Quarter 4

Learning Activity Sheets 7 (LAS_7, Qtr. 4)

for FABM 1 Grade 11

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS & MANAGEMENT 1

ACTIVITY SHEET 7

The Adjusting Entries Process

I. Learning Competency with Code

• Identify business and nonbusiness transactions, enumerate the types of
business documents, recite the rules of debit and credit, and apply these in
simple cases.
• Prepare adjusting entries. (ABM_FABM11- IVa-d -33)

II. Activity Proper

Adjusting Journal Entries are entries used to update the accounts prior to the
preparation of Financial Statements because they affect more than one accounting
period. Transactions are apportioned properly between the accounting periods
affected. The accounts affected are adjusted so that there will be no overstatement or
understatement of balance sheet items and income statement items.

The process of determining an entity’s net income or net loss requires certain
income and expense accounts to be apportioned over several accounting periods.
According to the accrual principle, income is recognized at the time it is actually
earned and expense is recognized at the time its is actually incurred or used. Thus, a
receipt of cash does not necessarily mean a recognition of an income, and payment of
cash does not necessarily mean a recognition of an expense.

One purpose of adjusting entries is for income and expenses to be reported in the
correct period.

Generally, majority of the account balances may already be presented in the

financial statements. However, there are accounts that need to be updated or
corrected. The accounts must be adjusted to determine the correct amount at which
they may be presented in the financial statements of the business enterprise.

Activity 1: Adjustment process

Entries made at the end of the accounting period to update or correct the
accounts in order to portray realistic financial statements are called adjusting
entries. They have at least one statement of financial position account entry and at
least one income statement account entry. They are needed when deferrals and
accruals exist.

A deferral is the postponement of the recognition of an expense already paid or

of a revenue already received. Deferrals would be needed in the following cases:

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 1. There are costs recorded that must be apportioned between two or more
accounting periods. Examples are cost of the building, prepaid insurance, and
supplies.
2. There are revenues recorded that must be apportioned between two or more
accounting periods. Example, commissions collected in advance for services to
be rendered in later periods.

An accrual is the recognition of an expense that has been incurred but not yet
paid or revenue that has been earned but not yet collected. Accrual would be required
in the following cases:

1. There are unrecorded revenues. An example is commissions earned but not

yet collected or billed to customers.
2. There are unrecorded expenses. An example is the wages earned by the
employees in the current accounting period but after the last pay period.

Recorded Costs Between Two or more Accounting Periods (Deferral)

Prepaid Expenses are expenses paid in advance. Not yet incurred but already
paid. Among the items are rent, insurance, and supplies. At the end of the accounting
period, a portion of these goods/services most likely have been used or will have
expired. The part of the expenditure that has benefitted current operations is treated
as an expense of the period. On the other hand, the part not consumed or expired is
treated as an asset that applies to the future operation of the business. If the
adjusting entries for prepaid expenses are not made at the end of the month, both the
statement of financial position and income statement will be stated wrong. The asset
of the business will be overstated and the expenses will be understated. For this
reason, owner’s equity on the statement of financial position and profit on the income
statement will be overstated.

There are two methods of recording prepaid expenses: (a) Asset Method, and (b)
Expense Method. Under the asset method, an asset account is debited for the advance
payment of expenses. Under the expense method, an expense account is used.

The adjusting entry for both methods also differs. Under the asset method, the
amount of the journal entry is expired or used portion of the amount initially paid.
Under the expense method, the amount of the adjusting journal entry is the unexpired
or unused portion of the amount initially paid.

Illustration 7.1 Adjusting Entries to record Deferred Expenses or Prepaid

Expenses

March 2, 2021 - TGH Company paid P48,000 for a one-year rent.

Transaction: Expiration of 10 months rent.

Analysis: Prepaid Rent, an asset account is decreased. Rent Expense, an expense

account, is increased.

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Rule: Debit to increase an expense (normal balance is Debit), credit to decrease an
asset.

