Adjusting Entries

Ok, ang gagawin ko, ipapakita ko muna sa inyo yung logic tapos ituturo ko sa inyo ung strategies kung papano
makakasagot sa exam:

Una sa lahat, ano ba ang adjusting entries?

Ang adjusting entries ay ang mga entrada sa libro na ginagawa para i-update ang Balance ng Accounts.
Bakit ba tayo nag-aadjusting entries?
Kasi ganito. Tatandaan nyo palagi, tao lang ang accountant. Hindi nya kayang entradahan lahat ng transaksyon araw
araw. Kung ultimo bolpen na kinuha sa kabinet eentryhan nya, imaginine nyo kung ang kumpanya nyo ay San Miguel
Corp. Gaano kalaki yun? Ang laki! Kung araw araw ka mag-eentrada sa nagagamit na bolpen, kumusta naman!
Tandaan natin na sa accounting may principle ng Cost Benefit Consideration.
So, sa loob ng isang taon, kadalasan, nag-eentry lang ang kumpanya pag naka-acquire ng asset or nakaincur ng
liability. Ina-update nalang nila yung balanse nung asset or liability at the end of the period para mareflect sa balance
sheet at income statement ang tamang balanse nya. Mas maiintindihan nyo to pagka nagbigay ako ng examples.

Ok, bago ang lahat, anu-ano ba ang adjusting entries?

1. Prepaid Expense (asset method & expense method)
2. Unearned Income (liability method &income method)
3. Accrued Expense
4. Accrued Income
5. Bad debts
6. Depreciation

1. Prepaid Expense

Prepaid expenses are expenses incurred which were paid in advance.

Lorenzo Ruiz Co. bought supplies from St. Therese of Avila bookstore for P1,000 cash on Jan. 1 2009. He used P600
throughout the year.

Asset method
Sa asset method, ang INITIAL entry ay Prepaid Expense(pede ring Supplies Inventory) . Asset ito at dito pinasok yung
supplies na binili

Jan 1. 2009
(dr) Supplies Inventory (or Prepaid Expense) P1,000
(cr) Cash P1,000

So, sa end of the year, kelangan i-ADJUST nyo yung account nyo ng Supplies Inventory. Kasi, kada gamit nila ng
supply, hindi naman ineentryhan kasi sobrang matrabaho yun kapag kada bolpen ng kumpanya na gagamitin ay
eentryhan ng accountant. So hindi practical yun. Kaya sa kumpanya, ang ginagawa nila, nag-aadjusting entry sila sa
end of the year. Kaya kailangan ng adjusting entry at the end of the year para tumama yung balanse ng Supplies
Inventory mo. Dapat ang balanse nalang ng Supplies Inventory nyo (or prepaid expense) Dec 31, 2009 ay P400.
So, kung debit ang normal balance ng SUPPLIES INVENTORY papano mo papababain yung balanse nya to 400? E di I-
credit mo sya. Diba?

Eh since double entry method tayo, kung may credit, dapat may debit. Anong Idedebit mo? Diba gumamit ka ng
supplies, edi expense mo na yung nagamit mo. So ang debit mo ay Supplies Expense

Adjusting Entry Dec. 31, 2009

(dr) Supplies Expense 600
(cr) Prepaid Expense 600
Expense Method
Sabi ko, malalaman ang method na ginamit ng kumpanya depende sa INITIAL ENTRY. Whether sa Asset ba sya
pinasok o sa Expense. So, sa Expense method, sa expense sya unang ipinasok.

So, using the same problem, ang entry on January 1, 2009:

(dr) Supplies Expense P1,000
(cr) Cash P1,000

So, bakit ganon ang initial entry? Siguro, excited yung accountant kaya kinonsider nya na as expense lahat lahat ng
supplies na binili kahit na hindi pa gamit. Tama ba yun? Kaya may adjusting entries para itama yung balanse nya at
the end of the year.

