L4: Adjustments

Accounting for Service and

Merchandising Entities
ACC11

PREPARED BY:
[INSTRUCTOR’S NAME]

Module No. 1 SCHOOL NAME

 LEARNING OBJECTIVES

⚫ Introduction of the Adjusting journal entries

⚫ Understanding the Impact of Time period in
making adjusting journal entries

⚫ Summary of accounts adjusted at the end of the

accounting period

⚫ Prepayments
⚫ Doubtful Accounts

Module No. 1 Title of Your Presentation

 Introduction of the Adjusting journal entries

Adjusting journal entries are journal entries made at the end of the reporting
period.

The main purposes of adjusting journal entries is to update the elements of the
financial statements, primarily to adjust real (assets, liabilities, capital) and
nominal accounts (income and expenses).

Adjusting journal entries consist of one real and one nominal account.

Adjusting journal entries are still recorded at the General Journal, just below
the initial journal entries made within the reporting period.
 Impact of Time Period in Adjusting journal entries

Time Periods:

1. Monthly
2. Quarterly (3 months)
3. Semi-annually (6 months)
4. Yearly/ Annually (12 months)

Adjustments are very sensitive to the time periods. It

reflects the covered time of the financial statements to be
prepared.

Module No. 1 Title of Your Presentation

Summary of accounts adjusted at the end of the accounting period

1. Prepayments 3. Deferred revenues

a. Asset method a. Liability method
b. Expense method b. Income method

2. Doubtful Accounts 4. Depreciation

a. Based on accounts receivable
b. Based on credit service 5. Accruals
revenue/ credit sales - Accrued income
-Accrued expense
 What are Prepaid expenses?

Prepaid expenses are costs that are advance payment for future
expenses. Common examples are:

Supplies

Prepaid rent

Prepaid insurance

Prepaid advertising
Prepayments: The company bought an insurance policy covering 1 –year on
January 1, 2020 worth P24,000 . What would be the adjusting journal entry at the
end of the month?
ASSET method EXPENSE method
Initial entry: Initial entry:
1/1 Prepaid insurance 24,000 1/1 Insurance expense 24,000
Cash 24,000 Cash 24,000

Adjusting journal entry: Adjusting journal entry:

1/31 Insurance expense 2,000 1/31 Prepaid insurance 22,000

Prepaid insurance 2,000 Insurance expense 22,000
 Doubtful Accounts

The basic adjusting journal entry at the end of the accounting period is:

Doubtful accounts xx
Allowance for doubtful accounts xx

How to compute doubtful accounts:

(a) Based on accounts receivable

Default risk rate x accounts receivable = Allowance for doubtful accounts

(b) Based on credit service revenue

Default risk rate x credit service revenue = Doubtful accounts
Doubtful accounts: Based on accounts receivable

The company has accounts receivable of P80,000 at the end of January,

2020.

At the end of the month, 5% of accounts receivable are doubtful of

collection.

Adjusting journal entry:

1/31 Doubtful accounts 4,000

Allowance for doubtful accounts 4,000
Doubtful accounts: Based on accounts receivable

The company has accounts receivable of P80,000 and allowance for doubtful
accounts of P2,800 at the end of January, 2020.

At the end of the month, 5% of accounts receivable are doubtful of collection. (.05 x P8,000 =
P4,000, the required allowance for doubtful accounts).

Required allowance of P4,000 less the existing balance of P2,800 = P1,200 needed adjustment
or increase in allowance for doubtful accounts.

Adjusting journal entry:

1/31 Doubtful accounts 1,200

Allowance for doubtful accounts 1,200
Doubtful accounts: Based on Credit service revenue

The company has credit service revenue of P300,000 at the end of

January, 2020.

At the end of the month, 2% of credit service revenue are doubtful of

collection.

Adjusting journal entry:

1/31 Doubtful accounts 6,000

Allowance for doubtful accounts 6,000
 Doubtful accounts: Based on Credit service revenue

The company has the following balances at the end of January, 2020: credit
service revenue – P300,000, accounts receivable –P80,000, allowance for
doubtful accounts – P2,800.

At the end of the month, 2% of credit service revenue are doubtful of collection.

Adjusting journal entry:

1/31 Doubtful accounts 6,000

Allowance for doubtful accounts 6,000