jhope collected royalty income of P720,000 in

advance on November 1, 2020. As of December 31,
2020, P560,000 of the advanced collection is earned.
 Jhope paid one-year fire insurance of P360,000 on
October 1, 2020.
 The end

POA - D. Adjusting Entries

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Adjusting Entries – Service

 Purpose of adjusting entries

 Adjusting entries are subdivided into the following:

 Accruals of income and expenses

 Observe the application of the following concepts in

Case 1: Accrual of income - interest income Jungkook

Case 2: Accrual of income - rent income Jungkook

Case 3: Accrual of expense - interest expense

Case 4: Accrual of expense - utilities expense

Case 5: Accrual of expense - salaries expense

 Recognition of depreciation expense

Case 6: Depreciation expense

 The concept of immediate recognition

Case 7: Bad debts expense

 Nominal accounts (Temporary accounts)- are

 A clearing account is an account use temporarily

 Mixed accounts - accounts that have both real and

 Methods of initial recording of income and expenses

Jungkook Co. rents out its building to various

Accruals, Depreciation and Bad debts

 Entity V entered into a one-year contract for a

 Entity V received a 10%, P180,000, one-year note

 Entity V acquired a machine on November 30, 2020

 Splitting of mixed accounts

Jhope Company uses a calendar year accounting

 J hope is renting a space for a monthly rental of

 Jhope has total accounts receivable of P400,000 as

 Jhope collected royalty income of P720,000 in

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