Acctg Adjusting Entries

Kevin Hart, opened a dental practice on January 1, Year 1.
During the first month of operations, the following transactions occurred.

1. Performed services for patients who had dental plan insurance. At, January 31, P1000 of such services were performed but not yet recorded.
2. Utility expenses incurred but not paid prior to January 31 totaled P1,500.
3. Purchased dental equipment on January 1 for P70, 000, paying P15,000 in cash and signing a P55,000, 3-year note payable. The equipment
depreciates P450 per month. Interest is P550 per month.
4. Purchased a one-year malpractice insurance policy on January 1 for P12,000.
5. Purchased P2,000 of dental supplies. On January 31, determined that P500 of supplies were on hand.
INSTRUCTION
Prepare the adjusting entries on January 31. Account titles are Accumulated Depreciation-- Equipment, Depreciation Expense, Service revenue,
Accounts receivable, Insurance expense, Interest expense, Interest payable, Prepaid Insurance, Supplies, Supplies expense, Utilities expense,
and Utilities payable.
SO LET'S PROCEED TO
REPORTER NUMBER 2 FOR
DEEPER EXPLANATIONS
AND INSTRUCTIONS. :))
On September 1, 20A, Visayan Commercial paid an
insurance premium covering the period from September 1,
20A to September 1, 20B in the amount of P3,600. The
accounting period ends on December 31, 20A.
The transaction is recorded in a comparative journal entry

showing both the Expense and Asset methods of
recording prepayments.
EXPENSE METHOD ASSET METHOD
Insurance Expense P 3,600 Prepaid Insurance P 3,600

Upon
payment Cash P 3,600 Cash P 3,600
on
Sep. 01, 20A.
To record insurance To record insurance
premium paid. premium paid.
• Expense or Expired portion computed as follows:
P 3 , 600
 P 300 x 4 mos  P 1, 200
12 mos .
(Sept. 01, 20A to Dec 31, 20A)
• Asset or Unexpired portion computed as follows:
P 3 , 600
 P 300 x 8 mos  P 2 , 400
12 mos .
(Jan. 01, 20B to Sept. 01, 20B)
TOTAL REPAYMENT P 3 , 600

ADJUSTING JOURNAL ENTRY
20A
Dec. 31 Prepaid Insurance P1,200
Insurance Expense P1,200
To record the expired portion
of insurance premium form
Sept. 1, 20A to Dec. 31, 20A.
COMPARATIVE ADJUSTING JOURNAL ENTRIES
EXPENSE METHOD ASSET METHOD

Adjusting
Entry Prepaid Insurance P 2,400 Insurance Expense P 1,200
on Insurance Expense P 2,400 Prepaid Insurance P 1,200
Dec. 31, To record unexpired(asset) To record expired(expense)
20A. portion of insurance portion of insurance
premium. premium.
UNDER EXPENSE METHOD UNDER ASSET METHOD
Before Adjustment Before Adjustment
Insurance Expense Prepaid Insurance
Sept 01 P 3,600 Sept 01 P 3,600

(Original (Original
Entry) Entry)
After Adjustment After Adjustment
Insurance Expense Prepaid Insurance
Sept.1 P3,600 P2,400 Dec. 31 Sept.1 P3,600 P2,400 Dec. 31
(Original AJE (Original AJE
Entry) Entry)
Balance P1,200 Balance P2,400
Prepaid Insurance Insurance Expense

Dec.1 P2,400 Dec.31 P1,200
AJE AJE
Take Note that after the adjustments have been made, both
the Expense Method and Asset Method showed the
breakdown of insurance premium payment of P3,600.
Insurance Expense P1,200

Prepaid Insurance P2,400
Total Repayment P3,600
EFFECTS OF ERROR/OMISSION ON FINANCIAL STATEMENTS
Under Expense Method Under Asset Method

• If adjusting entry is not prepared on Dec. 31, 20 A, • If adjusting entry is not prepared on Dec. 31, 20 A,
the whole amount of P3,600 will be charged to Expense when the whole amount of P3,600 will be charged to Asset when in
in fact, P2,400 is the prepaid portion of Asset. fact, P1,200 is the expired portion of Expense.
• Since the asset portion could not be recorded without the • Since the expense portion could not be recorded without
said adjusting entry, Expense is overstated and Asset is the said adjusting entry, Expense is understated and Asset
understated. is overstated.
• If the Expense is overstated, then Profit is understated. • If the Expense is understated, then Profit is overstated.
• Owners Equity is also understated because the amount of • Owners Equity is also overstated because the amount of
Profit that is closed to Owners Equity is understated. Profit that is closed to Owners Equity is overstated.
Therefore: Therefore:
Income Statement -Expense is overstated and Profit is Income Statement -Expense is understated and Profit is
understated. overstated.
Balance Sheet - Asset is understated and Owners Equity is also Balance Sheet - Asset is overstated and Owners Equity is also
understated. overstated.
FINANCIAL STATEMENTS PRESENTATION
• Prepared Insurance, being a real account will be

