ADJUSTING

ENTRIES
MARISOL P. BAGONOC
CONTENTS
OBJECTIVES
Relate the concept of accrual method
of accounting to accruals & deferrals

Describe the pro-forma

adjusting entries of accrued
income & accrued expense

Discuss the concept of writing

off worthless accounts
receivables.
 Accrued Income
• an income that is already earned but not yet
received.
1. Accounts receivable
2. Rent receivable
Enter
3. Interest title
receivable
4. Commission receivable
 Ex. A company is authorized to sell products w/ a 12%
commission. Sales made in December total P100 000 & the
company has not received yet its commission.

2019 Explanation Debit Credit

Dec 31
Commission receivable P12000
Commission P12 000
income
recognition of
accrued commission
 Accrued Expense
• an expense that is already
incurred but not yet paid.
• 1. Commission payable
• 2. rent payable
• 3. Salaries & wages
• 4. Taxes & license
• 5. Utilities
• 6. Interest
 Ex. Munich Co. has an outstanding loan w/ Swiss
Bank worth P1M. An interest of P20 000 from the date
of the loan until Dec. 31 has not yet been recorded.
2019 Explanation Debit Credit
Dec 31 Interest expense P20 000
Interest payable P 20 000
recognition of
Accrued interest
• A business has one store clerk w/ a daily salary of P500 working from
Monday-Friday. The clerk is paid every Friday. December 30 & 31 are
considered public holidays. Dec 31 falls on Thursday.

2019 Explanation PR Dr Cr
Dec Salary expense 50 P1500
31 salary payable 1 P1500
recognition of
accrued salary
Exercises:
1. An office space has been leased to Texas Company for P5,000 per
month beginning Sept. 1, 2016. No payment has yet been received for
the month of November and December.

2. A bill to a client for service rendered in December remains unrecorded.

The amount is P20,000.

3. ABZ Company is authorized to sell products on a 10% commission

basis. December sales amounted to P100,000. No entry has yet been
made to record the commission.
Exercises: (ANSWER)
Rent Receivable P10,000
1. Rent Income P10,000
Recognition of Accrued Rent income

Accounts Receivable P20,000

2. Service Income P20,000
Recognition of Accrued Income

Commission Receivable P10,000

3. Commission Income P10,000

Recognition of Accrued Commission
 Prepaid Expense- the asset paid in
advance but not yet consumed.
• Asset Method
• Ex. On March 15, 2016 Smith Agency purchased office
supplies P100 000. At the end of the year record
shows that 25% worth of supplies have been used.
• Mar 15Office Supplies P100 000
• Cash P100 000
• purchased of prepaid item
 Adjusting Entry
Date Particulars PR Dr Cr
2019 Office supplies expense 502 P25 000
Dec 31
Office supplies P25 000
adjustment to
prepaid supplies
 Expense Method
Date Particulars PR Dr Cr
2019 Office supplies expense 502 P100 000
March 15 Cash P100 000
purchased of prepaid
item

ADJUSTING ENTRY
Dec 31 Office supply 75 000
Office supply expense 75 000
adjustment to supply
expense
 Exercises: Accrued
income/expense
• Prepare the necessary adjusting entries for Dec 31,
2019.
1. A bill to a client for service rendered on Dec.
remains unrecorded. The services were determined
to be worth P10 000.
2. A company is authorized to sell products on a 12%
commission basis. December sales amounted to be
worth P10 000.
3. Utility bills amounting to P7000
remained unpaid as of Dec 31.
4. Salaries earned by store clerks
amounting to P4000 remain unpaid as
of Dec. 31.
5. Unpaid property taxes for the last
quarter P14 000.
 Answer
1. Accounts receivable P10 000
Service income P10 000
recognition of accrued income

2. Commission receivable P1 200

Commission income P1200
recognition of accrued commission
 Cont.
• 3. Utility expense P7000
Utility payable P7000
recognition of accrued utility

4. Salary expense P4000

salary payable P4000
recognition of accrued
salary
Cont.

