ACCOUNTING FOR

NON-ABM
ADJUSTING ENTRIES

Prof. Justiniano L. Santos, CPA, MBA

 Activity

IDENTIFICATION:
1. Identify different transactions happening in a
business within your community.

2. Enumerate the different business documents

that you encounter in your day to day
activities.

DEPARTMENT OF EDUCATION
 Analysis

How did you find the activity?

How many business transactions and business
documents have you identified?

What enabled you to accomplish the task?

What are the common business transactions and
business documents did all the group have identified?

What business transactions and business documents

have you not identified?

What hindered you from accomplishing the task

What were your “AHA” moments?
DEPARTMENT OF EDUCATION
 THE ACCOUNTING CYCLE
Identification of Events to be Recorded

Transactions are Recorded in the Journal

Journal Entries are Posted to the Ledger

END OF THE ACCOUNTING PERIOD? NO

YES
Preparation of a Trial Balance
THE ACCOUNTING CYCLE
Preparation of the Worksheet

Journalize and Post the Adjusting Journal Entries

Prepare an Adjusted Trial Balance

Prepare Financial Statements

Journalize and Post Closing Entries

Prepare a Post Closing Trial Balance

Journalize and Post Reversing Entries

 Trial Balance

What is a trial balance?

is a list of all accounts with their respective debit or
credit balances as of a given time.
Purpose of Trial Balance
To check the accuracy of posting by testing the equality
of the debit and credit amounts
It aids in locating errors in posting
It serves as a basis in the preparation of the financial
statements
 Trial Balance

Kinds of Trial Balance

Preliminary Trial Balance
Adjusted Trial Balance
Post-closing Trial Balance

DEPARTMENT OF EDUCATION
 Trial Balance

What are the errors that cannot be detected by trial

balance?
1. Failure to record a transaction
2. A transaction is journalized but not posted
3. A recorded transaction is posted twice.
4. Incorrect accounts were used to record a given
transactions
5. Incorrect amounts were recorded for a given transaction
NOTE: You must exercise care in recording transactions and
posting them to the ledger. Time and effort is wasted when you
trace back what you have done to locate the error.
 Trial Balance

What are the procedures to follow in correcting errors?

1. Just prepare the correct journal entry which was
advertently or inadvertently omitted.
2. Just post to the general ledger the journal entry
omitted.
3. Reverse the second entry made and post to the
general ledger.
4. Reverse the erroneous entry made and post to the
general ledger.
5. Same procedure in error 4.
 Trial Balance

Illustration – Insurance expense for P10,000 was recorded to Salaries

Expense
Method 1
Salaries Expense 10,000
Cash 10,000

Cash 10,000
Salaries Expense 10,000

Insurance Expense 10,000

Cash 10,000
 Trial Balance

Illustration – Insurance expense for P10,000 was recorded to Salaries

Expense
Method 2
Salaries Expense 10,000
Cash 10,000

Insurance Expense 10,000

Salaries Expense 10,000
 Trial Balance

Common Mistakes or Errors in Trial Balance

1. Error in addition or subtraction in the general ledger or error

in addition in the trial balance itself.

2. Error in transposition, which means that digits are

incorrectly interchanged (e.g. 890 is recorded as 980)

3. Slide error or transplacement error, which means that error

in placing the decimal point. (e.g. 150 is recorded as 15)
 Trial Balance
Shortcuts to Locate Errors in Trial Balance
1. Get the difference between the total debits and
credits.
2. A difference of 10, 100, 1000 etc. would
probably indicate a simple error in addition in
the trial balance or the general ledger.
3. If the difference is divisible by two (2), the error
would probably be in posting to the wrong side,
(debit is posted on the credit side or vice versa)
4. If the difference is divisible by nine (9), the error
would probably be an error in transposition or
error in transplacement.
 Trial Balance

Procedures to Correct Errors in Journalizing or Posting

1. Draw a straight horizontal-line through the error and

insert the correct title or amount if the entry is
incorrect or the posting is incorrect; or
2. Make a correcting entry. This will correct the wrong
entry recorded.

