ADJUSTING ENTRY

Matching principle – income and expenses with the proper period

ITEMS FOR ADJUSTMENT:

1. PREPAID EXPENSE
2. DEFERRED INCOME (or unearned income)
3. ACCRUED EXPENSE
4. ACCRUED INCOME
5. DEPRECIATION
6. DOUBTFUL ACCOUNTS
7. MERCHANDISE INVENTORY END

1. PREPAID EXPENSE – refers to expenses paid but not yet incurred. These are
expenses paid in advance.

ADJUSTING ENTRY:
USING ASSET METHOD:
Expense xx
Prepaid Expense xx

USING EXPENSE METHOD:

Prepaid expense xx
Expense xx

2. DEFERRED INCOME (also unearned income) – refers to income collected but

not yet earned. These are income received in advance

ADJUSTING ENTRY:
USING LIABILITY METHOD:
Deferred income xx
Income xx

USING INCOME METHOD

Income xx
Deferred income xx
 3. ACCRUED EXPENSE – refers to expenses incurred but not yet paid. These are
considered as a liability.

ADJUSTING ENTRY:
Expense xx
Accrued expense xx

4. ACCRUED INCOME – refers to income earned but not yet received or collected.
These are considered as an asset (receivable)

ADJUSTING ENTRY:
Accrued income xx
Income xx

5. DEPRECIATION – refers to the systematic allocation of the cost of the property

over it estimated useful life. Annual depreciation is computed using the
following formula:
Cost of the property xx
Less: salvage value xx
Depreciable cost xx
Divide by: estimated useful life xx
Annual depreciation xx
Salvage value is the amount that an asset is expected to be sold at the end of its
estimated useful life. This is also called “scrap value”.

ADJUSTING ENTRY:
Depreciation expense xx
Accumulated depreciation xx

Depreciation expense is shown in the income statement as part of expenses.

Accumulated depreciation is shown in the balance sheet as a reduction from the
corresponding asset to get its net book value.

6. DOUBTFUL ACCOUNTS – an estimate of the amount of receivables that is

doubtful as to collection. Also called uncollectible accounts or bad debts.
ADJUSTING ENTRY:
Doubtful accounts expense xx
Allowance for doubtful accounts xx

Doubtful accounts expense is shown in the income statement as part of expenses.

Allowance for doubtful accounts is shown in the balance sheet as a deduction from
the accounts receivable to get the net realizable value.
Doubtful accounts may be estimated based on sales, or based on receivables. If it is
computed based on sales, the resulting amount will be the doubtful accounts
expense for the current period. On the other hand, if it is computed based on
receivables, the resulting amount will be the allowance for doubtful accounts.

7. MERCHANDISE INVENTORY END, - refers to the amount of inventory that

remained unsold at the end of the accounting period.

ADJUSTING ENTRY:
Merchandise inventory xx
Income and expense summary xx

EXAMPLES:

PREPAID EXPENSE:
November 1- X Company paid P50,000 for 5 months rent in advance. The rental
will start on November 1
15 rendered service for P70,000 cash

Journalization: Using asset method:

Nov 1 Prepaid rent expense 50,000
Cash 50,000

15 cash 70,000
Service income 70,000

Unadjusted Trial balance: as of December 31, 2012

CALENDAR – JAN 1 – DEC 31
FISCAL –FEB 1 – JAN 31
Debit credit
Cash 20,000
Prepaid rent expense 50,000
Service income 70,000
TOTAL 70,000 70,000

Adjusting entry:
Actual should be adjustment
0 20,000 +20,000 (rent expense)
Rent expense 20,000
Prepaid rent expense 20,000

Adjusted trial balance:

DEBIT CREDIT
Cash 20,000
Prepaid rent expense 30,000
Service income 70,000
Rent expense 20,000
TOTAL 70,000 70,000

Using expense method:

Nov. 1 Rent expense 50,000
Cash 50,000

Nov. 15 cash 70,000

Service income 70,000

Unadjusted Trial balance

Cash 20,000
Service income 70,000
Rent expense 50,000
Total 70,000 70,000

Adjusting entry:
Actual should be adjustment
50,000 20,000 (30,000) rent expense

Prepaid rent expense 30,000

Rent expense 30,000

Adjusted trial balance:

Cash 20,000
Prepaid rent expense 30,000
Service income 70,000
Rent expense 20,000
DEFERRED INCOME (or unearned income)

November 1- B Company received P50,000 for 5 months rent in advance. The

rental will start on November 1

journalization: Using liability method:

Nov 1 Cash 50,000
Unearned Rent income 50,000

Unadjusted Trial balance: as of December 31, 2012

Debit credit
Cash 50,000
Unearned Rent income 50,000
TOTAL 50,000 50,000

Adjusting entry:
Actual should be adjustment
0 20,000 +20,000 (rent income)

Unearned Rent income 20,000

Rent income 20,000

Adjusted trial balance:

DEBIT CREDIT
Cash 50,000
Unearned Rent Income 30,000
Rent income 20,000
TOTAL 50,000 50,000

Using income method:

Nov. 1 Cash 50,000
Rent income 50,000

Unadjusted Trial balance

Cash 50,000
Rent income 50,000
50,000 50,000
Adjusting entry:
Actual should be adjustment
50,000 20,000 (30,000) rent income

rent income 30,000

Unearned Rent income 30,000

Adjusted trial balance:

Cash 50,000
Rent income 20,000
Unearned Rent income 30,000
50,000 50,000

ACCRUED EXPENSE
Jan 1 – purchased merchandise for P150,000 and issued a 45 day 12% promissory
note

