ADJUSTING THE RECORDS

Accrual of Income
Illustration:
● A client gave the business a P100,000 promissory note which pays 12% interest per annum on September 1,
2020. The note shall mature in 6 months on March 1, 2021.

Sept. 1, 2020 - Dec. 31, 2020 P100k x 12% x 4/12 P4,000

Jan. 1, 2021 - Mar. 1, 2021 P100k x 12% x 2/12 P2,000

Total interest from Sept. 1, 2020, to March 1, 2021 P6,000

Date Account Debit Credit

Dec. 31, 2020 Accrued Interest Income/Interest Receivable P4,000

Interest Income P4,000

To record the accrual of interest income

Accrual of Expense
Illustration:
● The business pays P24,000 semi-monthly every 18th and 3rd of the month

P24,000 Salaries Expense

12 days 3 days

Dec. 19, 2020 Dec. 31, 2020 Jan. 3, 2021

Dec. 19 - 31, 2020 P24k x 12 days/15 days P19,200

Jan. 1 - 3, 2021 P24k x 3 days/15 days P4,800

Total salaries expense from Dec. 19, 2020 - Jan. 3, 2021 P24,000

Date Account Debit Credit

Dec. 31, 2020 Salaries Expense P19,200

Accrued Salaries Expense/Salaries Payable P19,200

To record the accrual of salaries expense

Expiration of Prepayment
● Asset method - the prepayment is initially recorded upon payment of an asset, “Prepaid Expense” or “Deferred
Expense.” At the end of the reporting period, the expired portion is computed and adjusted as an expense

Date of Transaction End of period adjustment

Asset Method Prepaid Expense XXXX Expense XXXX

Cash XXXX Prepaid Expense XXXX
Illustration:
● October 1, 2020, the business paid P100,000 for the rental of an office space covering October 1, 2020, to
September 30, 2021.
The entire term of the P100,000 Rent Expense

3 months 9 months

Oct. 1, 2020 Dec. 31, 2020 Sept. 30, 2021

Oct. 1 - Dec. 31, 2020 P100k x 3 mos./12 mos. P25,000

Jan. 1 - Sept. 30, 2021 P100k x 9 mos./12 mos. P75,000

Total rent expense from Oct. 1, 2020 - Sept. 30, 2021 P100,000

Date Account Debit Credit

Dec. 31, 2020 Salaries Expense P19,200

Accrued Salaries/Salaries Payable P19,200

To record the accrual of salaries expense

Date of Transaction:
Date Account Debit Credit

Dec. 31, 2020 Rent Expense P100,000

Prepaid Rent P100,000

To record the prepayment of the rental

Adjusting Entry
Date Account Debit Credit

Dec. 31, 2020 Rent Expense P25,000

Prepaid Rent P25,000

To record the expired portion of the rental

prepayments

Usage of Supplies
Illustration:
● On May 1, 2020, the business purchased a total of P20,000 office supplies. At the end of the current year, the
supplies worth P4,000 remained unused. There were P7,000 unused supplies at the end of the prior year.

Prepaid Supplies/Office Supplies

Dec. 31, 2019 P7,000 P23,000 AJE

May 1, 2020 P20,000

 P27,000 P23,000

Dec. 31, 2020 P4,000

Date of Transaction
Date Account Debit Credit

May. 1, 2020 Prepaid Supplies/Office Supplies P20,000

Cash P20,000

To record the purchase of office supplies

Adjusting Entry
Date Account Debit Credit

Dec. 31, 2020 Office Supplies Expense P23,000

Prepaid Supplies/Office Supplies P23,000

To record the unused portion of the office

supplies

Earning of Deferrals
● Deferrals or income received or collected in advance are not earned by the business upon collection. This is
earned by the business as it renders its part on the contract or as time passes
● Liability method - the advance income is initially recorded as a liability as unearned income or deferred income
upon receipt. eventually, the realized or earned portion by the business is recorded as incomes by an adjusting
entry

Date of transaction End of period adjustment

Liability Method Cash XXXX Unearned/Deferred Income XXXX

Unearned/Deferred Income XXXX Income XXXX

● On July 1, 2020, the business received P200,000 advanced rental from a lessee. The advance rent covers two
years from July 1, 2020, to June 30, 2022. The business reports financial statements every December 31.

The entire term of the P200,000 rent income

6 months 18 months

July 1, 2020 Dec. 31, 2020 June. 30, 2022

July 1 - Dec. 31, 2020 P200k x 6 mos./24 mos. P50,000

Jan. 1 - June 30, 2021 P200k x 18 mos./24 mos. P150,000

Total two-year rental income P200,000

Date of Transaction
Date Account Debit Credit
 July 1, 2020 Cash P200,000

Unearned/Deferred income P200,000

To record the collection of advance rent

Adjusting Entry
Date Account Debit Credit

Dec. 31, 2020 Unearned/Deferred income P50,000

Rent Income P50,000

To record the earned portion of the rent

income

Depreciation
● A long-term asset such as building, machinery, equipment, furniture and fixture, improvements to properties
wears out by regular use or become obsolete by the passage of time. The gradual decrease in value of these
properties throughout their years of useful life is called depreciation expense

Pro-forma adjusting entry

Date Account Debit Credit

Dec. 31, 20XX Depreciation Expense XXXX

Accumulated Depreciation XXXX

To record the depreciation expense

● The accumulated depreciation account is a contra-asset and is present as a deduction against the pertinent
property account in the statement of financial position
● The cost of the asset less the accumulated depreciation is called the book value
● Straight-line method results in a uniform depreciation expense throughout the life of the property. The depreciable
cost of the asset is simply spread over as expense over the useful life.
Hiistorical Cost−Scrap value
● Annual Depreciation=
Useful Life∈ years
Illustration:
● On January 1, 2020, the business purchased equipment costing P100,000. It is expected to be used for 10 years
and has a scrap value of P10,000
Hiistorical Cost−Scrap value
● Annual Depreciation=
Useful Life∈ears
P 100,000−P 10,000
● Annual Depreciation=
10 years
P 90,000
● Annual Depreciation= =P 9,000 / year
10 years

Date Account Debit Credit

Dec. 31, 2020 Depreciation Expense P9,000

Accumulated Depreciation P9,000

 To record the depreciation expense

Provision for Bad Debts

● There is always a possibility that receivables from clients will not be fully collected. An uncollectible is called a
“bad debts expense.”
● Allowance Method estimates bad debts and records them as an expense in the year the business sells the goods
or service on account.

Pro-forma entries under the allowance method

Date Account Debit Credit

XXXX Bad Debts Expense XXXX

Allowance for Bad debts XXXX

To record estimated bad debt expense

● The write-off of worthless accounts is recorded as follows:

Pro-forma entries for write-off

Date Account Debit Credit

XXXX Allowance Bad Debts XXXX

Accounts Receivable XXXX

To record writing-off of accounts

receivable

● If the business recovered accounts previously written-off, the journal entries are:

Pro-forma entries for recovery of accounts

Date Account Debit Credit

XXXX Accounts Receivable XXXX

Allowance for Bad Debts XXXX

To record re-establishment of accounts

previously written-off

XXXX Cash XXXX

Accounts Receivable XXXX

To record collection of accounts previously

written-off