So, dapat ang expense mo lang talaga ay P600 diba, kasi yun lang talaga yung nagamit mo. Eh nirecord nya nung
una P1,000 so, bababaan mo yung expense mo ng P400 para tama yung balanse mo ng Expense. Eh normal balance
ng Expense ay Debit, anong gagawin mo? E di Credit Expense ng 400. Eh anong debit mo? Yung hindi nagamit na
P400, ilalagay mo sya sa imbentaryo. So ang debit ay supplies inventory.

So ang entry:
(dr) Supplies Inventory P 400
(cr) Supplies Expense P400

Ngayong alam nyo na ang logic ng Prepaid/Acrrued expense, tuturuan ko kayo ng strategies.

UNA: papano ba malalaman ang tinatanong ng teacher? Pano mo malalaman kung asset or expense method. depende
sa wording ng problem, yun ang method na gagamitin.

Ano ba ang wordings na ginagamit sa problem pag:

Asset Method (prepaid expense)

“…the company recorded an asset worth…”
“…an asset was recognized…”
“…and was recorded as an asset…”
“… a prepaid expense was recorded at…”
“…the company prepaid an expense worth…”
“…the Prepaid Asset account was recorded at…”
“…a supplies inventory worth…”
“Prepaid Asset…”

Expense Method
“…the whole acquisition was recorded as an expense…”
“… was expensed…”
“…an expense worth Pxx was recorded…”
“…Supplies/Prepaid expense of Pxx was recorded…”
And so on and so forth. Basta malalaman nyo naman sa wording ng problem kung saang account ipinasok yung
acquisition eh.
Kaya be cautious of the wordings.
At ito ang ultimate, the best technique when attacking adjusting entries problems is to use T-account.

Ganito yan, pag nalaman nyo na ang account na papasukan ng initial entry, gumawa ka na ng t-account nun. Tapos,
alamin mo ang ending balance nya. Tapos, yung adjusting entry mo yung nasa Debit/Credit depende kung papano
inadjust. Ganito:
So, kung papansinin nyo, pareho lang ng balanse ang accounts regardless kung anong method ang gagamitin.

2. UNEARNED INCOME
Ganoon din ang pinakalogic nya pero ngayon, ikaw naman ang kumita.
St. Martin de Porres Co. was paid by Inggo for P6,000 on August 1, 2009 for services to be rendered monthly
throughout the year for 12 months. On December 31, 2009:
Hindi pwedeng kada punta mo kay inggo para magrender ng service, magrerecord ka ng income. Gud lak,
nakakapagod yun kung araw araw mag-eentry ka diba? Pwede naman talaga sya pero, hindi practical at magastos
para sa kumpanya. Always remember the Cost-Benefit Principle.
Liability method.
In both cases, nauna nangyari ang bayaran. Nagkaiba lang ng pinasukan na account ng initial entry. Dito, ang initial
entry nya ay sa Unearned Income Account, which is a liability account.

Initial entry on aug 1, 2009

(dr) Cash 6,000
(cr) Unearned Income 6,000
So, lumipas ang panahon at 5 months of service na ang nairender as of dec. 31, 2009. Bale, part ng Unearned income
ay “earned” na. So, iaadjust mo ngayon yung Unearned Income account mo. Dapat ang ending balance nya ay P3,500
kasi hindi pa narerender yung P3,500 worth ng services. Babawasan mo ngayon yung balance ng Unearned Income
by debiting it. at ano ang iccredit mo? E di “income” kasi kelangan mo magrecognize ng income.

So, ang adjusting entries mo ay:

(dr) Unearned Income 2,500
(cr) Service Income 2,500

Income Method
Ang nangyari, sa initial entry, since excited na nman ung accountant, nirecognize nya lahat ng binayad as income
agad. Tama ba yun? Kaya may adjusting entries para itama at the end of the period.
Initial entry on aug. 1, 2009:
(dr) Cash 6,000
(cr) Service Income 6,000
So, para itama, dapat bawasan mo yung income mo kasi sobra sobra yun. Hindi pa naman lahat kasi yun nairender
mo na, worth P2,500 palang narerender mo as of Dec. 31. So, papano mo babawasan yung service income, edi idebit
mo sya by 3,500 para maging P2,500 lang yung lalabas sa income statement. Eh anong Credit? E di yung hindi pa
narerender na service which is Unearned income.

