ADJUSTING

ENTRIES
EMPV
STEP 5 : Preparing a
10-column worksheet
and making the
necessary adjusting
journal entries.
 ADJUSTING ENTRIES
• Entries normally done at the end of the accounting period
to adjust and finalize the balances of the accounts before
the preparation of financial statements to achieve
completeness and accuracy of financial statements.

END OF PERIOD ADJUSTMENTS:

1. Accrued Expenses 4. Unearned Revenues
2. Accrued Revenues 5. Depreciation
3. Prepaid Expense 6. Bad debts
ACCRUED EXPENSES (LIABILITY)
• Expenses already incurred but not yet paid by the business
as of the end of the accounting period.
• Examples: salaries payable, interest payable, rent
payable, utilities payable, etc.

Adjusting journal entry:

Expense Account XX
Accrued Expenses XX
ILLUSTRATIVE PROBLEM: SALARIES PAYABLE
Assuming on December 31,2019, salaries of employees incurred but not yet
paid of ABC Services Co. amounted to P 120,000.

Adjusting journal entry:

Dec. 31,2019. Salaries Expense 120,000

Salaries payable 120,000
ILLUSTRATIVE PROBLEM: UTILITIES PAYABLE
Assuming on December 31,2019, the following December bills were received
and unpaid:
Electricity P 20,000
Water 5,000

Adjusting journal entry:

Dec. 31,2019 Utilities Expense 25,000
Utilities payable 25,000
ILLUSTRATIVE PROBLEM: INTEREST PAYABLE
Assuming on October 1,2019, ABC Services Co. issued a promissory note to borrow P 100,000 from DEF Finance
which will mature on September 30,2020 along with any accrued interests. The note bears an interest of 12%. The
company’s reporting period ends every December 31.

Oct. 1,2019 Cash 100,000

Notes payable 100,000

The adjustment for interest is computed as follows:

Interest = Principal x Rate x Time period (I = PRT)
I = 100,000 X 12% X 3/12
= 3,000

Adjusting journal entry:

Dec. 31,2019 Interest Expense 3,000
Interest payable 3,000
 Sept. 30,2020 Interest Expense 9,000
Interest payable 3,000
Notes payable 100,000
Cash 112,000

WHAT IF ABC SERVICES CO. BORROWED FUNDS ON OCTOBER 17,2019?

The adjustment for interest is computed as follows: No. of days from Oct 17,2019
Interest = Principal x Rate x Time period (I = PRT) to December 31,2019
I = 100,000 X 12% X 75/360 October- 14 days
= 2,500 November – 30 days
December – 31 days
75 days

Adjusting journal entry:

Dec. 31,2019 Interest Expense 3,000

Interest payable 3,000
IF ADJUSTING ENTRIES REGARDING ACCRUED EXPENSES ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

ASSETS – NO EFFECT
LIABILITIES – UNDERSTATED
EQUITY - OVERSTATED
REVENUES – NO EFFECT
EXPENSES – UNDERSTATED
PROFIT – OVERSTATED
ACCRUED REVENUES (ASSET)
• income already earned but not yet collected by the
business as of the end of the accounting period.
• Examples: accounts receivable, interest receivable, rent
receivable

Adjusting journal entry:

Accrued Revenues XX
Revenue account XX
ILLUSTRATIVE PROBLEM: ACCOUNTS RECEIVABLE
Assuming on December 31,2019, P 200,000 worth of services were rendered but
not yet collected.

Adjusting journal entry:

Dec. 31,2019 Accounts receivable 200,000

Service Income 200,000
ILLUSTRATIVE PROBLEM: INTEREST RECEIVABLE
Assuming on October 1,2019, ABC Services Co. received a promissory note to lend P 100,000 to XYZ Company
which will mature on September 30,2020 along with any accrued interests. The note bears an interest of 12%. The
company’s reporting period ends every December 31.