presented as current asset in the asset section of the
Balance Sheet.
• Insurance Expense, being a nominal account will be

presented together with other expense accounts in the
Expense Section of the Income Statement.
GUIDE IN PREPARING ADJUSTING JOURNAL ENTRIES
ON PREPAYMENTS
• if an Expense account is debited upon payment (Expense
Method), the adjusting entry must recognize the Asset
Account. Therefore, you go for the opposite: credit the
Expense an debit th Asset.
• if an Asset Account is debited upon payment (Asset

Method), the adjusting entry must recognize the Expense
Account. Therefore, you go for the opposite: credit the
Asset an debit th Expense.
DOUBTFUL ACCOUNT EXPENSE/UNCOLLECTIBLE ACCOUNT
EXPENSE
when the customer could not pay anymore their accounts. When
this happen, the business should anticipate a loss that may be incurred
arising from these doubtful or hopeless accounts.
There are also various ways wherein uncollectible
accounts can be estimated
1. by setting-up a certain percent (%) of uncollectible

accounts based on the oustanding receivable
2. by aging the accounts receivable
3. by setting-up a certain percent (%) of uncollectible
accounts based on credit sales
TWO METHODS OF RECOGNIZING UNCOLLECTIBLE
ACCOUNT EXPENSE
• General Purpose Reporting, the allowance method

shall be used.
• Income Tax Reporting, the direct write-off method
shall be used.
1. Allowance Method - under this method, uncollectible account is
being recognize in anticipation that "what if the whole amount of
Accounts Receivable cannot be collected?"
An estimated should be made to provide a certain percent (%) as

estimated as "estimated uncollectible accounts" based on the
company's past experiences.
The Estimated Uncollectible Accounts is then deducted from

Accounts Receivable to arrive the Estimated Realizable Value. The
other term for Estimated Uncollectible Account is Allowance for
Doubtful Accounts.
Let us assume that the business has an oustanding
Accounts Receivable from various customers in the
amount of P20,000. At the end of its accounting period,
it is estimated that 5% of this, is doubtful collection.
The anticipated loss due to this doubtful account is

recorded at the end of the period by way of an
adjusting entry.
Uncollectible Accounts P1,000
Estimated Uncollectible Account P1,000
To set up provision for doubtful accounts,
5% of the oustanding receivable computed
as follows:
Accounts Receivable P20,000

X % of Provision 5%
Uncollectible Accounts P1,000
If uncollectible account expense is not recorded,
Expense Section of the Income Statement is
understated and profit is overstated. In the Balance
Sheet, this valuation account is understated so that the
Accounts Receivable is overstated. Owners Equity will
be overstated because the profit that is closed is also
overstated.
Uncollectible Accounts is an expense and will be presented in
the Expense Section of the Income Statement while the
Estimated Uncollectible Account will be presented in the
Balance Sheet as reduction from the Accounts Receivable to
arrive as its "Estimated Realizable Value" at the end of the
particular period as shown below:

Less:Estimated Uncollectible Accounts P1,000
Estimated Realizable Value P19,000
WORTHLESS ACCOUNTS
When an account of a certain customer is already
"hopeless" for collection, it is considered as a
"worthless account" and the same must be written-off
from the record.
Assume
Of the P20,000 oustanding Accounts Receivable, the following
were its composition as gleaned the Subsidiary Ledgers:
Schedule of Accounts Receivable

Caasi, Isagani P 6,500
Desierto, Ronald 800
Oliva, Eric 12,700
TOTAL P 20,00
After providing the 5% estimated doubtful accounts, the
General Ledger showed the following balances:
Accounts Receivable Estimated Uncollectible Accounts
P 20,000 P1,000
Disposal of property and
equipment
The acquisition of a property and equipment is not intended for sale by the business. However, it might be deemed wise
for the business to sell its fixed asset in order to acquire a new one which can be more productive in it’s operations.
Assume:
The business has a computer which it acquired a year ago. Per record, the acquisition cost was P35,000 and it’s accumulated
depreciation was P7,000 as of the date of sale. The net book value therefore is P28,000.
Case 1: The computer was sold for P30,000
Journal Entry to record the disposal at a gain:
Cash P30,000
Acc. Depreciation-Office Equipment 7,000
Office Equipment P35,000
Gain on Disposal of Office Equipment 2,000
To record the disposal of computer.
(The sale resulted to having a gain because the cash proceeds is bigger than it’s net book value. While the cash proceeds is P30,000, the net book value
is P28,000)
Journal Entry record the disposal at a loss.
Cash P25,000
Loss on disposal of office equipment 3,000
To record the sale of computer.
( The sale resulted to having a loss because the cash proceeds is smaller than it’s net book value. While the cash proceeds
isP25,000, the net book value is P28,000.)
BEFORE THE SALES
Office Equipment
Accumulated Depreciation
P35,000
P7,000
AFTER THE SALE
Office Equipment Accumulated Depreciation
P35,000 P7,000 P7,000

