OBJECTIVES

- Define adjusting journal entries (prepayments, unearned income, accrued expense, accrued
income, bad debts, and depreciation expense.
- Appreciate the importance of adjusting journal entries in accounting cycle.
- Prepare an adjustment data for every transaction.

Adjusting Journal Entries – used to update the accounts prior to the preparation of financial
statements because they affect more than one accounting period. Transactions are apportioned
properly between the accounting periods affected.

The following are the accounts subject to adjustments

1. Prepayments – expenses already paid but not yet incurred or used.

2. Unearned or deferred income – income already received but not yet earned
3. Accrued expenses – expenses already incurred or used, but not yet paid
4. Accrued income – income already earned but not yet received
5. Bad debts/doubtful accounts – losses due to uncollectible accounts
6. Depreciation expense – the allocation of tangible assets cost over its estimated useful life.

Prepayments
The following are the accounts subjected to adjustments:

Asset Method Expense Method

Journal Entry upon payment Journal Entry upon payment

Prepaid expense xxx Expense xxx
Cash xxx Cash xxx

Adjusting entry at the end of the Adjusting entry at the end of the
accounting period accounting period
Expense xxx Prepaid Expense xxx
Prepaid expense xxx Expense xxx
 Example1:
On April 30,2019, X.Co paid 36, 000 worth of
insurance premium for two years. Give the
adjusting journal entry on June 30, 2019
Journal Entry upon payment on April
30,2019
Prepaid Insurance 36,000
Cash 36,000
Paid-two year insurance
Adjusting entry at the end of the
accounting period on June 30,2019
Insurance Expense 3,000
Prepaid expense 3,000
To record expired insurance
Example1:
On April 30,2019, X.Co paid 36, 000 worth of
insurance premium for two years. Give the
adjusting journal entry on June 30, 2019
Journal Entry upon payment on April
30,2019
Insurance expense 36,000
Cash 36,000
Paid-two year insurance
Adjusting entry at the end of the
accounting period on June 30,2019
Prepaid insurance 33,000
Insurance expense 33,000
To record the unexpired insurance

Example 2

On September 1, 2019, X.Co paid a one-year advance rent for 30,000. Give the adjusting
journal entry on December 31, 2019

Journal Entry upon payment on September 1

Prepaid Rent 30,000

Cash 30,000
Paid rent for one year

Adjusting Journal Entry at the end of the accounting period December 31, 2019

Rent expense 10,000

Prepaid rent 10,000
To record expired rent
 Unearned or deferred Income

Liability Method
Income Method
Journal Entry upon payment
Journal Entry upon payment
Cash xxx
Unearned income xxx Cash xxx
Received cash for services to be rendered Income xxx
Received cash for services to be rendered

Adjusting entry at the end of the

accounting period Adjusting entry at the end of the
accounting period
Unearned income xxx
Income xxx Income xxx
To record the portion of the liability Unearned Income xxx
To record income not yet earned

Example 1
Example 1
On August 1, Dr. Yee received 90,000 for
dental fees to be rendered in the next 6 On August 1, Dr. Yee received 90,000 for
months. Give the adjusting journal entry at dental fees to be rendered in the next 6
the end of September months. Give the adjusting journal entry at
the end of September
Journal entry upon the receipt of cash on
August 1 Journal entry upon the receipt of cash on
August 1
Cash 90,000
Unearned dental fees 90,000 Cash 90,000
Received cash for dental services rendered dental fees 90,000
Received cash for dental fees in advance
Adjusting Journal Entry on September
30 Adjusting Journal Entry on September
30
Unearned dental fees 30,000
Dental fees 30,000 dental fees 60,000
To record dental fees earned unearned dental fees 60,000
To record dental fees not yet earned
Example 2

On December 1, 2016 Petit Co. received 48,000 amount of advance rentals for 6
months. Give the adjusting journal entries on December 31, 2016

