THE ADJUSTING ENTRIES

Accounting period is any length of time in which the life of the business is divided. Such time may either
be a monthly period, quarterly period, or a year.
At the end of each accounting period, financial reports are prepared to show the results of the business
operations. Such reports which always include the income statement and balance sheet should reflect the
revenues realized and expenses incurred, and a fairly measure of the assets, liabilities, and owner’s equity.
Normally at the end of each accounting period, there are several accounts that need to be adjusted.
Need for adjustment
1. To reflect the proper amounts of revenues, realized and expenses incurred during a period.
2. To show a fairly measure of the assets, liabilities, and owner’s equity.
Accounts that need to be adjusted
1. Adjustment for the expiration of prepayments of expenses.
2. Adjustment for the realization of income collected in advance.
3. Adjustment for the accrual of expenses.
4. Adjustment for the accrual of income.
5. Provision for bad debts.
6. Provision for depreciation.
Adjustment for the Expiration of Prepayment 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 become 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 account.
Example: On November 1 of the current year, C. Santos paid P 30, 000 for a three-month rental of the office
space.
Original Entry Adjusting Entry
Nov. 1 Prepaid Rent P 30, 000 Dec. 31 Rent Expense P 20,000
Cash P 30, 000 Prepaid Rent P 20, 000

Prepaid Rent Rent Expense

Nov 1 P 30, 000 Dec. 31 P 20, 000 Dec. 31 P 20, 000

Analysis:

The P 30, 000 which was paid in November 1 is for a three-month rental of the space, i.e, for November,
December, and January. As of December 31, the end of the accounting period, only P 20, 000 or rental for two
months have already been incurred, so that portion is an expense and the remaining P 10, 000 is still prepaid
until January 31 of the following accounting period.

1. Expense Method. Under this method, expense account is charged when payment is made. Using the
same example, the following are the entries made:
 Original Entry Adjusting Entry
Nov. 1 Rent Expense P 30, 000 Dec. 31 Prepaid Rent P 10,000
Cash P 30, 000 Rent Expense P 10, 000

Rent Expense Prepaid Rent

Nov 1 P 30, 000 Dec. 31 P 10, 000 Dec. 31 P 10, 000

Analysis

The rental payment of P 30, 000 is paid for the month of November, December, and January. As of
December 31, only P 20, 000 or for two months rental have been incurred. The remaining P 10, 000 is still
prepaid until January 31 of the next accounting period.

Adjustment for the realization of income collected in advance or unearned income

Unearned income arises when payment is received before goods are delivered or before services are
rendered.

There are two methods to be used the income method and the liability method. Again, the method to be
used depends on the original entries made.

1. Income method. Under this method, income account is credited when cash is received.

Example: On November 1 of the current year, the business received P 30, 000 cash for a three-month
rental fee from the tenant of the vacant space of the store.

Original Entry Adjusting Entry

Nov. 1 Cash P 30, 000 Dec. 31 Rent Income P 10,000
Rent Income P 30, 000 Unearned Rent P 10, 000

Rent Income Unearned Rent

Dec 31 P 10, 000 Nov 1 P 30, 000 Dec. 31 P 10, 000

Analysis:

The business received from a tenant a P 30, 000 cash advance rentals for the months of November,
December, and January. As of December 31, only two months rental or P 20, 000 are already earned. The
remaining P 10, 000 is still unearned until January 31 of the following accounting period.

2. Liability method. Under this method, a liability account is credited upon receipt of cash.

Original Entry Adjusting Entry

Nov. 1 Cash P 30, 000 Dec. 31 Unearned Rent P 20,000
Unearned Rent P 30, 000 Rent Income P 20, 000

Unearned Rent Rent Income

Dec. 31 P 20, 000 Nov. 1 P 30, 000 Dec. 31 P 20, 000
Analysis:

As of December 31, the two-month rentals or P 20, 000 are already earned. Only P 10, 000 or the rental
for the month of January is still unearned.

Accrual of Expenses

Accrued expenses are those expenses already incurred during the period but are not yet paid or
recorded.
At the end of the accounting period, the income statement should reflect such expense and the balance
sheet should reflect a liability account. The adjusting entry to record accrual of expenses is debit the expense
account and credit the liability account.

Example
Office employees are paid every two weeks. On December 31, five days’ salaries of an office employee
for P 300 per day have accrued.

