FUNDAMENTALS OF

ACCOUNTING
Chapter 5
Adjusting Journal Entries
 TRIAL BALANCE

• A list of accounts found in the ledger

together with the account's balance or total.
• A proof that for every debit, there is
corresponding credit.
• A proof that ledger is in balance.
 Steps in the preparation of the trial balance
1. In their proper numerical order, make a listing of all account titles.
2. Get the account balance of each ledger account and write them
under their corresponding debit or credit column.
3. Foot or add the debit and the credit columns of the trial balance.
4. Check whether the debit totals and credit totals are equal. They
must be equal, otherwise the trial balance has error.
 Possible errors in the trial balance

Transposition – occurs when order of two numbers are reversed.

Ex. 48 was erroneously entered as 84
450 was erroneously posted as P540
1234 was erroneously written as 4321

Transplacement or Slide – occurs when a decimal point has been moved or

misplaced.
Ex. 100 was erroneously entered as 10
450 was erroneously posted as 45
67.89 was erroneously written as 678.9
 Niko Ong Art Gallery
Trial Balance
September 30, 2014
ACCOUNT TITLE ACCOUNT CODE DEBIT CREDIT
Cash 110 840,500
Accounts Receivable 120 50,000
Art Supplies 130 12,000
Prepaid Rent 140 30,000
Prepaid Insurance 150 18,000
Transportation Equipment 160 300,000
Office Equipment 170 50,000
Accounts Payable 210 37,000
Notes Payable 220 200,000
Utilities Payable 240 900
Unearned Painting Revenue 260 250,000
Ong, Capital 310 500,000
Ong, Drawing 320 30,000
Painting Revenue 410 350,000
Salaries Expense 510 2,500
Utilities Expense 550 4,900
1,337,900 1,337,900
 ADJUSTING JOURNAL ENTRIES
• Adjusting entries are prepared at the end of the
accounting period to update the accounts for
internal transactions because they affect more
than one accounting period.
• This will record the accruals, expiration of
deferrals, estimation, and other events from the
worksheet.
 Accounts Subjected to Adjustments
PREPAYMENTS UNEARNED ACCRUED ACCRUED BAD DEPRECIATION
OR DEFERRED EXPENSES INCOME DEBTS/DOUBTFUL EXPENSE
INCOME ACCOUNTS
Allocation of
Expenses Income Expenses Income already Losses due to plant asset cost
already paid already already earned but not uncollectible over its
but not yet received but incurred or yet received. accounts. estimated useful
incurred or not yet used, but not life.
used. earned. yet paid.
Expense allotted
for wear and
tear of PPE due
to passage of
time.
I. Prepayments
(expenses already paid but not yet incurred or used)

Asset Method
Journal Entry upon payment:
Prepaid Expense xxx
Cash xxx

Adjusting Journal Entry at the end of the accounting period:

Expense xxx
Prepaid Expense xxx

Note: The amount on the adjusting journal entry represents the expired or used portion of the prepayment.
Example 1
On October 1, 2014, X Company paid one-year advance rent for P24,000. Give
the Adjusting Journal Entry on December 31, 2014.

Journal Entry upon payment on Oct. 1, 2014

Prepaid Rent 24,000
Cash 24,000
Paid one-year rent in advance

Adjusting Journal Entry at the end of the accounting period Dec. 31, 2014
Rent Expense 6,000
Prepaid Rent 6,000
To record the expired rent for the year
Computation:
The P24,000 rent represents one year or 12 months rent. Divide P24,000 by 12 to
get the monthly rent. Multiply it by 3 months representing the rent from Oct. 1 to
Dec. 31, 2014.
P24,000/12 x 3 = P6,000
P6,000 is therefore the expired/used rent from Oct. 1 to Dec. 31, 2014.