Journal entry upon the receipt of cash on December 1

Cash 48,000
Unearned rent income 48,000
Received 6 months rent in advance

Adjusting Journal Entry on December 31

Unearned rent Income 8,000

Rent Income 8,000
To record rent earned for the month

Accrued Expense

Adjusting entry at the end of the accounting period

Expense xxx
Expense payable xxx
To record unpaid expenses

Example 1
The company received a water bill in the amount of 9,800 on December 26, 2016. The
company intends to pay on January 8, 2017

Adjusting Journal Entry on December 31, 2016

Utilities Expense 9,800

Utilities payable 9,800
To record utilities for the month
 Example 2
Unpaid salaries at the end of December 31, 2016 amounted to 18,800

Adjusting journal entry on December 31, 2016

Salaries Expense 18,800

Salaries Payable 18,800
To record unpaid salaries at year end

Accrued Income

Adjusting entry at the end of the accounting period

Income receivable xxx
Income xxx
To record income earned

Example 1;
A one-year, 6% note receivable in the amount of 200,000 was received on January 1, 2016. The
interest and the principal are payable on maturity date. Give the adjusting journal entry on June
30,2016

Adjusting journal entry on June 30,2106

Interest receivable 6,000

Interest Income 6,000
To record interest income earned
 Bad Debts/Doubtful Accounts

Adjusting entry at the end of the accounting period

Bad debts expense xxx
Allowance for bad debts xxx
To record estimated uncollectible accounts

Or

Doubtful accounts expense xxx

Allowance for doubtful accounts xxx
To record estimated uncollectible accounts

Or

Uncollectible accounts expense xxx

Allowance for uncollectible accounts xxx
To record estimated uncollectible accounts

Example 1
Accounts receivable shows a balance of 100,000. It is estimated that 8% of this is uncollectible.
Give the adjusting entry on December 31, 2016 for the provision of the estimated uncollectible
account.

Bad Debt expense 8,000

Allowance for bad debts 8,000
To record estimated uncollectible accounts

Example 2
Accounts receivable shows a balance of 100,000. It is estimated that 8% of this is
uncollectible .Allowance for Bad Debts per general ledger has a balance of 1,000. Give the
adjusting journal entry on December 31, 2016 for the provision of the estimated uncollectible
account.

Bad Debt expense 7,000

Allowance for bad debts 7,000
To record estimated uncollectible accounts

Allowance for doubtful debts

1,000 balance before adjustments

7,000 adjusting journal entries
8,000 required balance (end)
Depreciation Expense

The following are the three factors considered in computing the depreciation expense:

1. Cost
2. Salvage value
3. Estimated useful of life

The formula for computing for annual depreciation is as follows:

Cost xxx
Less: salvage value - xxx
Depreciation cost xxx
Divided by: estimated useful life / xxx
Annual depreciation xxx

Adjusting entry at the end of the accounting period

Depreciation Expense xxx
Accumulated depreciation xxx
To record depreciation expense

Example:
A building with an estimated useful life of 30 years finished construction on June 1,
2016. The cost of the building is 4.8 million pesos with an estimated salvage value of 300,000.
Give the adjusting journal entry on December 31, 2016 to record the depreciation of the
building

Adjusting journal entry on Dec. 31, 2016

Depreciation Expense 87,500
Accumulated depreciation 87,500
To record depreciation expense for the building

Quiz

I. Give the adjusting journal entries on December 31 given the following.

1. Rent paid last July amounted to 21, 000 of which 14,000 has already expired. This was
initially r3cored as prepaid rent upon payment.

2. Supplies purchased during the year amounted to 2, 900, of which 2,000 has been use
during the year. The asset method was used upon purchase of the supplies.

3. Unearned interest has a balance of 4, 800, of which 1,900 has already been earned
during the year. The amount was initially credited to unearned interest upon collection.
4. Unpaid salaries of its cleaners as of December 31 is 8,000.

5. Uncollectible accounts at year-end is estimated to be 7, 890

6. Depreciation expense for its equipment, 12,000.