NOTE: Do not make erasures when correcting

errors to avoid suspicion. Just follow the above
procedure.
ADJUSTING THE ACCOUNTS
 PERIODICITY CONCEPT

 Accounting information is valued when it is communicated early

enough to be used for economic decision-making.

 To provide timely information, accountants have divided the

economic life of a business into artificial time periods—referred
to as the periodicity concept.
 PERIODICITY CONCEPT

 Accounting periods are generally a month, a quarter or a year.

The most basic is one year.
 Calendar year – is a twelve-month period ending on December
31.
 Fiscal year – is a twelve-month period that ends on any month
other than December 31.
 REVENUE AND EXPENSE RECOGNITION PRINCIPLES

1. Revenue Recognition Principle – income is recognized when it is

probable that economic benefits will flow to the enterprise and
these economic benefits can be measured reliably.
 REVENUE AND EXPENSE RECOGNITION PRINCIPLES

1. Expense Recognition Principle – expense is recognized in the

income statement when it is probable that a decrease in future
economic benefits related to a decrease in an asset or an increase
of a liability has arisen, and that the decrease in economic benefits
can be measured reliably.
 DEFERRALS AND ACCRUALS

 Deferral – is the postponement of the recognition of “an expense

already paid but not yet incurred” or “of a revenue already collected
but not yet earned.” This adjustment deals with an amount already
recorded in the balance sheet account, the entry, in effect, decreases
the balance sheet account and increases an income statement account.
1. Allocating assets to expense to reflect expenses incurred during the
accounting period (e.g. prepaid insurance, supplies and
subscription)
2. Allocating revenues received in advance to revenue to reflect
revenues earned during the accounting period (e.g. subscription)
 DEFERRALS AND ACCRUALS
 Accrual – is the recognition of “an expense already incurred but
unpaid,” or revenue earned but uncollected. This adjustment deals
with an amount unrecorded in any account, the entry, in effect,
increases both a statement of financial position and an income
statement account.
1. Accruing expenses to reflect expenses incurred during the
accounting period that are unpaid and unrecorded.
2. Accruing revenues to reflect revenues earned during the
accounting period that are uncollected and unrecorded.
 ADJUSTMENTS FOR DEFERRALS
Prepaid Insurance
 A one-year insurance paid in advance on March 1, 2015 for
P12,000. It should be expensed only for ten months (March to
Dec)

MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB
 ADJUSTING ENTRIES

1. Accrued Income – income already earned but were not collected

nor recorded.
2. Accrued Expenses – expenses already incurred but were not paid
nor recorded.
3. Unearned Income – advance collection recorded as a liability, but a
portion of which has been already earned.
 ADJUSTING ENTRIES

4. Prepaid Expense – advance payment recorded as an asset but a

portion of which has already expired.
5. Impairment Loss – client accounts that may not be collected
anymore or are doubtful of collection.
6. Depreciation Expense – transfer of asset cost to expense based on
declining utility value.
 ADJUSTING ENTRIES

1. Illustration – Healthway Clinic referred patient for laboratory examination to

Makati Diagnostic Laboratory and for which it is entitled to a commission or
referral fee of P500. The amount was not collected as of December 31, 2019,
the end of the accounting period
On Healthway Clinic books -
Date Particulars P/R Debit Credit
2019 Referral Fee Receivable 500
Dec 31 Referral Fee Income 500
To adjust for referral due from
Makati Diagnostic
 ADJUSTING ENTRIES

2. Illustration – Healthway Clinic referred patient for laboratory examination to

Makati Diagnostic Laboratory and for which it is entitled to a commission or
referral fee of P500. The amount was not collected as of December 31, 2019,
the end of the accounting period
On Makati Diagnostic books -
Date Particulars P/R Debit Credit
2019 Referral Fee Expense 500
Dec 31 Referral Fee Payable 500
To adjust for referral due to
Healthway Clinic
 ADJUSTING ENTRIES

3. Unearned Income –
1. Liability Method – the advance collection is credited to a liability account called
Unearned or Deferred Revenue.
To illustrate:
Assume that on October 1, 2019, Healthway Clinic sublet a building to Mercurio
Drugstore who paid P60,000 rent in advance for four months.
2019
Oct 1 Cash 60,000
Unearned Rent Income 60,000
to record advance collection for four months
 ADJUSTING ENTRIES