Adjusting Entry:

Date Accounting Titles and Explanation Debit Credit

Dec. 31 Salaries Expense P 1, 500

Accrued Salaries P 1, 500
Five-day accrued salaries of an
employee for P 20/day.

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 if there is payment, such collection is not yet recorded.
In order to avoid understatement of income and asset, an adjusting entry is needed at the end of the
period.
The entry to adjust accrual of income is to debit the asset account and credit the income account.

Example: A tenant who occupies the right side of the shop space, is two months in arrears as of the balance
sheet date. His monthly rental is P 2, 500 per month.

Adjusting Entry:

Date Accounting Titles and Explanation Debit Credit

Dec. 31 Accrued Rent Income P 5, 000

Rent Income P 5, 000
Two months accrued rent of a
tenant for 2, 500 per month

Provision for bad debts

Usually most business firms extend credits to attract more customers and to sell more goods. However,
not all credits extended are good or collectible. For a reason or another, a certain percentage of these collectibles
are not collected. For this reason, the business should provide for such losses for non-collection of credits. This
loss from uncollectible accounts is called bad debts. Bad debt is a nominal account which must be shown in the
income statement at the end of the accounting period.

Adjusting entry:

Bad Debts P xxxx

Allowance for Bad Debts P xxxx

Bad debts or Loss from Bad Debts is debited to show a decrease in proprietorship account due to
estimated loss.
Estimated Uncollectible Account or Allowance for Bad Debts 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 P xxx

Less: Allowance for Bad Debts xxx
Net Realizable Value P xxx

There are several methods of estimating the probable losses from bad debts:
1. Increasing the accumulated allowance for bad debts by a certain percentage of the accounts
receivable.
2. Increasing the accumulated allowance for bad debt to a certain percentage of accounts receivable.

Illustration

The following accounts are show in the pre-adjusted trial balance of Mr. Rodriguez as of December 31,
2020:

Debit Credit

Accounts Receivable P 7, 000

Allowance for Bad Debts P 7, 000

1. Increasing the accumulated allowance for bad debts by a certain percentage of the accounts receivable.

What is the adjusting entry to increase the allowance for bad debts by 10% of accounts receivable?

Computation:

Bad debts estimate = P 7, 000 x .10 = P 700

Adjusting Entry:

Bad Debts P 700

Allowance for Bad Debts P 700
To increase the allowance for bad debts
by 10% of accounts receivable.
 Balance Sheet Presentation:

Accounts Receivable P 7, 000

Less: Allowance for Bad Debts 700 P 6, 300

2. Increasing the allowance for bad debts to a certain percentage of accounts receivable

Computation:

Bad debts estimate = P 7, 000 x .10 = P 700

P 700 – P 500 = P 200

Adjusting Entry:

Bad Debts P 200

Allowance for Bad Debts P 200
To increase the allowance for bad debts
by 10% of accounts receivable.

Balance Sheet Presentation:

Accounts Receivable P 7, 000

Less: Allowance for Bad Debts 700 P 6, 300

Provision for depreciation

Assets which are relatively permanent in nature are fixed assets. They are used by the business in its
operation and are not intended for sale. The value of these assets, except land decreases as time passes by
due to the following reasons:

1. Wear and tear from operations

2. Inadequacy and obsolescence

An asset is said to be inadequate for the business if there is business expansions and the asset can no
longer fulfill the needs of the business. It is said to be obsolete in the introduction of new models or inventions
and the business desires to replace the old asset with a new one. The cost of the fixed asset is allocated to the
number of its useful life.

Depreciation is the portion of the cost of the asset which is already used or consumed. There are several
methods of depreciating assets. However, this book will deal only with the simplest methods of depreciating
assets. However, this book will deal only with the simplest method, the straight-line method of depreciation.
The following formula is used to compute for depreciation:

Cost – Salvage Value

Depreciation =
Estimated Useful Life

Example:
A delivery truck was purchased for p 250, 000. It is estimated to last 10 years after which it shall have a
value of P 50, 000. Compute for depreciation.
 Cost – Salvage Value
Depreciation =
Estimated Useful Life

P 250, 000 – P 50, 000

=
10 years

P 200, 000
=
10 yrs

= P 20, 000 / yr.

