ADJUSTING

ENTRIES
PREPAYMENTS
Remember:

We do NOT
record CASH
in adjusting
entries
PREPAYMENTS
• Prepaid Expense
payment
before • Unearned Revenue
service
 ASSET METHOD
PREPAID EXPENSE
INITIAL ENTRY
Transactions already Prepaid Expense xxx
paid but not yet Cash xxx
incurred

Nagbayad ka na, pero

hindi mo pa INITIAL ENTRY
natatanggap yung Expense xxx
service
Prepaid Expense xxx
 ASSET METHOD
PREPAID EXPENSE
Why is it called asset method?
INITIAL ENTRY
Transactions already
paid but not yet Prepaid Expense xxx
incurred Cash xxx
Nagbayad ka na, pero
hindi mo pa asset account
natatanggap yung
service
NOTE: adjusting entry under ASSET method is always
the USED portion
EXAMPLE 1.1
On February 1, Toni & Co. recorded an initial entry of 15,500 for their prepaid rent, paid by
cash. The balance represents their payment for 5 months worth of rentals. Based on these
information, what would be the adjusting entry as of Feb. 28?

ASSET METHOD

Prepaid Rent 15 500

Cash 15 500

15,500 is for 5 months

15,500 ÷ 5 = 3,100

Rent Expense 3 100

Prepaid Rent 3 100
 EXPENSE METHOD
PREPAID EXPENSE
INITIAL ENTRY
Transactions already Expense xxx
paid but not yet Cash xxx
incurred

Nagbayad ka na, pero

hindi mo pa ADJUSTING ENTRY
natatanggap yung Prepaid Expense xxx
service
Expense xxx
 EXPENSE METHOD
PREPAID EXPENSE
Why is it called expense method?
INITIAL ENTRY
Transactions already
paid but not yet Expense xxx
incurred Cash xxx
Nagbayad ka na, pero
hindi mo pa expense account
natatanggap yung
service
NOTE: adjusting entry under EXPENSE method is
always the UNUSED portion
EXAMPLE 1.2
On February 1, Toni & Co. recorded an initial entry of 15,500 for rent expense, paid by cash. The balance
represents their payment for 5 months worth of rentals. Based on these information, what would be the
adjusting entry as of Feb. 28?

EXPENSE METHOD

Rent Expense 15 500

Cash 15 500

15,500 is for 5 months

15,500÷ 5 = 3,100
3,100 x 4 = 64,000

Prepaid Rent 12 400

Rent Expense 12 400
EXAMPLE 1.3
On September 1, upon signing the one-year lease agreement for the warehouse, Toni Co.
also purchases insurance for the warehouse. The company pays PHP 96,000 in cash upfront
for a 12-month insurance policy for the warehouse.
(a) What would be the balance of Insurance Expense as of December 31?
(b) What would be the balance of Prepaid Insurance as of December 31?

A. Insurance Expense - used B. Prepaid Insurance - unused

96,000 is for 1yr/12months 96,000 is for 1yr/12months

96,000 ÷ 12 = 8,000 96,000 ÷ 12 = 8,000
8,000 x 4 = 32,000 8,000 x 8 = 64,000

Insurance Expense 32 000 Prepaid Insurance 64 000

 LIABILITY METHOD
UNEARNED REVENUE INITIAL ENTRY
Transactions where cash is
Cash xxx
already received but the Unearned Revenue xxx
service is not yet rendered

Nagbayad na si customer, INITIAL ENTRY

pero hindi mo pa
narerender yung service Unearned Revenue xxx
Revenue xxx
 LIABILITY METHOD
UNEARNED REVENUE
Why is it called liability method?

Transactions where cash is

INITIAL ENTRY
already received but the Cash xxx
service is not yet rendered Unearned Revenue xxx
Nagbayad na si customer,
pero hindi mo pa liability
narerender yung service
NOTE: adjusting entry under LIABILITY method is
always the USED portion
EXAMPLE 2.2
A tenant of Abarkada Apartment paid PHP90,000 worth of rent for the 3 month period ending January 31,
2021. Financial statement date is December 31, 2020. Make a journal and adjusting entry using liability
method.

LIABILITY METHOD

Cash 90 000
Unearned Rent Revenue 90 000

90,000 is for 3 months

90,000 ÷ 3 = 30,000
30,000 x 2 = 60,000

Unearned Rent Revenue 60 000

Rent Revenue 60 000
 REVENUE METHOD
UNEARNED REVENUE INITIAL ENTRY
Transactions where cash is
Cash xxx
already received but the Revenue xxx
service is not yet rendered

Nagbayad na si customer, INITIAL ENTRY

pero hindi mo pa
narerender yung service Revenue xxx
Unearned Revenue xxx
 REVENUE METHOD
UNEARNED REVENUE
Why is it called revenue method?

Transactions where cash is

INITIAL ENTRY
already received but the Cash xxx
service is not yet rendered Revenue xxx
Nagbayad na si customer,
pero hindi mo pa revenue
narerender yung service
NOTE: adjusting entry under REVENUE method is
always the UNUSED portion
EXAMPLE 2.2
A tenant of Abarkada Apartment paid PHP90,000 worth of rent for the 3 month period ending January 31,
2021. Financial statement date is December 31, 2020. Make a journal and adjusting entry using revenue
method.

REVENUE METHOD

Cash 90 000
Rent Revenue 90 000

90,000 is for 3 months

90,000 ÷ 3 = 30,000
30,000 x 1 = 30,000

Rent Revenue 30 000

Prepaid Rent Revenue 30 000
EXAMPLE 2.3
August 1, Madrigal Realty received PHP18,000 from Mr. X for 9 months rental.
(a) What would be the balance of Unearned Rent Revenue as of December 31?
(b) What would be the balance of Rent Revenue as of December 31?

A. Unearned Rent Revenue - unused B. Rent Revenue- used

18,000 is for 9 months 18,000 is for 9 months

18,000 ÷ 9 = 2,000 18,000 ÷ 9 = 2,000
2,000 x 4 = 8,000 2,000 x 5 = 10,000

Unearned Rent Revenue = 8 000 Rent Revenue = 10 000

1. An account used to show that revenue had been received and will be applied to some future period?
a) unexpired expense
b) unearned revenue
c) unused supplies
d) accounts receivable

2. Orange Co. sold six advertising spaces for P400 each, to be run in the November 2010 through
April 2011 issues. Orange credited Unearned Advertising for P2, 400 on November 1. If Orange’s year
end is December 31, which of the following would be reflected in Orange’s 2010 income statement?
a) Revenues of P800
b) Unearned Revenues of P800
c) Revenues of P1,600
d) Unearned Revenues of P1,60

INCOME STATEMENT is only composed of REVENUES, EXPENSES, & NET INCOME/LOSS

Unearned Rent has a credit balance of P240,000 composed of the following:
• January 1, balance of P45, 000 representing rent prepaid for three months, January to March.
• A credit of P195, 000 representing advance rental payment for twelve months, beginning April 1. The
December 31 adjusting entry will require a debit to Unearned Rent and a credit to Rent Revenue of:
a) P191,250
b) P195,000
c) P240,000
d) none of these
Liability Method
Unearned Rent Revenue 191,250
Rent Revenue 191,250

Jan-March = 45,000 (used)

April-March = 195,000 (partially used)

195,000 ÷ 12 = 16,250
16,250 x 9 = 146,250
45,000 + 146,250 = 191,250