ASSET METHOD

Journal Entry upon Payment (Asset Method)

Date Description PR Debit Credit
2021
March 2 Prepaid Rent 48,000
Cash 48,000
To record payment of rent for one year.

Adjusting Journal Entry at the End of the Accounting Period (Asset Method).
Date Description PR Debit Credit
2021
Dec 31 Rent Expense 40,000
Prepaid Rent 40,000
To record rent expense incurred for the month.
P48,000 x (10mos. / 12 mos.) = P40,000

EXPENSE METHOD

Journal Entry upon Payment (Expense Method)

Date Description PR Debit Credit
2021
March 2 Rent Expense 48,000
Cash 48,000
To record payment of rent for one year.

Adjusting Journal Entry at the End of the Accounting Period (Expense Method).
Date Description PR Debit Credit
2021
Dec 31 Prepaid Rent 8,000
Rent Expense 8,000
To record rent expense incurred for the month.
[P48,000–{P48,000x(10mos./12mos.)] = P8,000

Posting to Ledger:

General Ledger
Account: Prepaid Rent Account No. 1003
Date Item PR Debit Credit Balance
March 2 Advance Payment 48,000 48,000
March 31 Adjusting Entries 40,000 8,000

General Ledger
Account: Rent Expense Account No. 5003
Date Item PR Debit Credit Balance
March 2 Advance Payment 48,000 48,000
March 31 Adjusting Entries 8,000 40,000
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 The Prepaid Rent account now has a balance of P8,000 which represents 2-
month paid in advance. The Rent Expense account reflects the P40,000 expense of
the month.

Illustration 7.2 Adjusting Entries to record Deferred Expenses or Prepaid

Expenses

On February 2, 2022 Malakas purchased P15,000 of office supplies on account.

By the end of the month, P4,000 worth of these supplies are still unused.

Under the asset method, a supplies account (an asset) is recorded when the
amount is paid.

The February 21, 2022 entry to record the purchase on the account of office
supplies was already posted to the general ledger and included in the balances, as
shown in the unadjusted trial balance. (the entry is shown for illustration purposes)

Adjusting Journal Entry (Asset Method)

General Journal
Date Account Title & Explanation PR Debit Credit
2022
Feb 2 Supplies P15,000
Initial
Entry Accounts Payable P15,000
made To record the purchased of office
supplies on account (asset method).

Feb 28 Supplies Expense P11,000

Adjusting
Entry
Supplies P11,000
To set-up the value of unused supplies.

The “Supplies” account debited on February 28, 2022 (end of the month) above is
an asset account and represents the value of supplies unused as of the end of
February 2022. If these entries will be posted to the general ledger, the following
should be the balance of each account:

Account Title Debit Credit

Supplies 4,000
Accounts Payable 15,000
Supplies Expense 11,000

Journal Entry upon payment (Expense Method)

Date Account Title & Explanation PR Debit Credit

2022
Feb 2 Supplies Expense P15,000
Accounts Payable P15,000
To record the purchased of office supplies on
account (expense method).

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Adjusting Journal Entry at the End of the Accounting Period (Expense Method).

Date Account Title & Explanation PR Debit Credit

2022
Feb 28 Supplies P4,000
Supplies Expense P4,000
To set-up the value of unused supplies.

If these entries are posted in the general ledger, the following should be the
balances of each account:

Account Title Debit Credit

Supplies 4,000
Accounts Payable 15,000
Supplies Expense 11,000

The asset account, Supplies, now reflects the proper amount of P4,000, yet to be
consumed. In addition, the amount of supplies used of the Supplies Expense during
the accounting period is reflected as P11,000.

Notice that even with the different approaches in recording the transactions in
the journal entries, the balances in the general ledger will always be the same whether
you used the asset method or the expense method.

Illustration 7.3 Adjusting Entries to record Deferred Income or Unearned

Revenue.

These are items that have been initially recorded as liabilities but are expected to
become income over time or through the operations of the business.

There are two methods of recording unearned revenue: (a) liability method, and
(b) revenue method. Under the liability method, a liability account is used to record
the amount received in advance. Under the revenue method, a revenue account is
used.