Oct. 1,2019 Notes receivable 100,000

Cash 100,000

The adjustment for interest is computed as follows:

Interest = Principal x Rate x Time period (I = PRT)
I = 100,000 X 12% X 3/12
= 3,000

Adjusting journal entry:

Dec. 31,2019 Interest Receivable 3,000
Interest Income 3,000
 Sept. 30,2020 Cash 112,000
Interest receivable 3,000
Interest income 9,000
Notes receivable 100,000

IF ADJUSTING ENTRIES REGARDING ACCRUED REVENUES ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

ASSETS – UNDERSTATED
LIABILITIES – NO EFFECT
EQUITY - UNDERSTATED
REVENUES – UNDERSTATED
EXPENSES – NO EFFECT
PROFIT – UNDERSTATED
EXERCISE :
Compute for the amount of the interest as of December 31,2019
base on the following information:

Issue Date Principal Interest rate Maturity date

a. September 25,2019 P 1,000,000 12% January 15,2020
b. November 12,2019 500,000 15% March 28,2020
c. December 1,2019 300,000 8% April 15,2020
 PREPAID EXPENSES (ASSET)
• Cash was already paid for future services or expenses waiting to be used or
incurred by the business in the future.
• Examples: prepaid rent, prepaid insurance, office supplies, etc.
• From the time prepaid expenses are paid, it can be recorded either using the
asset method or the expense method.
• Under the asset method, the payment of expenses in advance is initially
recognized in full as an asset while under the expense method, it is recognized in
full as an expense.
• Adjusting entries needed depends on the type of method used to account for
prepaid expenses. At the end of the accounting period, prepaid expenses shall
be analyzed for the portion of expired and unexpired or used/ unused.
• Under the asset method, adjusting entry done at the end of the period is to
recognize the expired/used portion as expense while under expense method,
adjusting entry done is to recognize the unexpired/unused portion as an asset.
ILLUSTRATIVE PROBLEM: PREPAID RENT
Assuming on October 1, 2019, ABC Services Co. paid P 120,000 one-year rent.

ASSET METHOD

Oct. 1,2019 Prepaid rent 120,000

Cash 120,000

Adjusting journal entry:

Dec. 31,2019 Rent Expense 30,000

Prepaid rent 30,000
 Prepaid Rent Rent Expense

10/1 120,000 12/31 30,000 12/31 30,000

12/31 90,000 12/31 30,000

ILLUSTRATIVE PROBLEM: PREPAID RENT
EXPENSE METHOD

Oct. 1,2019 Rent Expense 120,000

Cash 120,000

Adjusting journal entry:

Dec. 31,2019 Prepaid rent 90,000

Rent Expense 90,000
 Rent Expense Prepaid Rent

10/1 120,000 12/31 90,000 12/31 90,000

12/31 30,000 12/31 90,000

ILLUSTRATIVE PROBLEM: OFFICE SUPPLIES
Assuming on June 1, 2019, ABC Services Co. purchased office supplies P
75,000 for cash. As of December 31,2019, the value of the unused supplies was
P 50,000.
ASSET METHOD

June 1,2019 Office Supplies 75,000

Cash 75,000

Adjusting journal entry:

Dec. 31,2019 Office Supplies Expense 25,000

Office Supplies 25,000
 Office Supplies Office Supplies Expense

06/1 75,000 12/31 25,000 12/31 25,000

12/31 50,000 12/31 25,000

ILLUSTRATIVE PROBLEM: OFFICE SUPPLIES
EXPENSE METHOD

June 1,2019 Office Supplies Expense 75,000

Cash 75,000

Adjusting journal entry:

Dec. 31,2019 Office Supplies 50,000

Office Supplies Expense 50,000
 Office Supplies Expense Office Supplies

06/1 75,000 12/31 50,000 12/31 50,000

12/31 25,000 12/31 50,000

IF ADJUSTING ENTRIES REGARDING PREPAID EXPENSES ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

ASSET METHOD
ASSETS – OVERSTATED
LIABILITIES – NO EFFECT
EQUITY - OVERSTATED
REVENUES – NO EFFECT
EXPENSES – UNDERSTATED
PROFIT – OVERSTATED
IF ADJUSTING ENTRIES REGARDING PREPAID EXPENSES ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

