Adjusting Entries

Before we proceed, I gave you guys the BETTER OPTION of adjustments. Though there are other options
available, it is not a sound and just way of accounting, as it may break some rules/principles. Well then,
VAMOS! Let’s start!

1. Know the types of adjusting entries. Don’t be afraid. Just because it’s adjusting entries doesn’t
mean it’s like a whole new species of accounts. The accounts are just like your accounting
elements (asset, liability, capital), as well as income and expenses. However, there is the contra-
asset account. Don’t fear, kasi ang contra asset is a negative asset used to offset an asset, thus
changing it to a new value. Here are the adjusting entries:
a. Accrued Income: Income you’ve generated, but no cash is received. In short, may utang
pa sayo ang mga customers. Under the accrual principle, we recognize transactions on
the day they occur, rather than recording them on the time we received cash. Kapag
may di pa nacollect si owner na cash from customers, pero may nagenerate na income
from its operations, treat it na may income na nagenerate, regardless of whether cash is
received or not. This is a “de-kahon” (read it: fill-in-the-blanks) entry, kasi it can be any
receivable item, and make sure na matching sila. For example, rent receivable and rent
income, or interest receivable and interest income. The entry to this is:

Receivable xx

Income xx

To record _________income accrued

b. Accrued Expense: Expenses incurred but not yet paid. In short, ikaw ang may liability to
pay the creditor the expenses incurred. Also base it on accrual principle (shown above),
similar explanation: expenses incurred should be recorded on the day the transaction
happened, not when cash has been paid. This is a “de-kahon” (read it: fill-in-the-blanks)
entry, kasi it can be any expense, and make sure na matching sila. For example, rent
expense and rent payable, or salaries expense and salaries payable. Entry:

Expense xx

Payable xx

To record ________ expense unpaid

c. Bad Debts: This is the estimated amount of receivables na HINDI MO NA

MAICOCOLLECT. Siguro si customer, tinamad siya magbayad ng utang niya or pwede din
na nakalimutan niya na may utang siya. There are two ways: Direct Write-Off Method
and Allowance Method.
i. Direct Write-Off Method: Sa method na ito, it was deemed that a portion of
receivables is NO LONGER COLLECTIBLE. Di na macocollect ni business yung
receivable ni customer, in other words, wala nang pag-asa. Thus, in this process,
 accounts receivable will be reduced to that amount. In other words, parang
trinatrato mo na wala nang pag-asang mababayaran ni owner ang utang mo sa
kanya. Entry would be like:

Bad Debts Expense xx

Accounts Receivable xx

To record uncollectible receivables

ii. Allowance Method: Kapag allowance method, it provides for bad debts during
the period the sale/service is recorded. Pero, pag deemed uncollectible na
talaga, iwri-write off na siya. The Allowance for Bad Debts is a CONTRA-ASSET
ACCOUNT that is deducted in Accounts Receivable. There is a difference
between bad debts expense and allowance for bad debts. Bad Debts Expense,
is, well, an EXPENSE ACCOUNT na mahahanap mo sa INCOME STATEMENT.
Allowance for Bad Debts is a CONTRA-ASSET ACCOUNT found in the Statement
of Financial Position. Entry:

Bad Debts Expense xx

Allowance for Bad Debts xx

To record bad debts expense and set up of allowance of

bad debts

Suppose iwriwrite-off na natin ang Accounts Receivable:

Allowance for Bad Debts xx

Accounts Receivable xx

To write off uncollectible accounts receivable

d. Depreciation: there is a need for depreciation in non-current assets like property, plant,
and equipment. Why?
i. Wear and tear. In other words, as time passes, nadadamage yung asset. Engines
and chassis of vehicles can break down, hence the need for periodic
maintenance. Damage to moving parts of machinery, isa pang halimbawa. As
time passes, nadadamage yung machine, thus needing repair. And even if
narepair ang mga assets na ito, it will never perform the way it was the time it
was bought and in brand new condition.
 ii. Obsolescence. In other words, nagiging luma na yung machine, and it can’t keep
up with:
iii. Modern technology, wherein new designs and features equal better
performance, capability, and more output produced by the asset.

The straight-line depreciation is easy to implement. To compute for the annual

depreciation of an asset via this method, the formula would be:
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐴𝑠𝑠𝑒𝑡 − 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 (𝐼𝑛 𝑌𝑒𝑎𝑟𝑠)
For example, on May 01, 2019, XYZ Business purchased furniture for P85,000. The end
of the accounting period for the business would be every December 31. The furniture has a scrap value
of P5,000, and has a useful life of 8 years. To easily understand how to depreciate an asset easily,
consider these factors:

- Date of Purchase. Kailan mo binili? What month? Did you purchase it at the start of the
month? In between? End of the month? You have to look at the date of purchase. The
depreciation will start as soon as you have the asset.
- Accounting Period. Tignan mo kung kailan magtatapos ang accounting period niya. Di lahat
ng businesses sa December nagtatapos ang accounting period nila, so take that as a
consideration.
- Details. Cost of the asset, scrap value, useful life.