Adjusting entry on dec. 31, 2009:

(dr) Service Income 3,500
(cr) Unearned income 3,500

Eto yung T-Account Technique:

Ulit, ang Balances na mag-aappear sa Financial Statement nyo ay pareho lang regardless kung anong method ang
gagamitin ng kumpanya.

Basta be aware of the wordings talaga kung saan account pinasok yung entry kasi dun mo malalaman kung anong
method ang ginamit ng problem.

Accruals
Una sa lahat, kung titignan nyo sa dictionary, ang ibigsabihin ng “accrual” ay “additional”. So, accruals are additional
Income or Expense that the company needs to recognize at the end of the period due to past transactions. Simple
lang ang accruals. Ito lang ang pagrerecognize ng:
1. Accrued Income (Receivable Account)
2. Accrued Expense (Payable account)

Accrued Expense
Entry:
(dr) Expense
(cr) Accrued Expense

Accrued Income
Entry:
(dr) Accrued Income
(cr) Income

Baket ba nagkakaroon ng accruals? Diba, ang accounting natin ay “accrual basis” meaning to say, we should
recognize income/gains when earned and expenses/losses when “incurred”. So, kabaliktaran ito ng Prepayments at
Unearned Income kasi sa Accruals, nahuhuli ang bayad.

Kung nakapagrender ka na ng service or nakapagdeliver ka na ng goods at hindi pa nababayaran, magrerecognize ka

ng Accrued Income.

Kung nakaavail ka na ng service or nakabili ka na ng goods pero hindi pa nababayaran, magrerecognize ka ng

Accrued Expense.

Q: Eh baket ganon, hindi ba inentryhan ng accountant noong nagrender ka ng service or nagdeliver ka ng goods?

A: Eto ang usually na hindi naiisip ng isang estudyante. Ang accountant, hindi yan mag-eentry sa books hangga’t
walang supporting documents. Kadalasan, nag-iissue ng resibo ang kumpanya kapag nabayaran na sya. So,
nagkakaroon lang ng entry USUALLY pag may bayaran nang nangyari kasi dun nag-iissue ng resibo. So, since ang
resibo ang supporting document ng isang trransaksyon, ito ang magsisilbing go-signal sa accountant para mag-entry
sa books.

Anong wordings ng problems sa Accruals?

“the company recognized an accrued income/expense of ….”
“accruals of Pxx were to be recognized”
And so on and so forth.

So, ang pinagkaiba ng:

Prepayments/Uneanred Income – nauna magbayad bago serbisyo (bayad muna bago baba)
Accruals – una serbisyo bago bayad (study now, pay later)
*note: ang accruals, walang asset/liability income/expense method kasi wala namang initial entry ito. Ang initial entry
mo palang ay yung recognition ng accruals.
ACCRUED INTEREST

Pag AR, hindi sya nag-eearn ng interest.

Ang nag-eearn ng interest ay ang Notes Receivable. Ang computation ng Interest kung based ba sya sa
days/months/years ay depende sa problem.

