Adjusting Entries

Adjusting Entries
• It brings records or balances up-to-date
• Prepared at the end of the accounting period
 Adjusting Entries
• Accruals
• Deferrals
• Depreciation
• Provision for Bad Debts
 Accruals
• Accrued Income
• Accrued Expense
 Accruals
• Accrued Income
• Earned but not yet collected
• Treated as asset since there is a receivable
 Accruals
• Accrued Expense
• Incurred but not yet paid
• Treated as liability since there is a payable
 Accrued Income
Developers Inc. owns a property that rents out hotels at a monthly rate of P500,000 payable every 5 th of
the following month. The rental for December 2020 will be received in January 5, 2021. Assume that
Dec. 31, 2020 is the end of the accounting period.

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Accrued Rent Income 500,000
Rent Income 500,000
 Accrued Income
Interest on notes receivable in the amount of P51,000 have accrued on
December 31.

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Accrued Interest Receivable 51,000
Interest Income 51,000
 Accrued Expense
Metro Hotels rent on a property at a monthly rate of P500,000 payable every 5 th of the following month.
The rental for December 2020 will be paid on January 5, 2021. End of the period is Dec. 31, 2020.

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Rent Expense 500,000
Accrued Rent Expense 500,000
 Accrued Expense
Interest on notes payable in the amount of P51,000 have accrued
on December 31.
DATE PARTICULARS DEBIT CREDIT
Dec. 31 Interest Expense 51,000
Accrued Interest Expense 51,000
 Deferrals
• Prepaids (or pre-payments)
• Pre-collections
 Prepaids
• Already paid but not yet incurred
• Either expense method or asset method

Original entry is a Original entry is a

record to an record to an ASSET
EXPENSE
 Prepaids
On September 1, 2020, AVN Commercial paid an insurance premium covering the
period from Sep. 1, 2020 – Sep. 1, 2021 amounting to P3,600. Accounting period ends
on Dec. 31, 2020.
Expense Method
DATE PARTICULARS DEBIT CREDIT
Sep. 1 Insurance Expense 3,600
Cash 3,600

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Prepaid Insurance 2,400
Insurance Expense 2,400
 Prepaids
On September 1, 2020, AVN Commercial paid an insurance premium covering the
period from Sep. 1, 2020 – Sep. 1, 2021 amounting to P3,600. Accounting period ends
on Dec. 31, 2020.
Asset Method
DATE PARTICULARS DEBIT CREDIT
Sep. 1 Prepaid Insurance 3,600
Cash 3,600

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Insurance Expense 1,200
Prepaid Insurance 1,200
 Expense Method
DATE PARTICULARS DEBIT CREDIT
Sep. 1 Insurance Expense 3,600
Cash 3,600

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Prepaid Insurance 2,400
Insurance Expense 2,400

Asset Method
DATE PARTICULARS DEBIT CREDIT
Sep. 1 Prepaid Insurance 3,600
Cash 3,600

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Insurance Expense 1,200
Prepaid Insurance 1,200
 Pre-collections
• Already collected but not yet earned
• Either income method or liability method

Original entry is a Original entry is a

record to an record to a
INCOME LIABILITY
 Pre-collections
On October 1, 2020, TUP Realty Co. collected P12,000 from a tenant on advance
collection from building rental for one year. Accounting period ends on Dec. 31, 2020.

Income Method
DATE PARTICULARS DEBIT CREDIT
Oct. 1 Cash 12,000
Rent Income 12,000

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Rent Income 9,000
Unearned Rent Income 9,000
 Pre-collections
On October 1, 2020, TUP Realty Co. collected P12,000 from a tenant on advance
collection from building rental for one year. Accounting period ends on Dec. 31, 2020.

Liability Method
DATE PARTICULARS DEBIT CREDIT
Oct. 1 Cash 12,000
Unearned Rent Income 12,000

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Unearned Rent Income 3,000
Rent Income 3,000
 Income Method
DATE PARTICULARS DEBIT CREDIT
Oct. 1 Cash 12,000
Rent Income 12,000

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Rent Income 9,000
Unearned Rent Income 9,000

Liability Method
DATE PARTICULARS DEBIT CREDIT
Oct. 1 Cash 12,000
Unearned Rent Income 12,000

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Unearned Rent Income 3,000
Rent Income 3,000
 Depreciation
• Straight-line Method:
 
 Depreciation
A business acquired an office equipment for P80,000 in Oct. 1, 2020. Freight paid was P1,500 and
installation cost P500. The estimated useful life is 5 years with a residual value of P10,000.

  ( 80,000+1,500+500) −10,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛=
5 𝑦𝑒𝑎𝑟𝑠
  82,000 −10,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛=
5 𝑦𝑒𝑎𝑟𝑠
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛=14,400
𝑀𝑜𝑛𝑡h𝑙𝑦 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛=1,200
 Depreciation
A business acquired an office equipment for P80,000 in Oct. 1, 2020. Freight paid was P1,500 and
installation cost P500. The estimated useful life is 5 years with a residual value of P10,000.

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Depreciation Expense 3,600
Accrued Depreciation – O.E. 3,600
 Provision for Bad Debts
A business has outstanding accounts receivable from various customers amounting to P20,000. At the
end of it accounting period, it is estimated that 5% of the accounts receivable is doubtful of collection.

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Doubtful Accounts 1,000
Allowance for Doubtful Accounts 1,000
Adjustments on Inventories
Adjustments on Inventories
• They are done on perpetual inventory system

• When inventory balance does not conform to the

physical inventory count.
Inventory Balance: P50,000

Physical Inventory Count: P30,000

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Cost of Sales 20,000
Merchandise Inventory 20,000
Inventory Balance: P50,000

Physical Inventory Count: P85,000

DATE PARTICULARS DEBIT CREDIT

Dec. 31 Merchandise Inventory 35,000
Cost of Sales 35,000
Reversing Entries
 Reversing Entries
• Accruals
• Accrued Income
• Accrued Expense
• Deferrals
• Prepaids (Expense Method)
• Pre-collections (Income Method)
 Reversing Entries
Accrued Income
DATE PARTICULARS DEBIT CREDIT
Dec. 31 Accrued Rent Income 500,000
Rent Income 500,000

DATE PARTICULARS DEBIT CREDIT

Jan. 1 Rent Income 500,000
Accrued Rent Income 500,000
 Reversing Entries
Accrued Expense
DATE PARTICULARS DEBIT CREDIT
Dec. 31 Interest Expense 51,000
Accrued Interest Expense 51,000

DATE PARTICULARS DEBIT CREDIT

Jan. 1 Accrued Interest Expense 51,000
Interest Expense 51,000
 Reversing Entries
Prepaids (Expense Method)
DATE PARTICULARS DEBIT CREDIT
Dec. 31 Prepaid Insurance 2,400
Insurance Expense 2,400

DATE PARTICULARS DEBIT CREDIT

Jan. 1 Insurance Expense 2,400
Prepaid Insurance 2,400
 Reversing Entries
Pre-collections (Income Method)
DATE PARTICULARS DEBIT CREDIT
Dec. 31 Rent Income 9,000
Unearned Rent Income 9,000

DATE PARTICULARS DEBIT CREDIT

Jan. 1 Unearned Rent Income 9,000
Rent Income 9,000
 TIPS ON IDENTIFYING METHODS
1. Methods are dependent on the original entries.

2. The account that has been deducted during adjusting is the method
used.

3. If a Preliminary Trial Balance is given, the account that has a balance

signifies the method used.