To solve the above problem, we will have a yearly depreciation of P10,000. The question:
Will we record P10,000 as depreciation expense? NO. Again, look at the accounting period
and the date of purchase. Wala pang 1 year yan, so it’s not P10,000. Now, let us compute
for depreciation. Since start of the month yan, ang method is to include also that month in
computing depreciation. From May to December, 7 months + 1 kasi start of the month niya
binili. If at the end of the month, then 7 lang, iexclude ang May. Computation would be
P10,000 x 8/12 = P6,666.67. From May 1-Dec. 31, yan ang amount ng iyong depreciation.
But, what if in between?

Let’s use the same amount, pero purchased on May 17. Ganito:

1. Count how many days ang month na yun. May has 31 days, so 31-17=14. But, wait! Isali
din natin si May 17, kasi at the time na napurchase mo na yung asset, magsisimula na
siyang magdepreciate. So, 14+1=15 days.
2. Add it to the # of days per month up to end of account period. So,
15+30+31+31+30+31+30+31=229 days.
3. Multiply the yearly depreciation (P10,000) and number of days remaining up until the
end of accounting period. P10,000 x (229/365) = P6273.97.
 To record depreciation:

Depreciation Expense-(Asset) xx

Accumulated Depreciation – (Asset) xx

To record depreciation of (asset)

Deferred Income- cash collections received as advanced payment for services to be rendered.
Do not confuse it with accruals. Ito ang keywords:

Accruals Deferrals
Rendered, but no cash received (Income) Received cash
Incurred, but not yet paid (Expense) Advanced payment
To be rendered in a future date

Liability ang deferrals kasi, albeit may cash ka namang nareceive from the customer, the services
that you will render on a certain date should be performed exactly on that date. It is the owner’s
responsibility to render these services to the customer. The entries are:

Cash xx

Unearned Income xx

To record cash collected in advance for services to be rendered in the

future.

To record the income already generated:

Unearned Income xx

Service Income xx

To recognize income generated.

Prepayments. Assets that become expense over time, reason for it being that, based on one of the
definition of assets, it gives the business positive value/benefits arising from their operations. Example is
rent. For us commoners, ang rent sa atin is seemingly like an expense, gaya ng boarding house. May
binabayaran tayong rent every month, and we treat it as an expense. In business, kapag rent, it is an
asset. Kailangan ng rent so that the business can establish and conduct operations. Pwede rin siyang
maging expense, which I will discuss later. Later, as time passes, nagiging expense na siya. Other
examples are your office supplies, store supplies, and advertising. Over time, magagamit sila for the
benefit of the business, for without these things, hindi sila makakagenerate ng profits.
 For prepayments, we treat them as part of CURRENT ASSETS, which are expected to be
converted to cash within a year. Journal entry:

Prepaid (Expense) xx

Cash xx

To record…

For adjusting entries, we need to know how much of these assets are used up. If it pertains to an
asset involving advanced payment for services availed like rent and advertising, compute first how much
should be paid monthly. For example, on August 01, XYZ Business paid for 6 months advertising for
P18,000. Every month, he will pay P3,000. So, up until December 31 (the end of the accounting period
for XYZ), the advertising expense would total to P15,000, while the prepaid advertising remaining would
be P3,000. What if made in between start and end of the month? Let’s say that the transaction was
made in August 26. Applying the same rule as we had on depreciation, include the date the transaction
has been made. August has 31 days, so 31-7+1=25 days, plus the remaining months. Total would be
P14,380.43.

Expense xx

Prepaid (Expense) xx

To record…

Tips:

1. Computing bad debts can confuse you. For example, you have Accounts Receivable of P55,000
and an Allowance for Bad Debts of P4,000.
a. Allowance for Bad Debts should be raised by 12% of Accounts Receivable. P55,000 x
12% = P6, 600. This will be your bad debts expense.
b. Allowance for Bad Debts should be raised to 12% of Accounts Receivable. P55,000 x 12%
= P6,600 – existing Allowance of P4,000 = 2,600. Got it? Good.
2. Analyze the problem. If in doubt, try putting yourself into the shoes of the owner to better
understand what happened.
3. Know the difference between accruals and deferrals. Remember, accruals: may income
generated pero no cash received in the case of accrued income, or expense incurred but unpaid
sa accrued expense. Pag deferrals, advanced collection for services to be rendered.