PART IV

ADJUSTING AND CLOSING THE ACCOUNTS

Chapter 6: Adjusting the Accounts

Objectives
 discuss the types of adjusting entries
 define worksheet
 prepare adjusting entries

Worksheet Definition
 It is a working paper used in accounting to facilitate the preparation of adjusting entries, financial statements, closing
entries and post- closing trial balance.

Definition of Adjusting Entries

 These are journal entries made usually at the end of the accounting period to correct the balances of some accounts.

2 GROUPS OF ADJUSTING ENTRIES

1. ACCRUALS 2. DEFERRALS

TYPES OF ADJUSTING ENTRIES:

1. Adjusting entry to take up unrecorded or accrued income
2. Adjusting entry to take up unrecorded or accrued expense
3. Adjusting entry to take up bad debts
4. Adjusting entry to take up depreciation
5. Adjusting entry to take up earned revenue as income and unearned revenue as liability
6. Adjusting entry to take up unexpired cost as asset and expired cost as expense
7. Adjusting entry to take up inventory at the end

Methods of Recording or Accounting (in general):

1. Accrual basis
 It is a method of recording wherein income is recorded when earned regardless of when cash is collected or
received, while expenses are recorded when incurred regardless of when cash is paid.
2. Cash basis
 It is a method of recording wherein income is recorded when cash is received, while expenses are recorded
when cash is paid.

Methods of Recording Income:

1. Income Method
2. Liability Method

Methods of Recording Expense:

1. Expense Method
2. Asset Method

Classification of Accounts that are Usually Adjusted:

1. Bad Debts/Doubtful Accounts
 These refer to the amount of Accounts Receivable that may not be collected for the period.
 This account is classified as expense and presented in the Income Statement.
2. Allowance for Bad Debts or Allowance for Doubtful Accounts
 This account is classified as a contra-asset account and is deducted from Accounts Receivable.
 This account is presented in the Statement of Financial Position.
3. Depreciation
 This refers to the lowering of value (for a particular period) of property, plant and equipment (except land) due to
constant use or passage of time.
 This account is classified as expense and is presented in the Income Statement.
4. Accumulated Depreciation
 This is classified as a contra-asset account and is deducted from property, plant and equipment (building,
machineries, vehicle, equipment, etc.)
 This account is presented in the Statement of Financial Position.
5. Prepaid Expense
 This account is classified as asset and is presented in the Statement of Financial Position.
6. Accrued Income
 This account if classified as asset and is presented in the Statement of Financial Position.
7. Unearned Income
 This account is classified as liability and is presented in the Statement of Financial Position.
8. Accrued Expense
 This account is classified as liability and is presented in the Statement of Financial Position.

PRO-FORMA ENTRIES FOR ADJUSTING ENTRIES:

1. Unrecorded or Accrued Income:
_________Receivable xxxx
__________ Income xxxx
2. Unrecorded or Accrued Expense:
_________ Expense xxxx
__________Payable xxxx

3. Bad Debts:
Bad Debts xxxx
Allowance for Bad Debts xxxx

4. Depreciation:
Depreciation Expense xxxx
Accumulated Depreciation xxxx

5. Merchandise Inventory at the end:

Merchandise Inventory, Dec. 31, ______ xxxx
Income Summary xxxx

6. Prepaid Expense Using Asset Method:

_________ Expense xxxx
Prepaid _____ Expense xxxx

7. Prepaid Expense Using Expense Method:

Prepaid_______ Expense xxxx
________Expense xxxx

8. Unearned Income Using Income Method:

__________ Income xxxx
Unearned ________ Income xxxx

9. Unearned Income Using Liability Method:

Unearned ________ Income xxxx
_________ Income xxxx

Illustrative Problem:
Prepare the necessary adjusting entries for Ben Trading, for the year ended December 31, 2015.
1. Interest Income on Notes Receivable amounting to P500 remained unrecorded and uncollected.
2. Commission Income amounting to P2,000 remained unrecorded and uncollected.
3. Interest Expense on Notes Payable amounting to P1,000 remained unrecorded and unpaid.
4. Rent Expense amounting to P6,000 remained unrecorded and unpaid.
5. Of the Accounts Receivable of P300,000, 1% may be uncollectible.
6. Furniture and Equipment costing P105,000, has residual value (scrap value) of P5,000 and estimated useful life of 10
years. Compute depreciation for the year.
7. Merchandise Inventory on hand on December 31, 2015 amounts to P8,000.

Adjusting Entries
2015 Account Titles and Explanation Debit Credit
Dec. 31 Interest Receivable 500
Interest Income 500
-to take up unrecorded Interest Income

31 Commission Receivable 2,000

Commission Income 2,000
-to take up unrecorded Commission Income

31 Interest Expense 1,000

Interest Payable 1,000
-to take up unrecorded Interest Expense

31 Rent Expense 6,000

Rent Payable 6,000
-to take up unrecorded Rent Expense

31 Bad Debts Expense (300,000 x 0.01) 3,000

Allowance for Bad Debts 3,000
-to take up Bad Debts Expense

31 Depreciation Expense 10,000

Cost – Residual Value = 105,000 - 5,000
Estimated Useful Life = 10 years
Accumulated Depreciation 10,000
-to take up Depreciation Expense

31 Merchandise Inventory, December 31 8,000

Income Summary Account 8,000
-to take up ending inventory