ADJUSTING JOURNAL ENTRIES
Need for Adjustment
- To reflect the proper amounts revenues realized and expenses incurred during a period.
- To show a fairly measure of the assets, liabilities, and owners’ equity.
ACCOUNTS THAT NEED TO BE ADJUSTED:
1. Adjustment for the expiration of prepayments of expenses.
2. Adjustment for the realization of income collection in advance.
3. Adjustment for the accrual of expenses.
4. Adjustment for the accrual of income.
5. Provision of bad debts.
6. Provision of depreciation.
ADJUSTMENT FOR THE EXPIRATION OF PREPAYMENTS OF EXPENSES
- Prepaid expenses are expenses paid in advance. At the time of payment, the account is an asset and as it
is used it becomes an expense. The adjusting entry for this account depends on the original entries
made when it was paid.
There are two methods to be used:
1. Asset Method
- Under this method, the original entry made is charged to an asset.
2. Expense Method
- Under this method, expense account is charged when payment is made.
ILLUSTRATION – ASSET METHOD
On November 1 of the current year, C Santos paid P30,000 for a three-month rental of the office space.
ORIGINAL ENTRY
Date Account title and description Acct. No. Debit Credit
Nov. 1 Prepaid Rent 30,000
Cash 30,000
Payment for 3 mos. rent
ADJUSTING ENTRY
Date Account title and description Acct. No. Debit Credit
Dec. 31 Rent expense 20,000
Prepaid rent 20,000
to record adjustment for rent
ILLUSTRATION – EXPENSE METHOD
On November 1 of the current year, C Santos paid P30,000 for a three-month rental of the office space.
Date Account title and description Acct. No. Debit Credit
Nov. 1 Rent expense 30,000
Cash 30,000
To record for 3 mos. rent
ADJUSTING ENTRY
Date Account title and description Acct. No. Debit Credit
Dec. 31 Prepaid Rent 10,000
Rent Expense 10,000
To adjust rent expense
ADJUSTMENT FOR THE REALIZATION OF INCOME COLLECTED IN ADVANCE OR UNEARNED INCOME
- Unearned income arises when payment is recorded before goods are delivered or before services are
rendered.
There are two methods to be used:
1. Income Method
- Under this method, income account is credited when cash is received.
2. Liability Method
- Under this method, a liability account is credited upon receipt of cash.
ILLUSTRATION – INCOME METHOD
On November 1 of the current year, C Santos paid P30,000 for a three-month rental of the office space.
ORIGINAL ENTRY
Date Account title and description Acct. No. Debit Credit
Nov. 1 Cash 30,000
Rent Income 30,000
Payment for 3 mos. rent
ADJUSTING ENTRY
Date Account title and description Acct. No. Debit Credit
Dec. 31 Rent income 10,000
Unearned Income 10,000
To adjust rent income
ILLUSTRATION – LIABILITY METHOD
On November 1 of the current year, C Santos paid P30,000 for a three-month rental of the office space.
ORIGINAL ENTRY
Date Account title and description Acct. No. Debit Credit
Nov. 1 Cash 30,000
Unearned Income 30,000
rent for 3 mos.
ADJUSTING ENTRY
Date Account title and description Acct. No. Debit Credit
Dec. 31 Unearned income 20,000
Rent Income 20,000
To adjust the rent income
ACCRUAL OF EXPENSES
- Accrued expenses are those expenses already incurred during the period but are not yet paid or
recorded.
ILLUSTRATION (note : there is only one illustration for this)
Office employees are prepaid every two weeks. On December 31, five days salaries of an office employee for
P300 per day have accrued.
Date Account title and description Acct. No. Debit Credit
Dec. 31 Salaries Expense 1,500
Salaries payable 1,500
Unpaid salaries
****the adjusting entry to record accrual of expenses is debit the expense account and credit the liability
account.
ACCRUAL OF INCOME
- Accrued income arises when goods have been delivered or services have been rendered but no amount
of payment have been collected or there is no payment, such collection is not yet recorded.
ILLUSTRATION:
A tenant who occupies the right side of the shop space is two months in depts as of the balance sheet date. His
monthly rental is P2,500 per month.
Date Account title and description Acct. No. Debit Credit
Dec. 31 Accrued Rent Income 5,000
Rent Income 5,000
To adjust rent income
**** the entry to adjust accrual of income is to debit the assets account and credit the income account
PROVISION OF BAD DEBTS
- The entry to adjust bad debts is as follows:
Date Account title and description Acct. No. Debit Credit
Dec. 31 Bad Depts
Allowance for bad depts
*** Bad depts or loss for bad depts is debited to show a decrease in proprietorship account to estimated loss.
Estimated Uncollectible Accounts or allowance for bad depts which is a valuation account is credited because it
is a deduction from an asset account, Account Receivable. In the balance sheet presentation. Estimated
uncollectible account is deducted from accounts receivable to show the net book value or the net realizable
value of the accounts receivable.
ILLUSTRATION:
Accounts Receivable Pxxx
Less: Allowance for bad debts Pxxx
Net Realizable Value Pxxx
There are several methods of estimating the probable losses from bad depts.
1. Increasing the accumulated allowance for bad depts by a certain percentage of the accounts receivable.
2. Increasing the accumulated allowance for bad depts to a certain percentage of account receivable.
Debit Credit
Accounts Receivable 7,000
Allowance for bad depts 500
1. Increasing the allowance for bad depts by a certain percentage of the accounts receivable.
What is the adjusting entry to increase the allowance for bad depts by 10% of accounts receivable?
COMPUTATION:
Bad debts estimate = P7,000 x 10 = P700
Adjusting Entry:
Debit Credit
Bad Depts 700
Allowance for bad depts 700
To record increase of allowance for bad depts by 10% of account receivable
Balance sheet presentations:
Account receivable 7,000
Less: Allowance for bad depts 1,200
Net: Realizable Value 5,800
2. Increasing the allowance for bad depts for a certain percentage of account receivable.
Using the same information in the pre-adjusted trial balance, What is the adjusting entry to increase the
allowance for bad depts to 10% of the account receivable?
COMPUTATION:
Bad depts estimate = P7,000 x 10 =P700
P700 – 500 = P200
Adjusting Entry:
Debit Credit
Bad Depts 200
Allowance for bad depts 200
To record increase of allowance for bad depts by 10% of account receivable
Balance sheet presentation:
Account receivable 7,000
Less: Allowance for bad depts 700
Net: Realizable Value 6,300
PROVISION FOR DEPRECIATION
The following formula is used to compute for depreciation:
D = C – SV
n
Where :
D = is the depreciation
C = is the original cost which includes the invoice price less discount plus the other cost incurred before the use
of the asset such as freight and installation.
S = is the salvage value or scrap value. This is the amount wherein the asset can be sold after its useful life.
n = is the number of estimated useful value.
ILLUSTRATION:
A delivery truck was purchased for P250,000. It is estimated to last 10 years after which it shall have a value of
P50,000. Compute for the depreciation.
D = C – SV
n
= P250,000 – P50,000
10 years
= P20,000/year
Adjusting Entry:
Debit Credit
Depreciation, delivery truck P20,000
Accumulated depreciation, delivery truck P20,000