EXPENSE METHOD
ASSETS –UNDERSTATED
LIABILITIES – NO EFFECT
EQUITY - UNDERSTATED
REVENUES – NO EFFECT
EXPENSES – OVERSTATED
PROFIT –UNDERSTATED
 UNEARNED REVENUES (LIABILITY)
• Cash was already collected by the business from customers, but the service was
not yet rendered.
• Examples: unearned rent, unearned subscriptions
• From the time cash is collected from customers in advance for future provision of
services, it can be recorded either using the liability method or the revenue
method.
• Under the liability method, the receipt of payment in advance from customers is
initially recognized in full as a liability while under the revenue method, it is
recognized in full as revenue.
• Adjusting entries needed depends on the type of method used to account for
unearned revenue. At the end of the accounting period, unearned revenue shall
be analyzed for the portion of earned and unearned.
• Under the liability method, adjusting entry done at the end of the period is to
recognize the earned portion as revenue while under revenue method, adjusting
entry done is to recognize the unearned portion as a liability.
ILLUSTRATIVE PROBLEM: UNEARNED RENT REVENUE
Assuming on June 1, 2019, DEF Leasing Co. received P 120,000, 12 months
advance rental from ABC Services Co.
LIABILITY METHOD

June 1,2019 Cash 120,000

Unearned Rent Revenue 120,000

Adjusting journal entry:

Dec. 31,2019 Unearned Rent Revenue 70,000

Rent Revenue 70,000
 Unearned Rent Revenue Rent Revenue

12/31 70,000 06/1 120,000 12/31 70,000

12/31 50,000 12/31 70,000

ILLUSTRATIVE PROBLEM: UNEARNED RENT REVENUE
REVENUE METHOD

June 1,2019 Cash 120,000

Rent Revenue 120,000

Adjusting journal entry:

Dec. 31,2019 Rent Revenue 50,000

Unearned Rent Revenue 50,000
 Rent Revenue Unearned Rent Revenue

12/31 50,000 06/1 120,000 12/31 50,000

12/31 70,000 12/31 50,000

IF ADJUSTING ENTRIES REGARDING UNEARNED REVENUES ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

LIABILITY METHOD
ASSETS – NO EFFECT
LIABILITIES – OVERSTATED
EQUITY - UNDERSTATED
REVENUES – UNDERSTATED
EXPENSES – NO EFFECT
PROFIT – UNDERSTATED
IF ADJUSTING ENTRIES REGARDING UNEARNED REVENUES ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

REVENUE METHOD
ASSETS –NO EFFECT
LIABILITIES – UNDERSTATED
EQUITY - OVERSTATED
REVENUES – OVERSTATED
EXPENSES – NO EFFECT
PROFIT –OVERSTATED
DEPRECIATION
• the systematic allocation of the cost of property, plant and
equipment to its useful life.
• Depreciation expense is the expense to be recognized for the use of
property, plant and equipment except land due to decline in
usefulness (physical wear and tear and obsolescence) as they age.
• Property, plant and equipment (PPE) - are tangible assets used for
production or supply of goods, for rental to others or for
administrative purposes and are expected to be used for a long
period of time by the business. (PAS 16)
• The allocation of the cost of property, plant and equipment to its
useful life is done by using different depreciation methods.
• Straight line method is the method of allocating the cost of PPE in
which the business is expecting that the PPE provides equal
economic benefits in its useful life
• The annual depreciation expense using the straight-line method is computed as:

• Cost – is the purchase price of the PPE.

• Salvage value – is the estimated amount or value of the asset at the end of its useful life.
This is also known as residual value, scrap value or disposal value.
• Depreciable cost – is the difference between the cost of PPE and the salvage value.
• Useful life – is the estimated life in years an asset is expected to be used or provide benefits.
• Accumulated depreciation – is the cumulative depreciation balance of a PPE at certain
point in time. This is a contra-account to the cost of the PPE. Instead of directly crediting the
cost of the PPE when recognizing depreciation expense for the period, this account is used
in order to maintain the historical cost of the PPE.
• Carrying value – is the net amount between the cost of the PPE and the related
accumulated depreciation at a certain point in time. In layman’s term, this is the amount
or part of the PPE not yet used or exhausted. This is also called the “Book value”.

Adjusting journal entry:

Depreciation Expense XX
Accumulated Depreciation XX
ILLUSTRATIVE PROBLEM: DEPRECIATION
Assuming on July 1, 2019, ABC Services Co. purchased an equipment costing P 200,000 on
account. ABC estimates that it has an estimated useful life of 5 years and with a salvage
value of P 50,000. The company uses straight-line method is depreciating its depreciable
assets.