Purchases 150,000
Notes payable 150,000

Feb 15 – paid the note in full, including interest

Notes payable 150,000

Interest expense 2,250
Cash 152,250
I = Prt
150,000 x .12 x 45/360 = 2,250

Dec 1 2012– purchased merchandise for P150,000 and issued a 45 day 12%
promissory note

Purchases 150,000
Notes payable 150,000

Dec 31
Interest expense 1,500
Interest payable 1,500

January 15 2013
Notes payable 150,000
 Interest expense 750
Interest payable 1,500
Cash 152,250

ACCRUED INCOME
Jan 1 – sold merchandise for P150,000 and received a 45 day 12% promissory note

Notes receivable 150,000

Sales 150,000

Feb 15 – collected the note in full, including interest

Cash 152,250
Notes receivable 150,000
Interest income 2,250

Dec 1 – sold merchandise for P150,000 and received a 45 day 12% promissory note

Notes receivable 150,000

Sales 150,000

Dec 31 – accrued interest income 1,500

(interest receivable)
Interest income 1,500

Jan 15 – collected the note in full, including interest

Cash 152,250
Notes receivable 150,000
Interest income 750
Accrued interest income 1,500
DEPRECIATION - equipment
COST P510,000
Date of purchase January 1, 2010
Salvage value P10,000
Useful life 5 years

510,000-10000/5 = 100,000

2010 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2011 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2012 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2013 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2014 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000
 2010 2011 2012 2013 2014
Equipment 510,000 510,000 510,000 510,000 510,000
Less: AD 100,000 200,000 300,000 400,000 500,000
Net book value 410,000 310,000 210,000 110,000 10,000

DEPRECIATION - equipment

COST P510,000
Date of purchase APRIL 1, 2010
Salvage value P10,000
Useful life 5 years

510,000-10000/5 = 100,000 X 9/12 = 75,000

2010 depreciation expense - equipment 75,000

Accumulated depreciation- equipment 75,000

2011 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2012 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2013 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2014 depreciation expense - equipment 100,000

Accumulated depreciation- equipment 100,000

2015 depreciation expense - equipment 25,000

Accumulated depreciation- equipment 25,000

2010 2011 2012 2013 2014

2015
Equipment 510,000 510,000 510,000 510,000 510,000
510,000
Less: AD 75,000 175,000 275,000 375,000 475,000
500,000
Net book value 435,000 335,000 235,000 135,000 35,000
10,000

DEC 31, 2012 250,000 200,000

Selling price 250,000 200,000

Net book value 235,000 235,000
Gain 15,000 (35,000)

Journal entry: (250,000)

Cash 250,000
Accumulated depreciation 275,000
Gain on sale of equipment 15,000 (other income)
Equipment 510,000

Journal entry (200,000)

Cash 200,000
Accumulated depreciation 275,000
Loss on sale of equipment 35,000 (other expense)
Equipment 510,000

DOUBTFUL ACCOUNTS (uncollectible accounts, bad debts)

2012 2013 2014
Accounts receivable 100,000 150,000 500,000
Sales 500,000 400,000 600,000

Doubtful accounts estimated at:

a. 1% sales

2012 Doubtful accounts expense 5,000

Allowance for doubtful accounts 5,000

2013 doubtful accounts expense 4,000

Allowance for doubtful accounts 4,000

2014 doubtful accounts expense 6,000

Allowance for doubtful accounts 6,000
 2012 2013 2014
Allowance beginning 0 5,000 9,000
Add: doubtful accts exp 5,000 4,000 6,000
Allowance ending 5,000 9,000 15,000

Balance sheet: 2012 2013 2014

Accounts receivable 100,000 150,000 500,000
Less: allow for DA 5,000 9,000 15,000
Net realizable value 95,000 141,000 485,000

2012 2013 2014

Accounts receivable 100,000 150,000 500,000
Sales 500,000 400,000 600,000

b. 5% accounts receivable

2012 doubtful accounts expense 5,000

Allowance for doubtful accounts 5,000

2013 doubtful accounts expense 2,500

Allowance for doubtful accounts 2,500

2014 doubtful accounts expense 17,500

Allowance for doubtful accounts 17,500

2012 2013 2014

Allowance beginning 0 5,000 7,500
Add: doubtful accts exp 5,000 2,500 17,500
Allowance ending 5,000 7,500 25,000

Balance sheet: 2012 2013 2014

Accounts receivable 100,000 150,000 500,000
Less: allow for DA 5,000 7,500 25,000
Net realizable value 95,000 142,500 475,000
MERCHANDISE INVENTORY END

Merchandise inventory beginning 75,000

Merchandise inventory ending 50,000

ADJUSTMENT METHOD
Income and expense summary 25,000
Merchandise inventory 25,000

DIRECT METHOD:
Merchandise inventory 50,000
Income and expense summary 50,000

Example no. 2
Merchandise inventory beginning 20,000
Merchandise inventory ending 50,000

ADJUSTMENT METHOD
Merchandise inventory 30,000
Income and expense summary 30,000

DIRECT METHOD
Merchandise inventory 50,000
Income and expense summary 50,000

PURCHASE JOURNAL – purchases on account

Sales journal – SALES ON ACCOUNT
CASH PAYMENT JOURNAL – ALL CASH PAYMENTS
CASH RECEIPT JOURNAL – ALL CASH RECEIPTS
GENERAL JOURNAL – OTHER TRANSACTIONS

CASH SALES – CRJ

SALES NOTES REC-GENERAL JOURNAL
CASH INVESTMENT – CRJ
NON CASH INVESTMENT – GJ