For the adjusting journal entry, under the liability method, the amount of
adjusting entry is the end portion of the amount initially received. Under the revenue
method, the amount of the adjusting entry is the unearned portion of the amount
initially received.

To illustrate: March 2, 2021 – Magalang, the owner of the GoodFood Catering

Services, entered a contract with NK Hotel for a year, starting 2021 to 2022. On the
same date, NK Hotel paid an amount of catering service of P90,000 for 3 months. The
entries to record and to adjust in the books are:

As of the end of March 2021, GoodFood Catering Services has already earned the
service revenue for the first month, thus an adjusting entry is recorded:

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Journal Entry upon receipt of Cash (Liability Method)

Date Account Title & Explanation PR Debit Credit

2021
March 2 Cash P90,000
Unearned Service Revenue P90,000
To record receipt of full payment for the 3-
month service contract with Accents Hotel.

Adjusting Journal Entry at the End of the Accounting Period (Liability Method).

Date Account Title & Explanation PR Debit Credit

2021
March 31 Unearned Service Revenue P30,000
Service Revenue P30,000
To record service income earned for 1
month.
P90,000 x (1month/3months) = P30,000

Journal Entry upon receipt of Cash (Income Method)

Date Account Title & Explanation PR Debit Credit

2021
March 2 Cash P90,000
Service Revenue P90,000
To record receipt of full payment for the 3-
month service contract with Accents Hotel.

Adjusting Journal Entry at the End of the Accounting Period (Income Method)

Date Account Title & Explanation PR Debit Credit

2021
March 31 Service Revenue P60,000
Unearned Service Revenue P60,000
To record service income earned for 1
month.
P90,000 – [P90,000 x (1mo./3mos.)= P60,000

Illustration 7.4 Depreciation of Plant and Equipment

Depreciation expense is the allocation of plant asset cost over its estimated
useful life. This is the expenses allotted for the wear and tear of property, plant and
equipment due to passage of time.

Proper accounting, therefore, requires the allocations of the cost of the asset over
its estimated useful life. The amount allocated to any one accounting period is called
depreciation or depreciation expense

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 The depreciation must be estimated since it is often impossible to tell how long
an asset or how much asset is used in any one period.

Suppose GoodFood Catering Services estimates that the vehicle used for delivery
will last for 10 years (120 months) and will be worthless at the end of that time. The
depreciation of the vehicle is computed at P10,000 (P1,200,000/120 months). This
amount represents the cost allocated for the month, thus reducing the asset account
and increasing the expense account.

General Journal
Date Account Title & Explanation PR Debit Credit
2021
Initial Entry
Mar 2 Vehicle P1,200,000
Notes Payable P1,200,000
To record Purchase of equipment on
account.

Adjusting Entry
Dec 31 Depreciation Expense - Vehicle P100,000
Accumulated Depreciation - Vehicle P100,000
To record depreciation of vehicle.
P1,200,000 x (10mos./120 mos.) = P100 ,000

In the above transaction, the asset account was not credited directly. Instead, a
new account, Accumulated Depreciation, was used. Accumulated Depreciation is a
contra-asset account used to accumulate the total past depreciations on a specific
long-lived asset. It is called contra account because it represents a balance that is
subtracted from the balance of an associated account. In this case, the balance of
Accumulated Depreciation-Vehicle, is a deduction from the associated account Vehicle.
After the adjustment entry has been made, the plant and equipment section of the
statement of financial position for the GoodFood Catering Services.

Plant and Equipment:

Vehicle P1,200,000
Less: Accumulated Depreciation (100,000)
P 1,100,000

The contra-account is used for two very good reasons. First, it recognized that
depreciation is an estimate. Second, the use of the contra account preserves the fact of
the original cost of the asset and shows how much of the asset has been allocated to
expense as well as the balance left to be depreciated. As the months pass, the amount
of the accumulated depreciation will grow, and so the net amount shown as an asset
will be reduced. In 24 months, for instance, Accumulated Depreciation – Vehicle, will
have a total of P240,000; when this amount is subtracted from Vehicle, the net
amount of P960,000 will remain, referred to as the net book value or carrying
amount of the asset.