3. Unearned Income –
1. Liability Method –
2019
Dec 31 Unearned Rent Income 45,000
Rent Income 45,000
to adjust for three months rent earned
 ADJUSTING ENTRIES

3. Unearned Income –
2. Income Method – the advance collection is credited to income account.
To illustrate:
Assume that on October 1, 2014, Healthway Clinic sublet a building to Mercurio
Drugstore who paid P60,000 rent in advance for four months.
2019
Oct 1 Cash 60,000
Rent Income 60,000
to record advance collection for four months
 ADJUSTING ENTRIES

3. Unearned Income –
2. Income Method –
2019
Dec 31 Rent Income 15,000
Unearned Rent Income 15,000
to adjust for three months rent earned
 ADJUSTING ENTRIES

4. Prepaid Expense – a prepayment is the opposite of accrual. It represents

advance payment for service to be received or expense to be incurred in the
future.
1. Asset Method – the advance payment is recorded as an asset called Prepaid
Expense.
To illustrate:
Marciano Drugstore issued a check on Nov. 1, 2019 for P9,000 as advance payment
for six months store rental.
2019
Nov 1 Prepaid Rent 9,000
Cash in Bank 9,000
to record advance payment for six months rental
 ADJUSTING ENTRIES

4. Prepaid Expense – a prepayment is the opposite of accrual. It represents advance

payment for service to be received or expense to be incurred in the future.
1. Asset Method – the advance payment is recorded as an asset call Prepaid Expense.
To illustrate:
Marciano Drugstore issued a check on Nov. 1, 2019 for P9,000 as advance payment for
six months store rental.
2019

Dec 31 Rent Expense 3,000

Prepaid Rent 3,000
to adjust for two months expired rent
 ADJUSTING ENTRIES

4. Prepaid Expense – a prepayment is the opposite of accrual. It represents

advance payment for service to be received or expense to be incurred in the
future.
2. Expense Method – the advance payment is recorded as an expense .
To illustrate:
Marciano Drugstore issued a check on Nov. 1, 2019 for P9,000 as advance
payment for six months store rental.
2019
Nov 1 Rent Expense 9,000
Cash in Bank 9,000
to record advance payment for six months rental
 ADJUSTING ENTRIES

4. Prepaid Expense – a prepayment is the opposite of accrual. It represents advance

payment for service to be received or expense to be incurred in the future.
2. Expense Method – the advance payment is recorded as an expense .
To illustrate:
Marciano Drugstore issued a check on Nov. 1, 2019 for P9,000 as advance payment
for six months store rental.
2019

Dec 31 Prepaid Rent 6,000

Rent Expense 6,000
to adjust for four months unexpired rent
 ADJUSTING ENTRIES

5. Impairment Loss – no matter how efficient the credit department

is in screening customers, some of them may still not able to pay.
Losses from uncollectible accounts are considered part of the risk
and the entity assumes and should therefore be considered part of
operating expenses.
1. Direct Write Off – this method recognizes impairment loss only
when it is certain that the company will not be able to collect the
account anymore.
 ADJUSTING ENTRIES

5. Impairment Loss –
To illustrate:
Assume Carla Auto Repair recorded P80,000 accounts receivable for services
rendered in 2018 with collections of P50,000. The following year another
P120,000 were recorded for services rendered with collections of P60,000 from
previous and present accounts. Mr. Decena, a 2018 customer who owed the
company P10,000 became insolvent in 2019 and could not pay his account
anymore. The bookkeeper cancelled his account as authorized by the business
owner and prepared the following entry, in 2019:
2019
Dec 31 Impairment Loss 10,000
Accounts Receivable – Mr. Decena 10,000
to write off the account of Mr. Decena
 ADJUSTING ENTRIES

5. Impairment Loss –
1. Direct Write-off –
The T accounts for Accounts Receivable and Impairment Loss will show the following:
Accounts Receivable

2018 services 80,000 2018 collections 50,000

2019
Jan 1 Beginning Balance 30,000 2019 collections 60,000
2019 services 120,000 Dec 31 adjustment 10,000

Dec. 31 balance 80,000

 ADJUSTING ENTRIES

5. Impairment Loss –
1. Direct Write-off –
The T accounts for Accounts Receivable and Impairment Loss will show the
following:
Impairment Loss