Analysis:
When you paid P24,000 for the one-year rent in advance on Oct. 1, you debited the
asset account Prepaid Rent representing 12 months rent. On December 31, at the
end of the accounting period, the P24,000 Prepaid Rent is not totally asset since it
includes the 3 months expired or used portion (Oct. 1 to Dec. 31). Hence, an
adjusting entry is necessary to recognize the rent expense for 3 months by debiting
it and decreasing the balance of prepaid rent by crediting it.
Example 2
On March 31, 2014, B Company paid P72,000 insurance premium for 2
years. Give the Adjusting Journal Entry on May 31, 2014.

Journal Entry upon payment on March 31, 2014

Prepaid Insurance 72,000
Cash 72,000
Paid two-year insurance premium in advance

Adjusting Journal Entry on May 31, 2014

Insurance Expense 6,000
Prepaid Insurance 6,000
To record the expired insurance for the year
Computation:
The P72,000 premium represents 2 years or 24 months premium. Divide P72,000
by 24 to get the monthly premium then multiply it by 2 to get the used months
from Mar. 31 to May 31, 2014.
P72,000 / 24 x 2 = P6,000
Expired insurance premium, therefore to be charged to expense is P6,000
representing to 2 months from Mar. 31 to May 31, 2014.

Analysis:
When you paid P72,000 for the two-year insurance on Mar. 31, 2014, you debited
the asset account Prepaid Insurance representing 24 months insurance. On May
31, 2014 which is the end of the accounting period, the P72,000 Prepaid Insurance
is not totally an asset since it includes the 2 months expired or used portion (Mar.
31 to May 31). Hence, an adjusting entry is necessary to recognize the insurance
expense for 2 months by debiting it and decreasing the balance of prepaid
insurance by crediting it.
Example 3
Supplies account on January 1, 2014, showed a balance of P7,000. On
December 31, 2014, supplies on hand amounted to P2,000.

Adjusting Journal Entry on December 31, 2014

Supplies Expense 5,000
Supplies 5,000
To record supplies used for the year
Computation:
Supplies at the beginning of the year is P7,000. At the end of the year,
the remaining balance is P2,000. The difference represents the supplies
used during the year. Subtract P2,000 from P7,000 to get the supplies
used during the year.
P7,000 - P2,000 = P5,000
Analysis:
On January 1, 2014, the asset account Supplies has a balance of P7,000.
Since at the end of the year, the balance of the asset account Supplies
decreased to P2,000, the difference represents the supplies used during
the year. You will have to recognize the used supplies as an expense by
debiting supplies expense and decrease the asset account Supplies by
crediting it.
Example 4
Supplies account showed a balance of P12,000. Supplies used during
the year amounted to P4,000. Give the Adjusting Journal Entry on Dec.
31, 2014.

Adjusting Journal entry on Dec. 31, 2014

Supplies Expense 4,000
Supplies 4,000
To record supplies used for the year
Computation:
There is no computation necessary because the P4,000
supplies used during the year was already given in the
problem.

Analysis:
The asset account Supplies showed a balance of P12,000 at
the beginning of the year. Supplies used during the year
amounted to P4,000. This should be recorded as expense by
debiting supplies expense and crediting the asset account
Supplies to decrease its balance.
II. Unearned or Deferred Income
(income already received but not yet earned)

Liability Method
Journal Entry upon receipt of cash:
Cash xxx
Unearned Income xxx

Adjusting Journal Entry at the end of the accounting period:

Unearned Income xxx
Income xxx

Note: The amount on the adjusting journal entry is the earned portion of the amount initially received.
Example 1
On November 30, 2014, A Company received P36,000 advance rental for 6
months. Give the Adjusting Journal Entry on December 31, 2014.

