Charisle Gizzarie A.

Ortiz, 202131493
Adjusting Entries

- Are entries prepared at the end of the accounting period to update some accounts and

ensure their accuracy before preparing the financial statements.

Accounts need to be change and updated:

1. Accrued Income

2. Accrued Expense

3. Prepaid Expense

4. Unearned/ Deferred Income

5. Bad Debts

6. Depreciation Expense

I. ACCRUAL PRINCIPLE

- Also known as Revenue Recognition Principle and Expense Recognition Principle.

- Under accrual basis, income is recognized as earned at the time service is rendered

and this is recorded regardless of when cash is collected.

- On the other hand, expense is recognized as incurred at the time services is received

or used up regardless of when the cash is paid.

Two accounts related to the accrual basis:

1. Accrued Income – is a current asset representing account to be collected

2. Accrued Expense – is a current liability representing account to be paid

 Charisle Gizzarie A. Ortiz, 202131493

Accrued Income Accrued Expense

Date Particulars Debit Credit Date Particulars Debit Credit

Dec Interest Dec Interest

31 Receivable 31 Expense
XXXX XXXX
Interest Interest
Income Payable

XXXX XXXX

*What will happen if accrued expense and accrued income are not recognized?

Viewpoint of Accrued Expense

Accounting Value Statement of Financial Statement of Income
Affected Position

Current Liabilities Understated

Owner’s Equity Overstated

Expenses Understated

Net Income Overstated

Viewpoint of Accrued Income

Accounting Value Statement of Financial Statement of Income

Affected Position

Current Liabilities Understated

Owner’s Equity Understated

Expenses Understated

Net Income Understated

 Charisle Gizzarie A. Ortiz, 202131493
Accrued Expenses (Given)
The semi-monthly salaries of the Company amounting to P150,000 covering the period

December 25, 2020 to January 8, 2021. The company's reporting period is calendar year.

AJE:
Salaries Expense 70,000
Salaries Payable 70,000
Accrued Income (Given)
The Company is subleasing portion of the office space at monthly rental of P30,000. For the rent,

Dec 16, 2018 to Jan 15, 2019. The bill was only prepared on January 18.

AJE:
Accrued Rent Receivable 15,000
Rent Income 15,000

II. PREPAID EXPENSE

- Represents advance payment for service to be received (expense to be incurred in the

future)

Prepaid Expense can be recorded using an:

a. Asset Method

- The advance payment is recorded as an asset Prepaid Expense. This

represents a right to receive service for cash already paid.

- Preferable method since it follows the conceptual flow of cost

 Charisle Gizzarie A. Ortiz, 202131493
Unadjusted: Adjusted:
Date Particulars Debit Credit Date Particulars Debit Credit
Nov 1 Prepaid Rent XXXX
Dec 31 Rent Expense XXXX
Cash XXXX Prepaid Rent XXXX

b. Expense Method

- An alternative method to record the advance payment is to

immediately debit it to expense account.

Unadjusted: Adjusted:
Date Particulars Debit Credit Date Particulars Debit Credit
Nov. 1 Rent Expense XXXX
Dec Prepaid Rent XXXX
Cash XXXX 31
Rent Expense XXXX

* What if an Accountant fails to make an adjusting entry?

- Rent Expense will be overstated, which in turn will understate net income and owner's

equity.

- Assets (prepaid Rent) will also be understated.

- Preferable method – ASSET METHOD

III. Deferred or Unearned Income

- Some companies require their clients to pay in advance. The advance collection

may be recorded:
 Charisle Gizzarie A. Ortiz, 202131493
a. under the liability method - The advance collection is credited to a

liability account called Unearned Revenue. It is a liability of the

company to render service for cash that was advanced by the client. If,

before the end of the year, service has been rendered, decrease the

liability and increase the revenue account

Unadjusted: Adjusted:
Date Particulars Debit Credit Date Particulars Debit Credit

June Cash XXXX Dec Unearned Rent XXXX

31 31 Income
Unearned Rent XXXX
Rent Income
Income XXXX

b. or under the income method - Record the advance collection

immediately with a credit to an income account

Unadjusted: Adjusted:
Date Particulars Debit Credit Date Particulars Debit Credit
June Cash XXXX
31 Dec Rent Income XXXX
Rent Income XXXX 31
Unearned Rent XXXX
Income

IV. Bad Debts

- the estimated amounts of receivables that could not be collected from customers

or from those who own the company. There are two methods of recognizing bad

debts:
 Charisle Gizzarie A. Ortiz, 202131493
a. direct write-off method

- this method recognized debts expenses only when it is certain that the

company will not be able to collect the account anymore.

Date Particulars Debit Credit

Dec 31 Bad Debts Expense XXXX

Account Receivable XXXX

- Bad Debts Expense will be shown in the operating section of the Income

statement

- Accounts Receivable will be shown in the current asset section of the

Statement of Financial Position

b. allowance method

- provides for bad debts or doubtful accounts during the period the sale of

service is recorded.

