ADJUSTING

ENTRIES
FABM 2
What is adjusting entries?

It involves an adjusting or correcting

the account balances to update the
records at the end of accounting period
for what is the current balance to what
is the correct balance for proper
reporting financial information
Why is there a need for adjusting entries?

Adjusting entries are needed because

there are other transactions which are
not yet recorded during the accounting
period . they may be called “ hidden
transaction”
The following items are adjusted at the end
of accounting period
1. Additional income or expense may not be
recorded yet
2. Recorded income or expense might
include amounts not belonging to the
current period
3. Asset account might include expired cost
4. Liability accounts might include income
already earned
two methods of accounting

1. Cash method
2. Accrual method
Cash method - under this method, income
is recorded only when cash is received and
expense is considered incurred only when
paid in cash
A physical count of office supplies for 50,000
recorded as expense. At the end of accounting
period, it was declared that 30,000 was used.
Original entry:
Dr. Supplies Expense 50,000
Cr. Cash 50,000

Adjusting Entry:
Dr. Supplies 20,000
Cr. Supplies Expense 20,000
Accrual method - income is recorded when goods are
delivered or service are rendered whether paid in cash or
not and expenses are recorded at the time they are
incurred even if not yet paid for. Under this method, the
following adjustments are made at the end of accounting
period
a. adjustments for unrecorded income or accrued income
b. adjustment for unrecorded expense or accrued
expense
c. adjustment for bad debts
d. adjustment for depreciation
e. adjustment for prepaid expense
f. adjustment for precollected income
g. setting up the ending inventory (for merchandising)
Guidelines on Adjusting Entries:
(in accordance with GAAP)

1. Bad Debts or Uncollectible

Accounts Receivable
2. Depreciation
3. Accruals of Income and Expense
4. Deferrals of Income and Expense
 Bad Debts or Uncollectible Accounts
Receivable
- an allocation of at least 10% of the total identified
accounts not yet paid (minimum of 5 years depending
on the term) which is charge to expense account. It
can be computed based on as a percent of sales or
service income or as a percent of accounts receivable
Adjusting Entry :
Dr. Bad Debts Account (expense)

Cr. Accounts Receivable

Percent of sales or income
On December 31, 2016, Nicandro II Service
Shop provide the following information
Service Income 3,500,000
Accounts Receivable 2,100,000
Allowance for doubtful accounts 50,000

The business estimated that doubtful accounts at

the end of the current year are 5% of the service
income
 Percent of sales or income

Step 1: The doubtful accounts expense is

computed as follows:
Service Income 3,500,000
Doubtful account rate . x 5% .
175,000
Step 2: Adjusting Entry
Dr. Bad Debt Expense 175,000
Cr. Allowance for doubtful accounts 175,000
 Percent of Accounts Receivable
On December 31, 2016, Nicandro II Service
Shop provide the following information
Service Income 3,500,000
Accounts Receivable 2,100,000
Allowance for doubtful accounts 50,000

The business estimated that doubtful accounts

at the end of the current year are 5% of the
outstanding accounts receivable
Step 1: The doubtful accounts expense is
computed as follows:
Service Income 2,100,000
Doubtful account rate . x 5% .
105,000
Step 2: Subtract required allowance of
doubtful account to the beginning balance of
allowance
105,000 – 50,000 = 55,000
Step 3: Adjusting Entry
Dr. Bad Debt Expense 55,000
 Depreciation
- is the recognition of part of asset cost as expense
because it has changed from “new” to “used” with
the use of a straight line method formula.
Depreciation per year= Cost – scrap value if any
Number of years
Adjusting Entry:
Dr. Depreciation Expense
Cr Accumulated Depreciation
Mr. Sy bought service vehicle for P420,000 which
estimated to last for 7 years with a salvage value
of P84,000 at the end of estimated life.
Formula : Cost-salvage value/no. of estimated
life
(420,000 – 84,000) 336,000/84 mos.= P4,000/mos.

adjustment
Dr. Depreciation expense 4,000
Cr. Accum. Depreciation 4,000
 Accruals of Income and Expense
- all income earned and all expenses incurred by the
business regardless of whether collected or paid in cash.
Income is already earned as soon the service has been
served or delivered to customer and expense considered
incurred as soon the service has been received or used by
the company. (Accrued income or expense)
Adjusting Entry :
Expense Dr. Expense Account
Cr. Accounts Payable
Income Dr. Accounts Receivable
Cr. Income/Revenue
Accrued Expense example

On December 30, 2016, the Angel

Consultancy hired daily wage worker for the
maintenance of the office. The daily wage of
the worker is 300.00 a day or a weekly salary
of 1,800.00

Dr. Salaries Expense 600

Cr. Salaries Payable 600
Accrued Income example:
On July 1, Mr. Sy received P48,000 check for
rent in advance.
to record payment received
Dr. Cash 48,000
Cr. Unearned Rent Income 48,000
to record adjustment
Dr. Unearned Rent income 24,000
Cr. Rent Income 24,000
(48,000/12 mos. = 4,000 x 6 mos.= P24,000)
 Deferrals of Income and Expense
- involves cash received in advance for income still to be earned
or rendered in the future and expense paid in advanced that is
not yet used or incurred. The income not yet earned and expense
not yet incurred should be separated at the end of accounting
period for proper recognition of the actual income earned and
expense incurred. (Deferred Income or Prepaid Expense)
Adjusting Entry:
Income Dr. Unearned Income
Cr. Income/Revenue
Expense Dr. Expense Account
Cr. Prepaid Account
Deferral of expense:

1. Asset method – when asset account

is debited at the time of payment
2. Expense method – when n expense
account is debited at the time of
payment
On December 1, 2002, Mr. Sy paid P12,000 for
three month rent in advance;

upon receipt of payment :

Dr. Prepaid Rent 12,000
Cr. Cash P12,000

(after 1 mo.) :

Dr. Rent expense 4,000

Cr. Prepaid Rent 4,000
ASSET METHOD
On December 1, 2002, Mr. Sy paid P12,000 for
three month rent in advance;

upon receipt of payment :

Dr. Rent Expense 12,000
Cr. Cash 12,000

(after 1 mo.) :

Dr. Prepaid Rent 8,000

Cr. Rent Expense 8,000
EXPENSE METHOD
Deferral of income:

1. Income method – when an income

account is credited at the time the
money is received
2. Liability method – hen a liability
account is credited at the time the
money is received
On December 1, 2007, Mr. Reyes received 3,000 as his advance
commission for the month of December. Only 2,000 has been
earned

upon receipt of payment :

Dr. Cash 3,000
Cr. Commission Income 3,000

Adjusting entry:

Dr. Commission Income 1,000

Cr. Unearned commission income 1,000

INCOME METHOD
On December 1, 2007, Mr. Reyes received 3,000 as
his advance commission for the month of December.
Only 2,000 has been earned

upon receipt of payment :

Dr. Cash 3,000
Cr. Unearned Commission 3,000

Adjusting entry:

Dr. Unearned Commission Income 1,000

Cr. Commission income 1,000
LIABILITY METHOD
Thank you