P35,000
PROMISSORY NOTES
ACCRUED INTEREST ON NOTES
Promissory Notes is an “unconditional promise in writing made by one person to another, signed by the maker, engaging to pay to order or to
bearer, a sum certain in money on demand or at a fixed determinable future time”.
There are two (2) parties in a promissory note:
Maker – is the one who signs and promises to pay at the specified amount in the instrument. (Notes Payable)
Payee – is the one to whom the promise is given and to whom the specified amount in the instrument is payable to. (Notes Receivable)
A promissory note can be a liability from the point of view of the maker which is termed as “Notes Payable” and an asset from the point of view
of the payee which is termed as “Notes Receivable”
A promissory note can be an “interest bearing” or “non- interest bearing”. A non-interest bearing note is where the maker pays the payee at
an amount specified in the note or at face value. Only interest bearing note is discussed in this book.
Interest on Notes is computed base on the following formula:
Interest = Principal x Rate x

Time
To illustrate:
Hotel Casa Blanca borrowed money from Banco de Oro and issued a P100,000, 6% - 60 day note dated December 16, 20A.
Isolation Data:
Principal Amount : P100,000

Interest Rate : 6%
Time : 60 days
Maturity Date : Feb. 15, 20B (counting 60 days from date of issue of receipt)
Interest : P1,000
Maturity Value : P101,000
Interest is computed as follows:

P100,000 x 6% x 60/360 = P1,000
Maturity Value is determined by the following formula:
Maturity Value = Principal + Interest
P101,000 = P101,000 + P101,000
Comparative Journal Entries
Transactions Book of Hotel Casa Blanca Book of Banco de Oro
(Maker – Liability, Notes Payable) (Payee – Asset, Notes Receivable)
On December 16 upon receipt and Cash P100,000 Notes Receivable P100,000
release of the note. Notes payable P100,000 Cash P100,000
Issued a P100,000 Received a P100,000
6% - 60 day note 6% - 60 day note.
upon maturity date, the entry Notes Payable P100,000 Cash P101,000
upon payment and receipt of the Interest Expense 1,000 Notes Receivable P100,000
principal and interest of the note Cash Interest Income 1,000
is on Feb. 15, 20B P101,000 To record receipt of principal
To record payment of principal and interest on the note.
and interest on the note.
The problem comes in because the date of maturity which is Feb. 15, 20B does not coincide with the accounting cut-off
date which is usually December 31, 20A. The interest which started to run from Dec.16 to Dec. 31, 20A should also be
recorded by way of adjusting entries as follows
Comparative Adjusting Journal Entries
Transactions Book of Hotel Casa Blanca Books of Banco de Oro
(Maker) (Payee)
Adjusting entries to take up Interest Expense Accrued interest income
accrued interest on Notes at P250 P250
Dec. 31, 20A Accrued Interest Expense Interest income
P250 P250
To take up interest on the note To take up interest on the note
from Dec. 16-31, 20A. from Dec. 16-31, 20A.
The above accrued interest is computed as follows:
P100,000 x 6% x 60/360 = P1,000 x 15 days/60 days = P250,00
Accrued Interest Expense is similar to Interest Payable while Accrued Interest Income is similar to Interest Receivable.
MERCHANDISE INVENTORY VALUATION
The most common method of inventory valuation that the accountants usually apply is to follow the cost flow assumptions from
purchases to cost of goods sold.
The generally accepted methods are the first-in ,first-out method and the weighted average method.
Illustration:
The following data was gathered from product 357 on December 31, 20A:
Unit Total
Quantity Cost Cost
Inventory, Beg. 250 P25 P6,250
1st purchase 300 26 7,800
2nd purchase 150 27 4,050
Goods Available for Sale 700 P18,100
Inventory, End (240)
Cost of Goods Sold 460
First-in, First-out (FIFO)
FIFO assumes that the units sold come from the earliest acquisition so that the unsold units must have come
from the latest acquisition. The unsold units of 240 should be computed in the following manner:
Unit Total
Quantity Cost Cost
from 2nd purchase 150 P27 4,050
from 1st purchase 90 26 2,340
Inventory, End 240 P6,390
On December 31, 20A, the adjusting entry to set-up inventory at the end follows:
20A
Dec. 31 Merchandise Inventory, End P6,390
Inventory & Expense Summary P6,390
To set-up inventory at the end.
After the ending inventory has been determined, the cost of goods sold can be computed as follows:
Goods Available for Sale P18,100

