FABM 2 Illustrations:

PREPARED BY: MR. KIM ORALE 😊

1. Supplies were purchased for cash on
ADJUSTING ENTRIES (STEP 4) December 2, 2019 for P19,000. The
- Assign revenues to the period in which they supplies were to be used over the next
are earned and expenses to the period in several months. A physical inventory
which they are incurred showed that P13,500 of the supplies were
a.) Measure properly the period’s on hand on December 31, 2014.
income
b.) Bring related asset and liability Asset Method Expense Method
accounts to correct balances for
financial reporting purposes 12/2/19 12/2/19
Prepaid supplies 19,000 Supplies expense 19,000
Cash 19,000 Cash 19,000
Related Principles:
1. Going Concern 12/31/19 12/31/19
2. Time Period/Accounting Period Supplies expense 5,500 Prepaid Supplies 13,500
3. Matching Principle Prepaid supplies 5,500 Supplies expense 13,500
4. Accrual/Cash Basis

Categories: 2. Assume that rent of P90,000 was paid on

September 30, 2019 to cover a one-year
1. Prepaid expenses Deferrals
2. Unearned Revenues period from that date.
3. Accrued Expenses Accruals
4. Accrued Revenues Asset Method Expense Method
5. Depreciation
9/30/19 9/30/19
6. Allowance for Doubtful Accounts Prepaid rent 90,000 Rent expense 90,000
Cash 90,000 Cash 90,000
DEFERRALS
- An expense already paid but not yet 12/31/19 12/31/19
incurred (Prepaid expense) Rent expense 22,500 Prepaid rent 67,500
Prepaid rent 22,500 Rent expense 67,500
- A revenue already collected but not yet
earned (Unearned Revenue)
2. Unearned Revenues (Collected in advanced)
1. Prepaid Expenses (Paid in advanced) Common examples:
Common examples: - Unearned Service Income
- Prepaid Supplies - Unearned Rent Income
- Prepaid Rent
- Prepaid Insurance Liability Revenue
Method Method
Asset Expense Record the Record the
Method Method receipt of receipt of
Record the Record the Initial Entry cash by cash by
payment by payment by crediting the crediting the
Initial Entry debiting the debiting the liability revenue
asset account expense account account
account Transfer the Transfer the
Transfer the Transfer the Adjusting amount amount not
Adjusting amount used amount Entry already yet rendered
Entry to appropriate unused to rendered to to
expense appropriate appropriate appropriate
account asset revenue liability
account account account
Illustrations: Illustrations:

1. On May 1, 2019, JKL Company received a
total of P45,000 as payment in advanced of
a one-year subscription to a monthly
magazine, beginning May 1, 2019.
Liability Method Revenue Method
1. Amiable Company incurs salaries at the
average rate of P85,000 per day for all
employees. The last payday in
December 2019 is Wednesday, which is
Dec. 25. (Assumed 5-working days,
Mon-Fri)

5/1/19 5/1/19 12/31/19

Cash 90,000 Cash 90,000 Salaries expense 340,000
Unearned SR* 90,000 Service Revenue 90,000
Salaries payable 340,000
12/31/19 12/31/19
Unearned SR 60,000 Service Revenue 30,000 Computation:
Service Income 60,000 Unearned SR 30,000 85,000 x 4days = 340,000
*SR – Service Revenue 4 days includes:
Dec 26, Thur
2. On April 1, 2019, Antonio, a doctor, Dec 27, Fri
received an amount of P65,000 as Dec 30, Mon
advanced payment for services to be render Dec, 31 Tue
in future date. The medical services that
already rendered as of year-end were Dec 28 and 29 are not included because
P49,000. they are weekends and not working
days.
Liability Method Revenue Method
2. On November 1, 2019 XYZ Bank lends
4/1/19 4/1/19
Cash 65,000 Cash 65,000
an amount of P500,000 to Kim Soo
Unearned SR* 65,000 Service Revenue 65,000 Hyun, a sole proprietorship with an
annual interest rate of 10%. The
12/31/19 12/31/19 Principal together with the interest will
Unearned SR 49,000 Service Revenue 16,000 be paid on November 1, 2020.
Service Income 49,000 Unearned SR 16,000

*SR- Service Revenue 12/31/19

Interest expense 8,333
ACCRUALS Interest payable 8,333
- An expense already incurred but not yet
paid Computation:
- A revenue already earned but not yet 500,000 x 10% = 50,000
collected 50,000 x 2/12 = 8,333

1. Accrued Expenses (Both expense and The interest that is to be accrue is only
liability) from November 1, 2019 up to December
Common examples: 31, 2019 which are two months.
- Accrued salaries payable
- Accrued interest payable 2. Accrued Revenues (Both revenue and asset)
Common examples:
Required entries: - Accrued revenue from services already
Salaries expense xx rendered
Salaries payable xx - Accrued interest recievable

Required entries:
Interest expense xx
Accounts Receivable xx
Interest payable xx
Service Revenue xx
 Interest Receivable xx FORMULA:
Interest Revenue xx
Annual Depreciation = Cost – Residual Value
Illustrations: Useful Life
1. Alipio and Andy, a law firm performed legal Required Entries:
services in late December, 2019 for clients.
The P50,000 services will be collected to Depreciation Expense xx
the clients in January, 2019. Accumulated Depreciation xx

12/31/19
Accounts Receivable 50,000
Service Revenue 50,000 Illustration:
A Company acquires a building on February 1,
DEPRECIATION 2019 at a cost of P1,410,000. The building has an
■ Systematic allocation of the depreciable estimated useful life of 20 years and an estimated
amount of an asset over the useful life residual value of P150,000.
■ This is applicable to Property, Plant and 1,410,000 – 150,000/20 years
Equipment assets
1,260,000/ 20 years
Reasons why depreciation occurs:
63,000 Annual Depreciation
1.) Physical Factors
From Feb 1. to Dec. 31 = 11 months
a.) Wear and tear due to frequent use
63,000 x 11/12 = 57,750
b.) Passage of time due to nonuse
12/31/19
c.) Action of elements such as wind, Depreciation Expense 57,750
sunshine, rain or dust Accumulated Depreciation 57,750
d.) Accidents such as fire, flood, &
earthquake
ALLOWANCE FOR DOUBTFUL
2.) Economic Factors
ACCOUNTS/BAD DEBTS
a.) Inadequacy
■ An Estimated Amount of credit from
b.) Supersession customer that is reasonably uncollectible
c.) Obsolescence Required Entries:
Terms: Doubtful Accounts Expense xx
Allowance for Doubtful Accounts xx
1.) Depreciable Amount – the depreciable cost of
the asset that will be subjected to depreciation.
2.) Residual Value – estimated amount of the Illustration:
asset after depreciation takes place. It is the asset
cost after its useful life.( other terms: Salvage Value, ABC Company estimates that based on the current
Scrap-in Value, Disposal Value) financial standing of Customer A, there is a
possibility that he cannot pay his credit amounting
3.) Useful Life – the period over which an asset is to P50,000.
expected to be available for use by the entity.
12/31/19
Doubtful Accounts Expense P50,000
Allowance for Doubtful Accounts P50,000