Journal Entry upon receipt of cash on Nov. 30, 2014

Cash 36,000
Unearned Rent Income 36,000
Received 6 months rent in advance

Adjusting Journal Entry on Dec. 31, 2014

Unearned Rent Income 6,000
Rent Income 6,000
To record rent earned for the year
Computation:
The P36,000 cash you received represents six months rent. Divide P36,000 by 6 to get
the monthly rent then multiply it by 1 month representing the rent from Nov. 30 to
Dec. 31, 2014.
P36,000/6 x 1 = P6,000
P6,000 is therefore the rent income from Nov. 30 to Dec. 31, 2014

Analysis:
When you received P36,000 for the six months rent paid to you in advance on
November 30, you debited cash and credited the liability account Unearned Rent
Income for 6 months rent. On December 31, which is the end of the accounting
period, the P36,000 Unearned Rent Income is not totally a liability account since it
now includes the 1-month earned rent (November 30 to December 31). Hence, an
adjusting entry is necessary to recognize the earned portion of the initially recorded
Unearned Rent Income by crediting Rent Income and debiting Unearned Rent Income
to decrease the liability.
Example 2
On May 1, Dr. Young received P60,000 for medical fees to be rendered in the
next 3 months. Give the Adjusting Journal Entry at the end of May.

Journal Entry upon receipt of cash on May 1

Cash 60,000
Unearned Medical Fees 60,000
Received cash for medical services to be rendered

Adjusting Journal Entry on May 31

Unearned Medical Fees 20,000
Medical Fees 20,000
To record medical fees earned
Computation:
The P60,000 cash received represents 3-month medical services to be rendered.
Divide P60,000 by 3 to get the monthly medical fee.
P60,000/3 = P20,000
P20,000 is therefore the medical fees earned from May 1 to May 31, 2014.

Analysis:
When the P60,000 was received on May 1 for the 3-month medical services paid in
advance, cash was debited and the liability account Unearned Medical Fees was
credited representing 3 months unearned fees. On May 31, the end of the month,
the P60,000 Unearned Medical Fees is not totally a liability account since it includes
the 1-month medical fees earned (May 1 to May 31). Hence, an adjusting entry is
necessary to recognize the earned portion of the initially recorded Unearned
Medical Fees by crediting Medical Fees and debiting Unearned Medical Fees to
decrease the liability.
III. Accrued Expenses
(expenses already incurred or used, but not yet paid)

Adjusting Journal Entry at the end of the accounting period:

Expenses xxx
Expenses Payable xxx
To record unpaid expenses.
Example 1
Unpaid salaries at the end of December 31, 2014 amounted to P20,000.

Adjusting Journal Entry on December 31, 2014

Salaries Expenses 20,000

Salaries Payable 20,000
To record unpaid salaries at year end

Analysis:
This is a liability on the part of the company because the employees have already
worked for this but the company has not paid their salaries. Hence, a liability on the
part of the company should be recognized at the end of the accounting period.
Example 2
The company received a telephone bill in the amount of P1,200 on December 29, 2014
which the company intends to pay on January 5, 2015.

Adjusting Journal Entry on December 31, 2014

Utilities Expense 1,200

Utilities Payable 1,200
To record unpaid utilities for the month

Analysis:
This is a liability on the part of the company because the telephone bill is for the month of
December but the company has not yet paid for it. Hence, a liability on the part of the
company should be recognized at the end of the accounting period.
III. Accrued Income
(income already earned, but not yet received)

Adjusting Journal Entry at the end of the accounting period:

Income Receivable xxx

Income xxx
To record income earned
Example
A one-year 10% note receivable in the amount of P100,000 was received on
January 1, 2014. The interest and the principal are payable on maturity date. Give
the Adjusting Journal Entry on June 30, 2014.