July 1,2019 Equipment 200,000

Accounts payable 200,000

Adjusting journal entry:

Annual depreciation = 200,000 – 50,000 = 30,000
5 years
2019 Depreciation Expense = 30,000 x 6/12 = 15,000
(July 1- Dec. 31,2019)

Dec. 31,2019 Depreciation Expense- Equipment 15,000

Accumulated Depreciation- Equipment 15,000
 As of December 31,2019, carrying value/ book value of the equipment would be:
Equipment (cost) – P 200,000
Less: Accumulated Depreciation-Equipment (15,000)
Carrying value/Book value 185,000

Equipment Accumulated Depreciation- Depreciation Expense-

Equipment Equipment

7/1 200,000
12/31 15,000 12/31 15,000

12/31 15,000 12/31 15,000

12/31 200,000
 In the next years, the following are the adjusting journal entry and carrying value of the
equipment:

Dec. 31,2020 Depreciation Expense- Equipment 30,000

Accumulated Depreciation- Equipment 30,000
Equipment (cost) – P 200,000
Less: Accumulated Depreciation-Equipment (45,000)
Carrying value/Book value,12/31/2020 155,000
Equipment Accumulated Depreciation- Depreciation Expense-
12/31/2019 200,000 Equipment Equipment
12/31/2019 15,000

12/31/2020 30,000 12/31/2020 30,000

12/31/2020 200,000 12/31/2020 45,000 12/31/2020 30,000

 Dec. 31,2021 Depreciation Expense- Equipment 30,000
Accumulated Depreciation- Equipment 30,000

Equipment (cost) – P 200,000

Less: Accumulated Depreciation-Equipment (75,000)
Carrying value/Book value,12/31/2021 125,000

Equipment Accumulated Depreciation- Depreciation Expense-

12/31/2020 200,000 Equipment Equipment
12/31/2020 45,000

12/31/2021 30,000 12/31/2021 30,000

12/31/2021 75,000 12/31/2021 30,000

12/31/2021 200,000
 Dec. 31,2022 Depreciation Expense- Equipment 30,000
Accumulated Depreciation- Equipment 30,000

Equipment (cost) – P 200,000

Less: Accumulated Depreciation-Equipment (105,000)
Carrying value/Book value,12/31/2022 95,000

Equipment Accumulated Depreciation- Depreciation Expense-

12/31/2021 200,000 Equipment Equipment
12/31/2021 75,000

12/31/2022 30,000 12/31/2022 30,000

12/31/2022 105,000 12/31/2022 30,000

12/31/2022 200,000
 Dec. 31,2023 Depreciation Expense- Equipment 30,000
Accumulated Depreciation- Equipment 30,000

Equipment (cost) – P 200,000

Less: Accumulated Depreciation-Equipment (135,000)
Carrying value/Book value,12/31/2023 65,000

Equipment Accumulated Depreciation- Depreciation Expense-

12/31/2022 200,000 Equipment Equipment
12/31/2022 105,000

12/31/2023 30,000 12/31/2023 30,000

12/31/2023 135,000 12/31/2023 30,000

12/31/2023 200,000
 06/30/2024 Depreciation Expense- Equipment 15,000
Accumulated Depreciation- Equipment 15,000
(Jan. 1 – June 30, 2024)

Equipment (cost) – P 200,000

Less: Accumulated Depreciation-Equipment (150,000)
Carrying value/Book value,06/30/2024 50,000

Equipment Accumulated Depreciation- Depreciation Expense-

12/31/2023 200,000 Equipment Equipment
12/31/2023 135,000

06/30/2024 15,000 06/30/2024 15,000

06/30/2024 150,000 06/30/2024 15,000

06/30/2024 200,000
WHAT IF ON June 30,2021, ABC Services Co., sold its
equipment
Assuming on June 30,2021, ABC Services Co. sold its equipment for P 130,000.