Ang gagamitin na pambilang ng interest ay:

Days kung(any of the following):

* kung ang terms sa notes nya ay in DAYS (a 30-day note, a 90-day note)
* kung dated sya sa alanganing araw (ex: Aug. 17, Mar 24, etc) unless otherwise specified
* kung sinabi sa problem na days
(pag days, usually ang denominator mo ay 365 days, unless sasabihin na 360 days ang gagamitin)
Months kung(any of the following):
* kung ang terms sa notes nya ay in Months (ex: a 6-month note, a 9-month note, etc)
* Month lang ang binigay na date (March 2009, Apr. 2009, etc) unless otherwise specified
* Dated on the first or the last day of the month (depende sya ah, unless specified)
* pa sinabi sa problem na in months sya
Years kung:
* kung ang terms sa notes nya ay in years(ex: a 2-year note, a 3-year note, etc) unless otherwise specified

Adjusting Entries

(dr) Interest Receivable xxx

(cr) Interest Income xxx

Sa Notes Payable, parehas din ang computation ng interest. Ang adjusting entries:

(dr)(Interest expense xxx

(cr) Interest Payable xxx

Bad Debts Expense.

Hindi naman kumplikado to. Ang recognition of expense:

(dr) Bad Debts Expense
(cr) Allow. for Bad debts

Depreciation
due to the wear and tear of assets, we depreciate them, to value them correctly, depending on the method which is
used by the company.
ang entry lang naman ay:

(dr)Depreciation Expense
(dr)Accumulated depreciation
. Problem
1. The records of Jerick Corp. show the following information:
(a) Purchased a three-year insurance policy for P7,200 on September 1, 2001, and recorded the premium
payment in the asset account.
(b) Borrowed P60,000 on a 1-year, 12% note on July 1, 2001. Interest is payable at maturity.
(c) Collected P8,400 on October 1, 2001, to cover six months' rent paid in advance, and recorded the receipt in a
liability account.
(d) The Allowance for Doubtful Accounts shows an unadjusted balance of P300 (debit) as of December 31,
2001. Based on an aging of receivables, it is determined that the balance in the allowance account should be
P1,775 at December 31, 2001.
(e) Machinery purchased on January 1, 2001, for P300,000 is to be depreciated at the rate of 20 percent per year.

Prepare journal entries to adjust the books of Jerick Corp. at December 31, 2001.

1. ANS:

(a) Insurance Expense ...................... 800

  Prepaid Insurance .................... 800
(b) Interest Expense ....................... 3,600
  Interest Payable ..................... 3,600
(c) Unearned Rental Income ................. 4,200
  Rental Income ........................ 4,200
(d) Doubtful Accounts Expense .............. 2,075
  Allowance for Doubtful Accounts ...... 2,075
(e) Depreciation Expense--Machinery ........ 60,000
  Accumulated Depreciation--Machinery... 60,000

2. The information listed below was obtained from the accounting records of Cahill Company as of June 30, 2001.
(a) Payments to vendors of P1,700 were made for purchases on account during the year and were not recorded.
(b) On June 28, 2001, Cahill received P5,400 in advance for services to be performed in July 2001. The P5,400
was credited to Sales Revenue.
(c) Building and land were purchased in 1994 for P780,000. The building's fair market value was P650,000 at the
time of purchase. The building is being depreciated over a 25-year life using the straight-line method, and
assuming no salvage value.
(d) On May 1, 2001, P120,000 was loaned to a shareholder on a 6-month note with interest at an annual rate of 8
percent. Interest is due at maturity.
(e) Accrued salaries and wages are P2,740 at June 30, 2001.
(f) The office supplies account has a balance of P3,170. An inventory of supplies revealed a total of P1,550.

Prepare journal entries to adjust the books of Cahill Company at June 30, 2001.
2. ANS:

(a) Accounts Payable ....................... 1,700

  Cash ................................. 1,700
(b) Sales Revenue .......................... 5,400
  Unearned Sales Revenue ............... 5,400
(c) Depreciation Expense--Building ......... 26,000
  Accumulated Depreciation--Building ... 26,000
(d) Interest Receivable .................... 1,600
  Interest Revenue ..................... 1,600
(e) Salaries and Wages Expense ............. 2,740
  Salaries and Wages Payable ........... 2,740
(f) Office Supplies Expense ................ 1,620
  Office Supplies ...................... 1,620
3. The following account balances pertain to the Henryville Manufacturing Co. at September 30, 2001 (before
adjusting entries).