5. Tax expense P14 000

Tax payable P14 000
recognition of accrued tax
 IW: Prepaid expense
• Prepare an adjusting entry on Dec 31, 2019
1. Paid 30 months newspaper subscription for P15 000 on
Sept 2019. Use the Asset method
2. Paid 5 years insurance premium. the monthly premium is
P1045.
3. Paid P5 600 for office supplies. 40% of the stock was used
as of Dec 31. Use Asset method
Answer:
1.Newspaper expense P1500
Newspaper P1500
adjustment to newspaper expense
2. Prepaid Insurance 62,700
cash 62,700 adjustment
to insurance expense
 Cont.

3. Office supplies expense 2240

Office supplies 2240
adjustment to supplies expense
 UNEARNED INCOME
• Refers to cash that is received in advance but not yet
earned. Ex. an advance deposit for a birthday party
in a restaurant.
• LIABILITY METHOD
• Ex. Oct. 1, 2015 Maslow Co. received from a tenant
an advance rent payment of P200 000 representing
10 months rent.
• Cash P200,000
• Unearned rent P200,000

• Adjusting entry
• Dec. 31, 2015 Unearned rent P60 000
Rent income P60 000
adjustment to advance rent
(200 000/10 mos=20 000x 3 mos)
 Income Method
Cash P200,000
• Unearned rent income P200,000
Adjusting:
Dec. 31 Rent income P140 000
Unearned rent P140 000
adjustment to rent income
•Accruals- the accrued income &
accrued expense transactions.
•Deferrals- the prepaid expense &
unearned income transactions.
 Exercises:
Prepare an adjusting entries on Dec. 31, 2019
1. Received P60 000 from a tenant on October 1 as an
advance payment for two years rent. Use liability method
2. Received P4500 on April 1 as one-year advance payment
of magazine subscription . Magazines are to be delivered on
a monthly basis. Use Liability method
3. Received P27000 on August 1 as eighteen months advance
payment of advertising from a customer. Liability method
 Answer
1. Dec 31 Unearned rent P 7500
rent income P7500
adjustment to unearned rent
(60 000/24mos=2500x3mos=7500)
 Cont.

• 2. Dec. 31 Unearned subscription P3 375

Subscription income P3 375
adjustment to unearned
subscription
(4500/12mos=375x9mos=3 375)
 Cont.

• 3. Dec. 31 Unearned advertising P7500

advertising income P7500
adjustment to unearned advertising
(P27000/18mos=1500x5mos=7500)
 Depreciation
•the systematic allocation of the
depreciable cost of an asset over its
useful life. the decrease in value of an
asset.
 2 Kinds of Depreciation
• 1. Physical depreciation- caused by wear & tear, forces of
nature, etc.
• 2. Functional depreciation- caused by an obsolescense of an
asset.
• Straight Line Method
• Depreciation= Cost- scrap value
Estimated Useful life
 Example:
• Purchased an equipment on Jan 1 2016 w/ a
cost of P50 000 and has an estimated useful
life of 5 years.
• Dep.= P50 000
• 5yrs
• = P10 000
 Scrap value/salvage
value/residual value
• = the estimated selling price of the asset at
the end of its useful life.
• Ex. if the asset is purchased on August 15
w/ a cost of P50 000, no scrap value, EUL is
5 years.
• (50 000/5yrs=10 000 x 4.5/12=P3750)
•Depreciation rate= 100%
Estimated useful life
=1.00
5
= 20%
Example:
• Berry Co. purchased an office equipment on Jan. 1, 2019 for
P105 000 w/ a salvage value of P5000 at the end of its
useful life of 5 years.
Dep.= P105 000-5000
5yrs
= P20 000
Dec. 31 Depreciation-office equipment P20 000
Accumulated depreciation P20000
depreciation for the year
 Doubtful Accounts Expense
• =also known as past due accounts, an
uncollected accounts at the end of the year.
• Dec 31 Doubtful accounts P
• Allowance for doubtful accounts P
Writing Off of the worthless
accounts receivable
•= removal of customer accounts from the
books
•Date Allowance for doubtful accounts
•Accounts receivable
 Recovery of previously written-
off accounts receivable
• Date Accounts receivable
Allowance for doubtful accounts
THANK YOU