Less: Inventory, End 6,390
Cost of Goods Sold P11,710
Here are the details of the Cost of Goods Sold:
Unit Total
Quantity Cost Cost
1st purchase (300-90) 210 26 5,460
Cost of Goods Sold 460 P11,710
It is important to emphasize that under the periodic system, the Cost of Goods Sold cannot be computed without first computing the cost of
ending inventory.
Weighted Average Method
The weighted average methods assumes that the units on hand and units sold must have come from the beginning inventory, then combined with
what has been purchased during the period. If the weighted average cost flow is assumed, the 240 units on hand as of the end of the period are
at the average unit cost of the period. The weighted average is computed as follows:
Total Cost of Goods Available for Sale = Weighted Average

Number of units Available for Sale Cost per unit
P18,100 = P25,857
700 units
Using the weighted average method, the cost assigned to the ending inventory of 240 units is computed as follows:
240 units x P25.857 = P6,206
20A
Income & Expense Summary P6,206
The Cost of Goods is computed as follows:

Merchandise Inventory Adjustment Under Perpetual Inventory System
Merchandise Inventory as per actual physical count of goods must reconcile with the balances of merchandise inventory
account as per stocked card. The actual physical count of goods is more reliable and must therefore prevail.
Case 1- If merchandise Inventory account as per stock card is P254,000 while the actual physical count of goods is
P252,000, there is an overage in inventory:
Per Stock Card P254,000

Per Actual Physical Count 252,000
Overage in Inventory P 2,000
The adjusting journal entry will reduce the merchandise inventory account as per stock card as follows:
Adjusting Journal Entry:
Inventory Short or Over P2,000

Merchandise Inventory P2,000
To close the overage inventory to cost of sales account:
Cost of Sales P2,000

Case 2- If merchandise inventory account as per as stock card is P252,000 while the actual physical count of goods is
P254,000, there is an inventory shortage:

Inventory Shortage P 2,000
The adjusting journal entry will increase the merchandise inventory balance per stock card as follows:

To close the inventory shortage cost to cost of sales account:

Assuming that the account of Mr. Ronald Desierto is hopeless
for collection, the balance of his account is written-off as
follows:
Estimated Uncollectible Accounts P800

Accounts Receivable P800
To write-off the account of Mr. Desierto
After posting this entry in the General Ledger, the results
would be:
Estimated
Accounts Receivable Uncollectible Accounts
P 20,000 P 800 write-off P 800 write-off P1,000
P 19,200 P200
After the "write-off" the Balance Sheet will show the
following:
Less:Estimated Uncollectible Accounts 200
Estimated Realizable Value P19,000
Accounts Receivable before the write-off P20,000
Less:Accounts Receivable written-off 800
Accounts Receivable balance P19,200
Take note that the "estimated realizable value" of the
Accounts Receivable before and after the write-off remain at
P19,000. This is so, because while the Estimated Uncollectible
Accounts was reduce by P800, same amount was deducted
from the Accounts Receivable.
At this point the schedule of Accounts Receivable will then

take exclude the name of Mr. Ronald Desierto. The Accounts
Receivable account will have a balance of P19,000
The Subsidiary Ledgers of Mr. Ronald Desierto will have the
posting after the write-off.
DATE PARTICULARS F DEBIT CREDIT BALANCE

Billing P800
Write-off P800 -0-
The Subsidiary Ledgers of Mr. Ronald Desierto will be remove
from the file of subsidiary Ledgers and transfer to separate
"dead accounts" ledger.
UNCOLLECTIBLE ACCOUNTS ARISING FROM ITS PROVISION
FOR DOUBTFUL ACCOUNTS ARE NOT DEDUCTIBLE FOR
INCOME TAX PURPOSS UNLESS IT IS WRITTEN-OFF.
Assume
After the write-off, Mr. Ronald Desierto paid his account. The
journal entry to record collection would be:
Cash P800
Miscellaneous Income P800
To record recovery of
uncollectible written-off.
CONTENT
• AGING OF ACCOUNTS RECEIVABLE