Debit Credit
Accounts Receivable ......................... P 40,000
Allowance for Doubtful Accounts ............. P 2,500
Inventory ................................... 99,700
Prepaid Insurance ........................... 2,400
Equipment ................................... 300,000
Accumulated Depreciation .................... 125,000
Notes Payable ............................... 48,000
Unearned Revenue ............................ 72,000

Additional information:

(a) The controller and the credit manager agreed that, based on an aging of year-end
accounts receivable, the allowance for doubtful accounts should be increased to
P4,300.
(b) The credit manager determined that a customer account with a balance of P850 was
uncollectible (without regard to the information in (a) above).
(c) The P48,000 note payable is dated August 13, 2001, and bears interest at 12 percent
per annum. The note and interest are payable at maturity on November 13, 2001.
(Assume a 365-day year and round to the nearest peso.)
(d) The prepaid insurance balance arose from the payment of an annual premium on
January 1, 2001.
(e) The company maintains a perpetual inventory system. The inventory at September
30, 2001, was P102,600 as determined by physical count.
(f) The equipment is being depreciated over a 20-year estimated useful life.
(g) The unearned revenue represents an amount received for a long-term equipment
rental to the Northcrest Tool & Die Co. The cash (P72,000) was received on April
26, 2001, and represents prepayment of a 1-year rental beginning May 1, 2001.

Prepare adjusting entries to Miel Co.'s accounts at September 30, 2001. Each entry should be made in general journal
format. Identify each entry by using the letter of the paragraph containing the additional information for the entry.
3. ANS:

(a) Doubtful Accounts Expense .............. 1,800

  Allowance for Doubtful Accounts ...... 1,800
(b) Allowance for Doubtful Accounts ........ 850
  Accounts Receivable .................. 850
(c) Interest Expense
757
(P48,000  12%  48/365) ..............
  Interest Payable ..................... 757
(d) Insurance Expense (P200  9 months) .... 1,800
  Prepaid Insurance .................... 1,800
(e) Inventory (P102,600 - P99,700) ......... 2,900
  Cost of Goods Sold ................... 2,900
(f) Depreciation Expense--Equipment ........ 15,000
  Accumulated Depreciation--Equipment... 15,000
(g) Unearned Revenue (P72,000  5/12) ...... 30,000
  Rental Revenue ....................... 30,000
4. Mico Co. had the following transactions pertaining to the fiscal year ended October 31, 2001.

- June 15, 2001, paid an annual casualty insurance premium of P5,400 for a policy
beginning July 1, 2001.
- October 1, 2001, received advance payment of P6,930 from a customer for a 9-
month equipment rental.

Provide the appropriate journal entries to record the preceding transactions. Adjust the accounts at year-end assuming that
no entries have been made between the transaction date and year-end and assuming that:

(1) transactions were originally recorded in asset and liability accounts.

(2) transactions were originally recorded in revenue and expense accounts.

4. ANS: Note: Journal Entries dated October 31 are adjusting entries

(1) Insurance:
  2001
  June 15 Prepaid Insurance .......... 5,400
             Cash ..................... 5,400
  Oct. 31  Insurance Expense
1,800
            (P5,400  4/12) ...........
             Prepaid Insurance ........ 1,800

Equipment rental:
  Oct. 1 Cash ....................... 6,930
             Unearned Rent Revenue .... 6,930
  Oct. 31 Unearned Rent Revenue
770
            (P6,930  1/9) ............
             Rent Revenue ............. 770

(2) Insurance:
  2001
  June 15 Insurance Expense .......... 5,400
             Cash ..................... 5,400
  Oct. 31  Prepaid Insurance
3,600
            (P5,400  8/12) ...........
             Insurance Expense ........ 3,600

Equipment rental:
  Oct. 1  Cash ....................... 6,930
             Rent Revenue ............. 6,930
  Oct. 31 Rent Revenue (P6,930  8/9) 6,160
             Unearned Rent Revenue .... 6,160