2019
Dec 31 Adjustment 10,000
 ADJUSTING ENTRIES

5. Impairment Loss –
1. Direct Write Off –
Although this method is simple to apply and is more acceptable by the BIR
than the allowance method, it has the following defects:
6. The accounts receivable presented in the 2018 statement of financial
position as P30,000 does not show the correct realizable amount.
7. The Impairment Loss recorded in 2019 violates the Expense Recognition
Principle which states that there should be proper matching of cost and
expenses to revenues earned for the period. The service income for this
account took place in 2018 and not in 2019, so the 2018 profit will be
overstated while 2019 profit will be understated.
 ADJUSTING ENTRIES

5. Impairment Loss –
2. Allowance Method – the impairment losses are determined by estimates
based on the company’s past experience or the experience of other
companies within the same business industry. To arrive at the estimate, a
certain percentage or ratio is derived between the impairment loss of the
company and its outstanding receivable for the previous year.

Using the same illustration but assume that based on past experience on
impairment loss, it is estimated that 5% of its outstanding accounts receivable
will be doubtful of collections.
 ADJUSTING ENTRIES

5. Impairment Loss –
2. Allowance Method –
The T accounts for Accounts Receivable and Impairment Loss will show the
following:
Impairment Loss
2018
Dec 31 Adjustment 1,500

2019
Dec 31 Adjustment 3,000
 ADJUSTING ENTRIES

5. Impairment Loss –
2. Allowance Method –
The T accounts for Accounts Receivable and Impairment Loss will show the following:

Allowance for Impairment Loss

2018
Dec 31 Adjustment 1,500
2019
Jan 1 Beginning Balance 1,500 Dec 31 Adjustment 3,000
Balance 4.500
 ADJUSTING ENTRIES

5. Impairment Loss –
2. Allowance Method – the impairment losses are determined by estimates
based on the company’s past experience or the experience of other
companies within the same business industry. To arrive at the estimate, a
certain percentage or ratio is derived between the impairment loss of the
company and its outstanding receivable for the previous year.

Using the same illustration but assume that based on past experience on
impairment loss, it is estimated that 2% of its credit sales will be doubtful of
collections.
 ADJUSTING ENTRIES

5. Impairment Loss –
2. Allowance Method –
The T accounts for Accounts Receivable and Impairment Loss will show the
following:
Impairment Loss
2018
Dec 31 Adjustment 1,600

2019
Dec 31 Adjustment 2,400
 ADJUSTING ENTRIES

5. Impairment Loss –
2. Allowance Method –
The T accounts for Accounts Receivable and Impairment Loss will show the
following:
Allowance for Impairment Loss

2018
Dec 31 Adjustment 1,600
2019
Jan 1 Beginning Balance 1,600
Dec 31 Adjustment 2,400
Balance 4,000
 ADJUSTING ENTRIES
6. Depreciation - refers to the decrease in the value of a non-current assets (fixed
assets) due to the ordinary wear and tear or passage of time.
Illustration:
A machinery costing P260,000 is acquired on August 1, 2019. It is estimated
to have a salvage value of P20,000 at the end of its 10-year useful life.
Compute the depreciation on December 31, 2019
Depreciation = (Acquisition Cost – Salvage or Scrap Value (at the end of the
service life)) / Estimated Useful Life x Number of months / 12
= (260,000 – 20,000) / 10 x 5/12
= 24,000 x 5/12
= 10,000
Depreciation Expense 10,000
Accumulated Depreciation-Machinery 10,000
 Summary of Adjusting Entries
TRANSACTION EFFECT PRIOR TO
ADJUSTMENT ADJUSTING ENTRIES
TYPES OF
ADJUSTMENT
INCOME STATEMENT BALANCE SHEET ACCOUNT DEBITED ACCOUNT CREDITED