Adjusting Entry:

Depreciation, delivery truck P 20, 000

Accumulated depreciation, delivery truck P 20, 000

Depreciation is an expense account. Accumulated depreciation is a contra asset account. A contra asset
account is an asset account where the account balance is a credit balance. It is described as "contra"
because having a credit balance in an asset account is contrary to the normal or expected debit balance.

Balance Sheet Presentation

Delivery Truck P 250, 000

Less: Accumulated Depreciation 20, 000 P 230, 000

Depreciation for a fractional period

If the purchase date of the asset does not coincide with the beginning of the accounting period, such
asset should be depreciated on a fraction of a period. Suppose the accounting period starts on January 1 and
ends on December 31. On May 1 of the current year, some pieces of furniture were purchased for P 4, 800. The
asset estimated to have 10 years of useful life. To compute for the depreciation on December 31,

Cost – Salvage Value

Depreciation =
Estimated Useful Life

P 4, 800 – 0
=
10 years

= P 480 / yr.

The annual depreciation of the furniture is P480. To compute for the depreciation from May 1 to
December 31, divide P 480 by 12 months to get the monthly depreciation. Then multiply the monthly depreciation
by 8 months , i.e from May to December.

P 480 / 12 mos. = P 40/ mo

P 40 x 8 mos. = P 320

Adjusting entries: Illustration of proform entries

1. Prepayment/ Prepaid Expenses

 Asset Method

Expense P xxx
Prepaid Expense P xxx

Expense Method

Prepaid Expense P xxx

Expense P xxx

2. Realization of Income Collected in Advance

Income Method

Revenue P xxx
Unearned Revenue P xxx

Liability Method

Unearned Revenue P xxx

Revenue P xxx

3. Accrual of Expenses

Expense P xxx
Accrued Expense P xxx

4. Accrual of Income

Receivable P xxx
Income P xxx

5. Provision for Bad Debts/ Allowance for Doubtful Accounts

Bad Debts P xxx

Estimated Uncollectible Accounts P xxx

6. Provision for Depreciation

Depreciation - asset P xxx

Accumulated depreciation-asset P xxx

Posting the adjusting entries

After the adjusting entries have been recorded in the general journal, they should be posted on the
general ledger to adjust the accounts. After accounts have been posted, an adjusted trial balance should be
prepared to prove the accuracy of the postings to the general ledger.

The worksheet

A worksheet is prepared to facilitate the preparation of adjusting entries, financial statements, and closing
entries. It is prepared before the construction of the financial statements and before the adjusting entries are
entered in the journal and posted.
 The following steps are taken in preparing a worksheet:

1. Write the heading of the worksheet at the top of the paper with the following information:

Name of the Business

Worksheet
For the period __________, 20, ___

2. Provide the following columns in the worksheet.

Income
Trial Balance Adjustment Adjusted T.B. Balance Sheet
Statement
Account Titles Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

3. Copy the trial balance on the first two money columns.

4. Enter in the adjustment columns the adjusting entries. Before each corresponding debit and credit
amounts, write in parenthesis the same index number or letter. Those accounts which are not found
in the trial balance should be written below the preadjusted trial balance.

5. Total the adjustment columns.

6. The adjustment trial balance columns is the total of the preadjusted trial balance and the adjustment
columns. If the amounts are the both debit, add. Then extend the amount to the debit column. Same
procedure will be followed if the amounts are both credits, only it will be extended to the credit column.
If the amount is bigger amount, then extend to the column of the bigger amount.

7. Add the adjusted trial balance columns to prove the equality of debits and credits.

8. The adjusted trial balances are extended to the balance sheet and income statement columns.
Assets, liabilities, and capital to the balance sheet column and income and expenses to the income
statement columns. Add these last four columns. Get the difference of the debit and credit sides of
the balance sheet. The difference of both should be equal, otherwise, an error or errors are
committed.

If the credit total of the income statement is more than the debit total, the difference is a net income.
If the debit side is more than the credit side, the difference is a net loss. Write the difference below
the smaller sides.

9. Write in the column for account titles “net income” if the difference is a net income or “net loss” if the
difference is a net loss.