June 30,2021 Depreciation Expense- Equipment 15,000

Accumulated Depreciation-Equipment 15,000
Selling price VS. Carrying value
Equipment (cost) – P 200,000
Accumulated Depreciation- (60,000)
130,000 140,000
Loss on asset disposal – 10,000
June 30,2021 Cash 130,000
Accumulated Depreciation-Equipment 60,000
Loss on asset disposal 10,000
Equipment 200,000

IF ADJUSTING ENTRIES REGARDING DEPRECIATION ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

ASSETS –OVERSTATED
LIABILITIES – NO EFFECT
EQUITY - OVERSTATED
REVENUES – NO EFFECT
EXPENSES – UNDERSTATED
PROFIT –OVERSTATED
BAD DEBTS
• These are uncollectible accounts due from customers. These bad
debts are recognized as bad debts expense and form part of the
general and administrative expenses of the business.
• Businesses use two methods in accounting for uncollectible
accounts: direct write-off method and allowance method.
• Under the direct write-off method, bad debt expense is recognized
only when the account of a customer is definitely uncollectible.
Also, under this method, the uncollectible account is directly
deducted from the accounts receivable. This is the only method
used for income tax purposes.
Adjusting journal entry:
Bad Debts Expense XX
Accounts Receivable XX
• Under the allowance method, bad debt expense is recognized even the
accounts of the customer is not certain to be uncollectible. This is an
expense for selling on credit. In this method, it uses a contra- account
known as Allowance for bad debts when recording bad debts in which
the Allowance for bad debts account is credited instead of the
Accounts Receivable account.
Adjusting journal entry:
Bad Debts Expense XX
Allowance for bad debts XX
• When an account is definitely uncollectible, the account shall be
written-off. The entry under the allowance method is:

Allowance for bad debts XX

Accounts Receivable XX
• When an account that is previously written off is later on
recovered, the entry under the allowance method is:

To reinstate the accounts previously written-off

Accounts receivable XX
Allowance for bad debts XX

To record of collection of account

Cash XX
Accounts receivable XX
ILLUSTRATIVE PROBLEM: BAD DEBTS (Allowance method)
Assuming as of December 31,2019, after the first year of operations, ABC
Services Co. has an accounts receivable balance of P 500,000 and the
company estimates that 2% of the accounts are uncollectible.
AR, 12/31/2019- P500,000
Adjusting journal entry: Less:Allow. Bad debts,12/31/2019- 10,000
Carrying value/Amortized cost/NRV P 490,000
Dec. 31, 2019 Bad Debts Expense 10,000
Allowance for bad debts 10,000

500,000 x 2% = 10,000
Accounts receivable Allowance for bad debts Bad debts expense
1/1/2019
1/1/2019

12/31/2019 10,000
12/31/2019

12/31/2019 10,000 12/31/2019 10,000

12/31/2019 500,000
ILLUSTRATIVE PROBLEM: BAD DEBTS (Allowance method)
During 2020,ABC Services Co. had sales on account of P 1,000,000, written off P 15,000
and recovered P 4,500 of accounts receivable. The company estimates that 2% of the
accounts receivable as of December 31,2020 were uncollectible.
Sales on account
Accounts receivable 1,000,000
Sales 1,000,000
Write offs
Allowance for bad debts 15,000
Accounts receivable 15,000
Recovery
Accounts receivable 4,500
Allowance for bad debts 4,500

Cash 4,500
Accounts receivable 4,500
 Adjusting journal entry:

Dec. 31, 2020 Bad Debts Expense 19,700

Allowance for bad debts 19,700

1,485,000 x 2% = 29,700

Accounts receivable Allowance for bad debts Bad debts expense

12/31/2019 500,000
12/31/2019 10,000
1,000,000 sales on account Write-offs 15,000
15,000 write offs 4,500 recovery 12/31/2020 30,200
4,500 recovery 12/31/2020 30,200
4,500 recovery Bad debts expense

12/31/2020 29,700 12/31/2020 30,200

12/31/2020 1,485,000

AR, 12/31/2020- P 1,485,000

Less:Allow. Bad debts,12/31/2020- 29,700
Carrying value/Amortized cost/NRVP 1,455,300
IF ADJUSTING ENTRIES REGARDING BAD DEBTS ARE NOT DONE AT THE END OF THE
ACCOUNTING PERIOD:

ASSETS –OVERSTATED
LIABILITIES – NO EFFECT
EQUITY - OVERSTATED
REVENUES – NO EFFECT
EXPENSES – UNDERSTATED
PROFIT –OVERSTATED
Other account titles may be used for bad debts are the following:

Expense account Allowance account

Doubtful accounts expense Allowance for Doubtful accounts

Uncollectible accounts expense Allowance for Uncollectible accounts