ACCRUED REVENUE Revenue is Asset is understated Receivable (A) Revenue

understated

ACCRUED EXPENSE Expense is Liability is Expense Payable (L)

understated understated

Prepaid Expense- Expense is

Asset is overstated Expense Prepaid Expense
Asset Method understated

Prepaid Expense- Expense is

Asset is understated Prepaid Expense Expense
Expense Method overstated
 Summary of Adjusting Entries
TRANSACTION EFFECT PRIOR TO
ADJUSTMENT ADJUSTING ENTRIES
TYPES OF
ADJUSTMENT
INCOME STATEMENT BALANCE SHEET ACCOUNT DEBITED ACCOUNT CREDITED

UNEARNED REVENUE Revenue is Liability is Revenue Unearned Revenue

– Income Method overstated understated (L)

UNEARNED REVENUE Revenue is Liability is overstated Unearned Revenue Revenue

– Liability Method understated (L)

Impairment Loss – Expense is Accounts Receivable

Asset is overstated Impairment Loss
Direct Write-off understated (A)

Impairment Loss – Expense is Allowance for

Asset is overstated Impairment Loss
Allowance Method understated Impairment Loss
 Summary of Adjusting Entries
TRANSACTION EFFECT PRIOR TO
ADJUSTMENT ADJUSTING ENTRIES
TYPES OF
ADJUSTMENT
INCOME BALANCE SHEET ACCOUNT ACCOUNT
STATEMENT DEBITED CREDITED

Depreciation Expense is Asset is Depreciation Accumulated

understated overstated Expense Depreciation
 SUBSIDIARY LEDGERS AND CONTROL ACCOUNTS
 Subsidiary Ledger – this is a special ledger which shows in detail the
transactions affecting the account of a customer or supplier.
 Control Account – the account that reflects the summation of
different subsidiary ledgers. For example, Accounts Receivable for
the customers and Accounts Payable for suppliers.
Worksheet Illustrated ACCOUNTS

Cash on Hand
TRIAL BALANCE
DEBIT
25,000  
CREDIT

Cash in Bank 45,000  

Accounts Receivable 49,000  
Notes Receivable 30,000  
A trial balance and additional Office Supplies 600  
information for adjustments Prepaid Insurance 15,000  
Machinery & Equipment 150,000  
for Carla Auto Repair Shop after Furniture & Fixtures 25,000  
one year of operation is shown: Accounts Payable
Notes Payable
 
 
26,000
50,000
Bella, Capital   132,850
Bella, Personal 5,000  
Repair Income   275,000
Referral Income   15,000
Salaries Expense 45,000  
Rent Expense 55,000  
Taxes & Licenses Expense 7,250  
Utilities Expense 46,750  
Interest Expense 250  
TOTAL 498,850 498,850
 Worksheet Illustrated
1. 10% of the accounts receivable should be recognized as doubtful of
collection.
2. Insurance premium is recorded as Prepaid Insurance was for six months
starting Sept. 1, 2019.
3. Supplies still on hand, P200
4. The note receivable represents a 60-day 12% note received from the
customer on Nov. 16, 2019.
5. Machinery and equipment were acquired April 1, 2019 with an estimated
useful life of 10 years and scrap value of P50,000.
 Worksheet Illustrated
6. The furniture and fixtures were acquired January 1, 2019 with an estimated
useful life of 10 years and a scrap value of P2,500.
7. The notes payable is for 60 days at 18% due to Republic Finance dated
December 1, 2019.
8. December gross receipts includes P50,000 that is subject to 3% percentage
tax.
 Worksheet Illustrated
DATE PARTICULARS PR DEBIT   CREDIT
  1 Impairment Loss   4,900.00    
      Allowance for Impairment Loss       4,900.00
               
  2 Insurance expense   10,000.00    
      Prepaid insurance       10,000.00
               
  3 Supplies Expense   400.00    
      Office Supplies       400.00
               
  4 Interest Receivable   450.00    
      Interest Income       1,600.00
               
  5 Depreciation Expense   7,500.00    
      Accumulated Depreciation       75,000.00
               
  6 Depreciation Expense   2,250.00    
      Accumulated Depreciation       2,250.00
               
  7 Interest Expense   750.00    
      Interest Payable       750.00
               
  8 Taxes and Licenses Expense   1,500.00    
      Taxes and Licenses Payable       1,500.00
TO BE CONTINUED…

DEPARTMENT OF EDUCATION
Thank you!