• PROVISION FOR DEPRECIATION OF
PROPERTY AND EQUIPMENT
• METHODS OF COMPUTING DEPRECIATION
• EFFECT OF ERROR/OMISSION ON
FINANCIAL STATEMENT
• RECORDING ACQUISITION OF PROPERTY
AND EQUIPMENT AT DISCOUNT
AGING OF ACCOUNTS RECEIVABLE
•This is the reasonable basis of

calculating UNCOLLECTIBLE
ACCOUNT EXPENSES based on
classified past due account. The actual
receivable being aged by category is
multiplied by the uncollectible
percentage to arrive at the required
estimate.
Example
Davao ports and Stevedoring services has an outstanding Accounts Receivable of
P150,000 with Recorded Estimated Uncollectible Account of P2,000.
Adjusting Journal Entry
Uncollectible Account Expense ₱ 2,284

Estimated Uncollectible Accounts ₱2,284
Provision of uncollectible accounts.
The General Ledger of Account Receivable and its related Estimated Uncollectible
Accounts will showing the following posting and balance:
Uncollectible Account Expense
Dec.31 ₱2,284
AJE
Account Receivable Estimate Uncollectible Account
150,000 2,000 Beg. Balance
2,284 AJE
4,284
Account Receivable ₱150,000
Estimated Uncollectible Account 4,284
Estimated Realizable Value ₱145,716
Direct Write-off Method
• Under this method, the business adopts a policy of directly charging to

Uncollectible Account Expense the account of customer whom it believe could not
pay its balance anymore without providing an estimated Uncollectible Account.
This report as identifying the particular customer's account that needs to written-
off. This method called "Direct write-off method".
To illustrate:
Let us assume that Mr.Ronald Desierto has left leaving an unpaid account balance of
P800.
To write-off the above account is by preparing a journal entry as follow:
Uncollectible Account Expense ₱800
Account Receivable ₱800
to write-off the account of Mr. Desierto.
Direct write-off, the balance of the Account Receivable account will automatically
reduce from ₱20,000 down to ₱19,200 (₱20,000-₱800).
Allowance versus Direct Write-off Method
COMPARATIVE JOURNAL ENTRIES
Transaction ALLOWANCE METHOD DIRECT WRITE-OFF
METHOD
1.Rendered services on account Account Receivable ₱20,000 Account Receivable ₱20,000
for ₱20,000. Service Income ₱20,000 Service Income ₱20,000
To record services rendered To record services rendered
account on account. account on account.
( Original Entry )
2. Estimated to be Doubtful of Uncollectible Account ₱1,000
collection is 5%. Est. Uncollectible Acct. ₱1,000
To set-up provision for NO ENTRY
doubtful account.
( Adjusting Entry )
3. Amount ascertained to be Est. Uncollectible Acct. ₱800 Uncollectible Account ₱800
worthless is ₱800.00. Account Receivable ₱800 Account Receivable ₱800
To record bad debts To record bad debts
written-off. written-off.
( Write-off Entry )
PROVISION FOR DEPRECIATION OF PROPERTY AND EQUIPMENT
o Property and Equipment as defined by Philippine Accounting Standards ( PAS No. 16)
are tangible assets which are held by an enterprises for use in the production of supply of goods
and services for rental to others, or for administrative purpose, and are expected to be used
during more than one year period.
o Property and Equipment are generally recorded at cost, less allowance for depreciation. Cost is
measured at the cash price equivalent. This is presented in the Balance sheet as Non-Current
Assets.
o Depreciable property is any asset that is eligible for tax and accounting purposes to
depreciation in accordance with the Internal Revenue Service(IRS) rules.
o Depreciable property can include buildings, machineries, motor vehicles, furniture and
fixtures, equipment and improvement to leased facilities.( Except land) because it is expected
to be useful to the business enterprise for an indefinite period of time.
o Depreciation expense the portion of the property and equipment that should be allocated
over the number of years and chargeable against expenses during the period.
The reason why property and equipment is subject to depreciation it‘s because this helps
in generating revenue in the conduct of its operation. The revenue that it generates should
be matched against depreciation expense incurred during the period.
(2) Kinds of depreciation
Physical Depreciation and Functional or Economic
Depreciation
METHODS OF COMPUTING DEPRECIATION
There are various methods of

computing depreciation, the
“straight-line method”.
(3) Factors that must be

considered in determining
depreciation. These are:
Acquisition Cost, Scrapt Value,
Estimated Economic or Useful
life
Straight-line Method
Straight – line depreciation is a simple method for calculating how much a particular fixed
asset depreciates (loses value) over time.
The straight-line method of depreciation assumes a constant rate of depreciation. It
calculates how much a specific asset depreciates in one year, and then depreciates the asset
by that amount every year after that.
To calculate the straight-line depreciation rate for your asset, simply subtract the salvage
value from the asset cost to get total depreciation, then divide that by useful life to
get annual depreciation:
Annual depreciation = (purchase price - salvage value) / useful life.