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Illustration 7.5 Accrued Expenses (Accruals)

Accrued Expenses are expenses already incurred or used, but not yet paid.

Adjusting Journal Entry at the end of the accounting period.

Expenses xxx
Expenses Payable xxx
To record unpaid expenses.

To illustrate: The company received an electricity bill in the amount of P10,500 on

December 28, 2021. The company intends to pay on January 10, 2022.

Date Account Title & Explanation PR Debit Credit

2021
Adjusting Journal Entry
Dec 31 Electricity Expense P10,500
Electricity Payable P10,500
To record unpaid electricity expense.

Analysis: this is liability on the part of the company because the Electricity bill is for
the month of December, but the company has not yet paid for it. Hence, a liability on
the part of the company should recognized at the end of the accounting period.

Illustration 7.5 Accrued Income

Accrued Income is income already earned but not yet received.

Income Receivable xxxx

Income xxxx
To record income earned.

To illustrate: A one-year, 6% note receivable in the amount of P180,000 was

received on February 1, 2021. The interest and the principal are payable on maturity
date. Give the Adjusting Journal Entry on October 31, 2021.

Adjusting Journal Entry on October 31, 2021.

Date Account Title & Explanation PR Debit Credit

2021
Adjusting Journal Entry
Oct 31 Interest Receivable P8,100
Interest Income P8,100
To record interest income earned.
Interest = P180,000 x 6% x 9/12 mos
= P 8,100
The interest for 9 months is P8,100.

Analysis: The note receivable bears interest at 6% per annum. This interest will
be received after one year on February 1, 2022. However, the note has already earned
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9 months interest on October 31, 2021 in the amount of P8,100 although interest has
not yet been received. Hence, an adjusting journal entry is necessary to recognize the
interest earned on the notes receivable for 9 month, that is from February 1 to October
21, 2021.

Illustration 7.6 Provision for Doubtful Accounts/ Bad Debts/ Uncollectible

Accounts

Bad Debts/ Doubtful accounts are losses due to uncollectible accounts.

Most business extend credit to their customers or render service on account.

Despite careful screening of customers who will be granted this privilege, there are still
instances that accounts cannot be collected. These uncollectible accounts are called
doubtful accounts or recorded as bad debts expense. Bad debts expense reduces the
amount of account receivables but instead of crediting Accounts Receivable, another
account is used, Allowance for Doubtful Accounts or Allowance for Bad Debts, a
contra-asset account. The difference between the Accounts Receivable account and the
Allowance for Bad Debts is known as net realizable value or carrying amount.

Adjusting Journal Entry at the end of the accounting period

Bad Debts Expense xxx

Allowance for Bad Debts xxx
To record estimated uncollectible accounts.

OR

Doubtful Accounts Expense xxx

Allowance for Doubtful Accounts xxx
To record estimated uncollectible accounts.

OR

Uncollectible Accounts Expense xxx

Allowance for Uncollectible accounts xxx
To record estimated uncollectible accounts.

To illustrate: Accounts Receivable shows a balance of P80,000. It is estimated

that 10% of this is uncollectible. Give the adjusting journal entry on December 31,
2021 for the provision of the estimated uncollectible account.

Date Account Title & Explanation PR Debit Credit

2021
Adjusting Journal Entry
Dec 31 Bad Debt Expense P8,000
Allowance for Bad Debts P8,000
To record estimated uncollectible accounts.
P80,000 x 0.10 = P8,000

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Another example,

1. Per general ledger, Accounts Receivable has a balance of P50,000. Based on

previous experience, 10% is estimated to be uncollectible. The adjusting entry would
be:

Date Account Title & Explanation PR Debit Credit

2022
March 31 Bad Debts Expense P5,000
Allowance for Bad Debts P5,000
To record estimated uncollectible
accounts.
10% x P50,000 = P5,000

