What are adjusting entries?

TYPES OF ADJUSTMENTS

 ACCRUALS
 Accrued Income
 Accrued Expense

 DEFERRALS
 PREPAID EXPENSE
 UNEARNED INCOME

 BAD DEBTS
 DEPRECIATION

ACCRUALS GAAP

Accrued Income

- income already earned but not yet collected.

Accrued Expense

- expense already incurred but not yet paid.

DEFERRALS

Deferred Income UNEARNED INCOME

- revenue already collected but not yet earned

 Cash collected is accounted for by recognizing liability LIABILITY METHOD

 Cash collected is accounted for by recognizing revenue immediately INCOME METHOD

Deferred Expense PREPAID EXPENSE

- expense already paid but not yet incurred.

 Items paid recognized as an asset ASSET METHOD

 Items paid recognized immediately as an expense EXPENSE METHOD

ACCRUALS VS DEFERRALS

Accrued Income Unearned Income

Accrued Expense Prepaid Expense

BAD DEBTS

- Accounts that may not be collected or are doubtful of collection

 this method recognizes bad debts expense only when it is certain that the company will not be able to collect
the account anymore DIRECT WRITE OFF METHOD
 involves setting aside a reserve for bad debts that are expected in the future ALLOWANCE METHOD

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DEPRECIATION

- It is the reduction in the value of an asset due to usage and passage of time

Cost – Scrap Value, if any = Depreciation

Useful life stated in no. of years

Identify the type of adjustment needed and prepare the necessary adjusting entry.

1. At the end of the year, salaries payable of ₱36,000 had not been recorded or paid.

ACCRUED EXPENSE

Date Particulars F Debit Credit

2020
Dec 31 Salaries Expense ₱ 3 600 0
Salaries Payable ₱ 36000
to record accrued expense

2. Supplies for office use were purchased during the year for 50,000, and 10,000 of the office supplies remained on
hand (unused) at year-end.

PREPAID EXPENSE

ASSET METHOD

Original Entry

Prepaid Supplies 5 000 0

Cash 50000
to record prepayement
Adjusting Entry

Dec 31 Supplies Expense 4 000 0

Prepaid Supplies 40000
to adjust prepaid supplies

3. Supplies for office use were purchased during the year for 50,000, and 10,000 of the office supplies remained on
hand (unused) at year-end.

PREPAID EXPENSE

EXPENSE METHOD

Original Entry

Supplies Expense 5 000 0

Cash 50000
to record prepayment
Adjusting Entry

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Dec 31 Prepaid Supplies 1 000 0
Supplies Expense 10000
to adjust supplies expense

4. Interest of 25,000 on a note receivable was earned at year- end, although collection of the interest is not due
until the following year.

ACCRUED INCOME

Dec 31 Interest Receivable 2 500 0

Interest Income 25000
to record interest

5. Gloria received 22,800 on Dec. 1, 2020 from a customer for services to be rendered during the months of
December, January, February, and March.

UNEARNED INCOME

INCOME METHOD

Original Entry

Cash 2 280 0
Service Revenue 22800
to record advance collection
Adjusting Entry

Dec 31 Service Revenue 1 710 0

Unearned Revenue 17100
to adjust revenue

6. Gloria received 22,800 on Dec. 1, 2020 from a customer for services to be rendered during the months of
December, January, February, and March.

UNEARNED INCOME

LIABILITY METHOD

Original Entry

Cash 2 280 0
Unearned Revenue 22800
to record advance collection
Adjusting Entry

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Dec 31 Unearned Revenue 570 0
Service Revenue 5700
to adjust revenue

7. Gloria acquired Office Equipment costing 250,000 on April 1, 2020. The equipment is expected to last 5 years
after which it will be worthless.

DEPRECIATION

Dec 31 Depreciation Expense 3 750 0

Accumulated Depreciation 37500
to record depreciation

8. 5% of the ₱150,000 outstanding accounts receivable should be recognized as doubtful of collection.

BAD DEBTS

ALLOWANCE METHOD

Dec 31 Bad Debts Expense 750 0

Allowance for Bad Debts 7500
to record allowance