EXAMPLE
Let‘s say your business buys a $2,000 MacBook that won‘t be useful after five years, and that
its estimated salvage value—how much you think you can sell it for in five years—is $500.
(Five years is the period over which the IRS says you have to depreciate computers.)
• To determine straight-line depreciation for the MacBook, you have to calculate the
following:
• annual depreciation = ($2000 - $500) / 5 years
• = $1,500 / 5 years
• = $300
According to straight-line depreciation, your MacBook will depreciate $300 every year.
(3) factors that must be considered in determining depreciation
1. Acquisition Cost – it is the amount paid or liability incurred when the asset
is required. It includes the purchase price and other incidental cost of its
acquisition.
2. Scrap Value – the estimated value of the asset at the end of its economic or
useful life. This is sometimes called salvage value or residual value.
3. Estimated Economic or Useful Life – the estimated length of time usually
stated in years that the asset can be of use.
Base on the above formula , the computed depreciated represents the yearly
expiration of the fixed asset and is called Annual Depreciation Expense‖.
The Straight – line Method using this formula:

ANNUAL Cost of the Asset - Salvage Value
DEPRECIATION = Estimated life of the asset in years
To illustrate:
The adjusting entry on Dec.31. 20A will record depreciation of

the air conditioning unit for the three(3) month period only:
20A Depreciation Expense

₱4,500
Dec.31 Accumulated Depreciation expense
₱4,500
Note: The DepreciationToExpense
recordtodepreciation
be recorded onexpense
the next account
period which covers from Jan. 1, 20B to Dec. 31, 20B will be ₱18,000.
from the period Oct.1 to December
Formula
When fixed asset is acquired without scrap value, the formula in computing depreciation is made
simpler:
FORMULA:
Cost of fixed asset = Annual Depreciation

Economic Life
In this instance, at the end of its economic life, the computed depreciation expense will be ₱100,000
which will equal to its accumulated depreciation of ₱100,000 also..
Using the same illustration:
₱100,000 = ₱20,000-Annual Depreciation
5 years
Since the air conditioning unit was acquired on Oct. 1, 20A, the computed depreciation for three (3)
month time ending Dec.31, 20A would be ₱5,000 (20,000 × 3/12).
Effects of Error/Omission on Financial Statement
 Income Statement – if depreciation expense is not recorded or understated,

Profit is overstated. Conversely, if depreciation expense is overstated, Profit is
understated. If overstatement or understatement of depreciation expense will
occur in one period, it will continue to overstate or understate profit in the
subsequent periods until such time that the error is discovered and corrected.
 Balance Sheet - the overstatement or understatement of depreciation expense
has the effect of overstating its valuation account, the Accumulated
Depreciation which has also the effect of understating or overstating the Net
Book Value of the property and equipment. This ― domino effect” of transactions
and events will overstate understate the non-current asset section of the Balance
sheet. Owner‘s Equity will also be affected depending on what this error/omission
will have in the Balance Sheet.
Financial Statement Presentation
Depreciation Expense is a nominal account which will be shown in the Expense section of the
Income Statement while the Accumulated Depreciation is a valuation, contra-asset or asset-offset
account which will be shown in the Balance Sheet as a reduction form the cost of fixed asset as
shown below: Metro Davao Commercial
Balance Sheet
As of 31 December 20A
Office Equipment ₱100,000
Less: Acc. Depreciation 5,000 ₱95,000
RECORDING ACQUISITION OF
PROPERTY AND EQUIPMENT AT
DISCOUNT
When property and equipment,

say for example a machine is
acquired at a discount, amount
of the discount is considered as a
‗reduction‖ from its acquisition
cost.
At this point, the machine will have a depreciable cost of ₱110,000 (₱90,000 + ₱20,000).
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LOGO
THANK YOU
Reporter: XX
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Disposal of property and
equipment
The acquisition of a property and equipment is not intended for sale by the business. However, it might be deemed wise
for the business to sell its fixed asset in order to acquire a new one which can be more productive in it’s operations.
Assume:
The business has a computer which it acquired a year ago. Per record, the acquisition cost was P35,000 and it’s accumulated
depreciation was P7,000 as of the date of sale. The net book value therefore is P28,000.
Journal Entry to record the disposal at a gain:
Cash P30,000
Gain on Disposal of Office Equipment 2,000
To record the disposal of computer.
(The sale resulted to having a gain because the cash proceeds is bigger than it’s net book value. While the cash proceeds is P30,000, the net book value
is P28,000)
Journal Entry record the disposal at a loss.
Cash P25,000
Loss on disposal of office equipment 3,000
To record the sale of computer.
( The sale resulted to having a loss because the cash proceeds is smaller than it’s net book value. While the cash proceeds
isP25,000, the net book value is P28,000.)
BEFORE THE SALES
Office Equipment
Accumulated Depreciation
P35,000
P7,000
AFTER THE SALE
Office Equipment Accumulated Depreciation
P35,000 P7,000 P7,000