2. Using the same illustration, assume that per general ledger, Allowance for Bad
Debts has an existing credit balance of P3,000. In this case, the adjusting entry would
be:

Bad Debts Expense P2,000

Allowance for Bad Debts P2,000
To record estimated uncollectible accounts

Required balance (10% x P50,000) -------------- P5,000

Existing Balance ----------------------------------- 3,000
Amount of adjustment----------------------------- P2,000

As Presented in the Statement of Financial Position

Accounts Receivable P50,000

Less: Allowance for Bad Debts 5,000
Net Realizable Value P45,000

References:

Fundamentals of Accountancy, Business and Management 1; Win Ballada, 2017 Edition

Fundamentals of Accountancy, Business & Management 1 for Senior High School; Florence Lao
Ong, 2016

III. Exercises
ACTIVITY SHEET 7
The Adjusting Entries Process

Written Task 7.1

A. True or False. Direction: Write True if the answer is correct, and False if
otherwise.
______________ 1. An income received in advance although services have not been
rendered to the client are unearned income.

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______________ 2. Adjusting entry is composed of at least one statement of financial
position account and at least one income statement account.
______________ 3. An accrual is the postponement of the recognition of an expense
already paid or of a revenue already received.
______________ 4. All adjusting entries are reversed at the beginning of the next
accounting period.
______________ 5. Failure to prepare an adjusting entry to record accrued income will
result to have understated profit.

Written Task 7.2

B. Simple Recall. Direction: Write the correct answer on the space before each
number.
______________ 6. The allocation of plant asset cost over its estimated useful life. This
is the expense allotted for the wear and tear of the property, plant and equipment due
to passage of time.
______________ 7. An expense that is already paid but not yet incurred.
______________ 8. Losses due to uncollectible accounts.
______________ 9. An income that is already received but not yet earned.
______________ 10. Expenses already incurred or used, but not yet paid.

Performance Task 7.1

C. Short Problem. Direction: Write your answers on a separate sheet of paper. (5
points each number).

1. On March 31, 2022, Mr. Magalang paid P93,000 amount of one year rent for his
store. Give the adjusting journal entry on December 31.

2. Last February 1, Marikit Printing Ads received P6,600 for a 6-month advertising
subscription of their Ad agency. Give the Adjusting entry on May 31.

3. JKB construction firm constructed its own building with a total cost amounting
to P15,000,000. The building has an estimated useful life of 20 years and a
salvage value of P1,000,000. The building was completed last March 31, 2020.
Give the Adjusting entry on December 31, 2021.

Performance Task 7.2

FaXionFleek Services closes its books every December 31. Prepare appropriate
adjusting journal entries for the year ended December 31, 2021.

1. FaXionFleek Services purchased land and building for P4,500,000. 60% of the
cost was allotted to land and the rest to the building. The building has a useful
life of 15 years and a salvage value of P150,000.

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 2. On May 1, the company entered into a contract with NPB Marketing Agency.
The company paid P180,000 for a 1-year advertising contract. (Asset Method
was used in recording the transaction.)
3. A one-year rent was paid in advance for the equipment used by the company in
the amount of P120,000. (Asset method was used in recording the transaction.)
4. Office supplies amounted to P16,000 for the year. At the end of the year, P4,500
amount of supplies remains on hand.
5. An equipment costing P180,000 has a salvage value of P20,000 and an
estimated useful life of 5years is depreciated on a straight-line basis.
6. Electric bill received on December 15 in the amount of P13,000 will be paid on
January 8,2021.
7. Employees salaries accrued but were unpaid at the end of the year, P33,000.
8. Uncollectible accounts at year-end is estimated to be 10% of Accounts
Receivable which has a balance of P95,000. Allowance for Bad Debts account
shows a credit balance of P2,500 before adjustment.

Good work!

Prepared by: Noted by:

NECCA T. PALCAT-BERIN LOURENE J. GUANZON

Subject Teacher ABM Group Head
Approved by:

SALVADOR J. SEMBRAN, PhD

Asst. Principal II - SHS

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