- Doubtful Accounts are determined by estimation based on the company’s

past experiences or the experience of other companies within the same

industry.
 Charisle Gizzarie A. Ortiz, 202131493
Date Particulars Debit Credit
Feb 1 Cash XXXX

Account Receivable XXXX

Dec 31 Bad Debt Expense

Allowance For Doubtful Accounts XXXX

XXXX

V. Depreciation

- Properties such as land, building, furniture and machinery are used for a long

period of time to support business operation. Except for land, the utility value

(ability to yield service) will decrease over time because of wear and tear,

obsolescence (becomes outdated) and inadequacy (cannot cope up with

demands for more volume or better quality of service).

In the Statement of Financial Position:

Asset Cost – Accumulated Depreciation = Net Book Value

Three factors to be considered in determining depreciation cost

1. Cost

2. Useful Life

3. Scrap Value or Disposal Value

 Charisle Gizzarie A. Ortiz, 202131493
Depreciation Formula:

Cost – Scrap Value, if any

= Depreciation
Useful Life (at years)

Date Particulars Debit Credit

Dec 31 Depreciation Expense- Equipment XXXX

Accumulated Depreciation- Equipment XXXX

Depreciation Expense- Building XXXX

Accumulated Depreciation- Building XXXX

*Accumulated Depreciation is a contra-asset account that is deducted from the cost price to

arrive at a net book value

SUMMARY:

1. Accrued income- income already earned but were not collected nor recorded

2. Accrued expenses- expenses already expired but were not paid nor recorded

3. Unearned income- advance collection recorded as a liability, but a portion of which has
already been earned.

4. Prepaid expense-advance payment recorded as an asset but a portion of which has already
expired.

5. Bad Debts-client accounts that may not be collected any more or are doubtful of collection.

6. Depreciation Expense- transfer of asset cost to expense based on its declining utility value.
 Charisle Gizzarie A. Ortiz, 202131493
PROBLEMS:

1. Adjusting entries involve:

a. Only capital accounts
b. Only real accounts
c. Only temporary accounts
d. One real and one nominal accounts
2. Why are adjusting entries necessary?
a. Transactions take place over more than one accounting period
b. To correct erroneous journal entries made
c. To make debits equal credits
d. To close the temporary accounts at year end
3. Which of the following is an example of an adjusting entry?
a. Record the purchase of an equipment
b. Record depreciation of a machine
c. Record the payment of wages to employees
d. Recording the purchase of supplies on account
4. An adjusting entry to accrue salaries incurred but not yet paid is an example of
a. Reflecting unrecorded income earned during an accounting period
b. Aligning recorded costs with appropriate accounting periods
c. Reflecting unrecorded expenses incurred during an accounting period
d. Aligning revenue appropriate accounting periods with
5. Which of the following items is not a possible adjusting entry?
a. Debit income and credit liability
b. Debit an asset and credit revenue
c. Debit an expense and credit liability
 Charisle Gizzarie A. Ortiz, 202131493
d. Debit an asset and credit liability
6. An adjusting entry in which a revenue is recognized before the related cash inflow occurs is
called
a. Footing
b. Deferral
c. Accrual
d. Nominal
PRACTICE EXERCISE:
Problem 1:
XYZ Company paid 1-year insurance premium on March 1 amounting to P30,000 to which
company made a debit to Insurance Expense.
Requirements:
1. Type of Adjustment
2. Adjusting journal entries on Dec. 31
3. Should the adjustment was not made, what is the effect on current assets?
Problem 2:
On September 1, 2020, XYZ company purchased equipment costing P500,000. The management
estimates that this equipment can be use for five years and will be able to sell at P20,000 at the
end of its life.
Requirements:
1. Depreciation Expense for 2020
2. Accumulated Depreciation, Dec 31, 2021
3. AJE on Dec 31, 2020
4. Book Value, Dec 31, 2021
Prepare the required adjusting entries at year-end:
1. Salaries earned by the workers of our company but not yet paid amounted to P25,000
 Charisle Gizzarie A. Ortiz, 202131493

2. During the last month of the rear Gasoline costs of P4,000 were incurred in their operations.
The bill has not yet arrived, and no entry has been made for this amount.
3. The rent of P9,000 for the month of December had been incurred but was unpaid at year end.
4. The company had a bank loan obtained on November 1. Accrued interest on the loan at
December 31 amounted to P5,000. Interest had not been recorded yet.
5. A client rented one of our buses to carry their guests to and from the airport beginning
December 20 at a daily rate of P5,000. No rental payment has been received.
6. Our company has not recorded the professional services it has rendered to a client for P40,000.
This amount remains uncollected at year end.
Problem 4:
An excerpt from the trial balance of XYZ company shows:

• Accounts Receivable P500,000

• Allowance for Bad Debts P20,000
• Sales P1,000,000
• Sales Return and Allowances P10,000
The company shows that 10% of AR is doubtful of collection.
Requirements:
1. AJE on Dec 31
2. Balance of Bad Debts expense as of Dec 31
3. Balance of Allowance for bad debts as of Dec 31
4. Should the adjustment was not made, what would be the effect on equity?
Problem 5:
Same problem with no.2
However, Accounts Receivable is 200,000. It is the company’s policy to provide 1% of
gross credit sales as a bad debts. Cash Sales amounted to 300,000.
Requirements:
1. AJE on Dec 31
 Charisle Gizzarie A. Ortiz, 202131493
2. Balance of Bad Debts expense as of Dec 31
3. Balance of Allowance for bad debts as of Dec 31
4. Should the adjustment was not made, what would be the effect on net income?