P35,000
PROMISSORY NOTES
ACCRUED INTEREST ON NOTES
Promissory Notes is an “unconditional promise in writing made by one person to another, signed by the maker, engaging to pay to order or to
bearer, a sum certain in money on demand or at a fixed determinable future time”.
There are two (2) parties in a promissory note:
Maker – is the one who signs and promises to pay at the specified amount in the instrument. (Notes Payable)
Payee – is the one to whom the promise is given and to whom the specified amount in the instrument is payable to. (Notes Receivable)
A promissory note can be a liability from the point of view of the maker which is termed as “Notes Payable” and an asset from the point of view
of the payee which is termed as “Notes Receivable”
A promissory note can be an “interest bearing” or “non- interest bearing”. A non-interest bearing note is where the maker pays the payee at
an amount specified in the note or at face value. Only interest bearing note is discussed in this book.
Interest on Notes is computed base on the following formula:
Interest = Principal x Rate x

Time
To illustrate:
Hotel Casa Blanca borrowed money from Banco de Oro and issued a P100,000, 6% - 60 day note dated December 16, 20A.
Isolation Data:
Principal Amount : P100,000

Interest Rate : 6%
Time : 60 days
Maturity Date : Feb. 15, 20B (counting 60 days from date of issue of receipt)
Interest : P1,000
Maturity Value : P101,000
Interest is computed as follows:

P100,000 x 6% x 60/360 = P1,000
Maturity Value is determined by the following formula:
Maturity Value = Principal + Interest
P101,000 = P101,000 + P101,000
Comparative Journal Entries
Transactions Book of Hotel Casa Blanca Book of Banco de Oro
(Maker – Liability, Notes Payable) (Payee – Asset, Notes Receivable)
On December 16 upon receipt and Cash P100,000 Notes Receivable P100,000
release of the note. Notes payable P100,000 Cash P100,000
Issued a P100,000 Received a P100,000
6% - 60 day note 6% - 60 day note.
upon maturity date, the entry Notes Payable P100,000 Cash P101,000
upon payment and receipt of the Interest Expense 1,000 Notes Receivable P100,000
principal and interest of the note Cash Interest Income 1,000
is on Feb. 15, 20B P101,000 To record receipt of principal
To record payment of principal and interest on the note.
and interest on the note.
The problem comes in because the date of maturity which is Feb. 15, 20B does not coincide with the accounting cut-off
date which is usually December 31, 20A. The interest which started to run from Dec.16 to Dec. 31, 20A should also be
recorded by way of adjusting entries as follows
Comparative Adjusting Journal Entries
Transactions Book of Hotel Casa Blanca Books of Banco de Oro
(Maker) (Payee)
Adjusting entries to take up Interest Expense Accrued interest income
accrued interest on Notes at P250 P250
Dec. 31, 20A Accrued Interest Expense Interest income
P250 P250
To take up interest on the note To take up interest on the note
from Dec. 16-31, 20A. from Dec. 16-31, 20A.
The above accrued interest is computed as follows:
P100,000 x 6% x 60/360 = P1,000 x 15 days/60 days = P250,00
Accrued Interest Expense is similar to Interest Payable while Accrued Interest Income is similar to Interest Receivable.
MERCHANDISE INVENTORY VALUATION
The most common method of inventory valuation that the accountants usually apply is to follow the cost flow assumptions from
purchases to cost of goods sold.
The generally accepted methods are the first-in ,first-out method and the weighted average method.
Illustration:
The following data was gathered from product 357 on December 31, 20A:
Unit Total
Quantity Cost Cost
1st purchase 300 26 7,800
2nd purchase 150 27 4,050
Goods Available for Sale 700 P18,100
Inventory, End (240)
Cost of Goods Sold 460
First-in, First-out (FIFO)
FIFO assumes that the units sold come from the earliest acquisition so that the unsold units must have come
from the latest acquisition. The unsold units of 240 should be computed in the following manner:
Unit Total
Quantity Cost Cost
from 2nd purchase 150 P27 4,050
from 1st purchase 90 26 2,340
Inventory, End 240 P6,390
20A
Inventory & Expense Summary P6,390
After the ending inventory has been determined, the cost of goods sold can be computed as follows:

Here are the details of the Cost of Goods Sold:
Unit Total
Quantity Cost Cost
1st purchase (300-90) 210 26 5,460
Cost of Goods Sold 460 P11,710
It is important to emphasize that under the periodic system, the Cost of Goods Sold cannot be computed without first computing the cost of
ending inventory.
Weighted Average Method
The weighted average methods assumes that the units on hand and units sold must have come from the beginning inventory, then combined with
what has been purchased during the period. If the weighted average cost flow is assumed, the 240 units on hand as of the end of the period are
at the average unit cost of the period. The weighted average is computed as follows:
Total Cost of Goods Available for Sale = Weighted Average

Number of units Available for Sale Cost per unit
P18,100 = P25,857
700 units
Using the weighted average method, the cost assigned to the ending inventory of 240 units is computed as follows:
240 units x P25.857 = P6,206
20A
Income & Expense Summary P6,206
The Cost of Goods is computed as follows:

Merchandise Inventory Adjustment Under Perpetual Inventory System
Merchandise Inventory as per actual physical count of goods must reconcile with the balances of merchandise inventory
account as per stocked card. The actual physical count of goods is more reliable and must therefore prevail.
Case 1- If merchandise Inventory account as per stock card is P254,000 while the actual physical count of goods is
P252,000, there is an overage in inventory:

Overage in Inventory P 2,000
The adjusting journal entry will reduce the merchandise inventory account as per stock card as follows:

To close the overage inventory to cost of sales account:

Case 2- If merchandise inventory account as per as stock card is P252,000 while the actual physical count of goods is
P254,000, there is an inventory shortage:

Inventory Shortage P 2,000
The adjusting journal entry will increase the merchandise inventory balance per stock card as follows:

To close the inventory shortage cost to cost of sales account:


Acctg Adjusting Entries

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Acctg Adjusting Entries

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Kevin Hart, opened a dental practice on January 1, Year 1.

During the first month of operations, the following transactions occurred.

The transaction is recorded in a comparative journal entry

Insurance Expense P 3,600 Prepaid Insurance P 3,600

TOTAL REPAYMENT P 3 , 600

EXPENSE METHOD ASSET METHOD

Before Adjustment Before Adjustment

Insurance Expense Prepaid Insurance

Sept 01 P 3,600 Sept 01 P 3,600

Balance P1,200 Balance P2,400

Prepaid Insurance Insurance Expense

Insurance Expense P1,200

Under Expense Method Under Asset Method

• Prepared Insurance, being a real account will be

• Insurance Expense, being a nominal account will be

• if an Asset Account is debited upon payment (Asset

1. by setting-up a certain percent (%) of uncollectible

• General Purpose Reporting, the allowance method

An estimated should be made to provide a certain percent (%) as

The Estimated Uncollectible Accounts is then deducted from

The anticipated loss due to this doubtful account is

Accounts Receivable P20,000

Accounts Receivable P20,000

Schedule of Accounts Receivable

Accounts Receivable Estimated Uncollectible Accounts

Case 1: The computer was sold for P30,000

Journal Entry to record the disposal at a gain:

Journal Entry record the disposal at a loss.

BEFORE THE SALES

P35,000 P7,000 P7,000

ACCRUED INTEREST ON NOTES

There are two (2) parties in a promissory note:

Interest = Principal x Rate x

Principal Amount : P100,000

Interest is computed as follows:

The above accrued interest is computed as follows:

P100,000 x 6% x 60/360 = P1,000 x 15 days/60 days = P250,00

MERCHANDISE INVENTORY VALUATION

First-in, First-out (FIFO)

Goods Available for Sale P18,100

Here are the details of the Cost of Goods Sold:

Total Cost of Goods Available for Sale = Weighted Average

240 units x P25.857 = P6,206

The Cost of Goods is computed as follows:

Goods Available for Sale P18,100

Per Stock Card P254,000

Adjusting Journal Entry:

Inventory Short or Over P2,000

To close the overage inventory to cost of sales account:

Adjusting Journal Entry:

Cost of Sales P2,000

Per Stock Card P252,000

Adjusting Journal Entry:

Merchandise Inventory P2,000

To close the inventory shortage cost to cost of sales account:

Adjusting Journal Entry:

Estimated Uncollectible Accounts P800

At this point the schedule of Accounts Receivable will then

DATE PARTICULARS F DEBIT CREDIT BALANCE

• AGING OF ACCOUNTS RECEIVABLE

•This is the reasonable basis of

Uncollectible Account Expense ₱ 2,284

• Under this method, the business adopts a policy of directly charging to

There are various methods of