10. Write the final totals and double rule.

 Adjusting entries, adjusted trial balance, worksheet, complete illustration ( Net Loss)

Sure Repair Shop

Trial Balance
December 31, 2020

Account Title Debit Credit

Cash P 900
Accounts Receivable 1, 200
Repair Supplies 1, 500
Repair Tools 1, 200
Furniture and Fixtures 6, 500
Service truck 20, 000
Notes Payable P 3, 250
G. Alajar, Capital 25, 200
G. Alajar, Drawing 750
Service Income 5, 900
Advertising Expense 250
Salaries and Wages 900
Utility Expense 150
Rent Expense 1, 000
Total P 34, 350 P 34, 350

On December 31, the end of the accounting period, the following data were taken:

1. An actual count of repair supplies showed a balance of P 850.

2. Repair tools are depreciated at 10% per annum.

3. Furniture and fixtures are estimated to have a useful life of 5 years while service truck has a useful
life of 10 years. Both assets were bought on September 1 of the current year.

4. A 10% interest has accrued on the note payable.

5. Of the income received, P 900 is applicable to the next accounting period.

6. Accrual expenses: salaries and wages P 250; rent P 500.

7. The balance of the advertising expense account represents payment for five months. Paid on
September 1 of the current year.

Adjusting Journal Entries

1. Repair Supplies Expense P 650

Repair Supplies P 650
( P 1, 500 – P 850 = P 650)
 2. Depreciation – repair tools 120
Accumulated Depreciation – repair tools 120
(P 1, 200 x .10 = P 120)

3. a. Depreciation – furniture and fixtures 433

Accumulated Depreciation – furniture
433
and fixtures
(P 6, 500 ÷ 5 = P 1, 300/yr.
1, 300 x 1/3 = P 433)
b. Depreciation – service truck 666
Accumulated Depreciation – service
666
truck
(P 20, 000 ÷ 10 = P 2, 000/yr.
2, 000 x 1/3 = P 666)

Both furniture and fixtures and service truck were purchased on September of the current year.

4. Interest Expense 325

Accrued Interest Expense 325
(P 3, 250 x .10 = P 325)

5. Service Income 900

Unearned Service Income 900

6. a. Salaries and Wages 250

Accrued Salaries and Wages 250

b. Rent Expense 500

Accrued Rent Expense 500

7. Prepaid Advertising 50
Advertising Expense 50
( P 250 ÷ 5 = P 50/ mo.
50 x 4 = P 200 from Sept. – Dec.
P 250 – 200 = P 50)
 Trial Balance Adjustments Adjusted T. B.
Accounts
Dr Cr. Dr. Cr. Dr. Cr.
Cash P 900 P 900
Accounts Receivable 1 200 1 200
Repair Supplies 1 500 (1) 650 850
Repair Tools 1 200 1 200
Furniture and Fixtures 6 500 6 500
Service Truck 20 000 20 000
Notes Payable P 3 250 P 3 250
G. Alajar, capital 25, 200 25, 200
G. Alajar, drawing 750 750
Service Income 5 900 (5) 900 5 000
Advertising expense 250 (7) 50 200
Salaries and Wages 900 (6a) 250 1 150
Utilities Expense 150 150
Rent Expense 1 000 (6b) 500 1 500
P 34 350 P 34 350
Supplies Expense (1) 650 650
Depreciation - repair tools (2) 120 120
Accumulated Depreciation
(2) 120 120
- repair tools
Depreciation – furniture &
(3a) 433 433
fixtures
Accumulated Depreciation
(3a) 433 433
– furniture and fixtures
Depreciation – service
(3b) 666 666
truck
Accumulated Depreciation
(3b) 666 666
– Service Truck
Interest Expense (3) 325 325
Accrued interest expense (4) 325 325
Unearned Service Income (5) 900 900
Accrued salaries and
(6a) 250 250
wages
Accrued Rent Expense (6b) 500 500
Prepaid Advertising (7) 50 50
P 3 894 P 3 894
Total P 36 644 P 36 644
REFERENCES:

Aliling L. E (2019) Fundamentals of Basic Accounting. Rex Bookstore. Sampaloc, Manila,

Philippines. First Edition.

Binuya, M,A.J (2016) Fundamental of Accountancy Business and Management 2. JFS

Publishing Services, Pasay City, Philippines. First Edition.

De Guzman, A. A. (2018) Fundamentals of Accountancy, Business and Management 1. Lorimar

Publishing, Inc. Cubao, Quezon City, Philippines

Arganda, et al (2012) Accounting Principles 1. National Book Store. Mandaluyong City,

Philippines. Fourth Edition