Adjusting Journal Entry on June 30, 2014

Interest Receivable 5,000

Interest Income 5,000
To record interest income earned
Computation:
Interest = Principal x Rate x Time
= P100,000 x 10% a year x ½ year
= P100,000 x .10 x 1/2
= P5,000

Analysis:
The note receivable bears interest at 10% per annum. This interest will be received
after one year on January 1, 2015. However, the note has already earned a half-
year interest on June 30, 2014 in the amount of P5,000 although this interest has
not yet been received. Hence, adjusting journal entry is necessary to recognize the
interest earned on the notes receivable for 6 months that is, from January 1 to June
30, 2014.
IV. Bad Debts/Doubtful Accounts
(losses due to uncollectible accounts)

Adjusting Journal Entry at the end of the accounting period:

Bad Debts Expense xxx

Allowance for Bad Debts xxx
To record estimated uncollectible accounts
Example 1
Accounts Receivable shows a balance of P50,000. It is estimated that 10% of this is
uncollectible. Give the Adjusting Journal Entry on December 31, 2014 for the
provision of the estimated uncollectible account.

Adjusting Journal Entry on December 31, 2014

Bad Debts Expense 5,000

Allowance for Bad Debts 5,000
To record estimated uncollectible accounts

Computation:
P50,000 x 10% = P5,000
Example 2
Accounts Receivable shows a balance of P50,000. It is estimated that 10% of this is
uncollectible. Allowance for Bad Debts per general ledger has a balance of P3,000. Give
the Adjusting Journal Entry on December 31, 2014 for the provision of the estimated
uncollectible account.

Adjusting Journal Entry on December 31, 2014

Bad Debts Expense 2,000

Allowance for Bad Debts 2,000
To record estimated uncollectible accounts
Note:
The required allowance for doubtful accounts is P5,000 (P50,000 x 10%). However, per
general ledger, the allowance for doubtful accounts already shows a balance of P3,000. An
adjusting journal entry to bring the balance of the allowance for doubtful accounts to the
required balance of P5,000 is necessary.
VI. Depreciation Expense
(expense allotted for the wear and tear of PPE due to passage of time)

Adjusting Journal Entry at the end of the accounting period:

Depreciation Expense xxx

Accumulated Depreciation xxx
To record depreciation expense
 Three factors to consider in computing the depreciation expense

1. Cost – purchase price of the depreciable asset.

2. Salvage Value – estimated value of the asset at
the end of its useful life.
3. Estimated Useful Life – estimation of the
number of years an asset can be useful to the
entity (as the name connotes, it is not an exact
measurement)
Formula for computing annual depreciation

Cost Pxxx
Less: Salvage Value xxx
Depreciable Cost Pxxx
Divided by: Estimated Useful Life xxx
Annual Depreciation Pxxx
 The process of recording depreciation does not
directly charge depreciation to the asset account. The
charge is recorded in a contra-asset account called
accumulated depreciation.

The use of this account allows the original cost of

the asset and the related accumulated depreciation
account to be shown in the balance sheet. The balance
of the Accumulated Depreciation is deducted from the
cost of the asset to get the carrying value of the asset.
Example
A building with an estimated useful life of 20 years finished construction on April 1,
2014. The cost of the building is 2.6 million with an estimated salvage value of
P200,000. Give the Adjusting Journal Entry on December 31, 2014 to record the
depreciation of the building.

Adjusting Journal Entry on December 31, 2014

Depreciation Expense 90,000

Accumulated Depreciation 90,000
To record depreciation expense for the building
Computation:
Cost P2,600,000
Less: Salvage Value 200,000
Depreciable Cost P2,400,000
Divided by: Estimated Useful Life 20 years
Annual Depreciation P120,000

Take note that what we have gotten is the annual depreciation. Since the building
was completed on April 1, we will have to apportion the annual depreciation of
P120,000 by dividing it by 12 to get the monthly depreciation then multiplying it by
9 months representing the depreciation of the building from April 1 to December
31, 2014.
P120,000/12 x 9 months = P90,000
 REVERSING JOURNAL ENTRIES
• Reversing entries are prepared to simplify the
accounting process.
• The adjusting entries is simply reversed on the first
day of accounting period.
• Not all adjusting entries are reversed, only accruals
and deferrals that use the nominal accounts.
END OF CHAPTER