Preparing

Adjusting
Entries
Maria Clarissa Agustin-Marcelo, LPT,MaEd
you are expected to learn how to:

• prepare adjusting
entries
(ABM_FABM11-IV-
a-d-33)
• At the end of the accounting period, some
accounts in the general ledger would require
updating.
• The journal entries that bring the accounts
up to date are called adjusting entries.
• One purpose of adjusting entries is for
income and expenses to be reported in the
correct period.
Prepare the adjusting entry for the
following:

• 1. For the month of September 2017

Mecca Company’s book of accounts shows
a debit balance on its Office Supplies
account the amount of P1,500. At the
end of the month the total office supplies
on hand amounts to P500. Record the
necessary adjusting entry for the month.
2. In December 1, 2016. XYZ
company paid for a one-year
insurance in the amount of P12,000.
It was recorded as debit to Prepaid
Insurance and credit to cash. Record
the necessary adjusting entry for the
month.
3. Donna issued a promissory
amounting to P100,000. 10%
interest on an annual basis.
Assuming that every month Donna
records all interest on the note.
Prepare the adjusting journal entry
for the month of January 2017.
Prepare the trial balance of Mabait Computer
Repairs. Given are the normal account balance as at
April 30, 2017
501 Salaries Expense 4,000
101 Cash 181,000
102 Accounts Receivable 15,000
401 Service Revenue. 25,000
301 Mabait, Capital 200,000
502 Supplies Expense 5,000
103 Equipment 25,000
201 Accounts Payable 5,000
Adjusting entries make it possible to
report correct amounts on the statement
of financial position and on the income
statement. All adjusting entries affect at
least one income statement account and
one statement of financial position
account.
What is an adjusting entry?
• are journal entries that are prepared in order
to generate correct data at the end of the
accounting period.
• These are then recorded in the general
journal and posted to the ledger accounts so
that information in the ledger accounts will
then be brought to correct balances.
• Are done to be able to depict sensible financial
statements.
ADJUSTING ENTRY FOR DEPRECIATION
When an entity acquired long-lived assets
such as buildings, service vehicles,
computers or office furniture, it is basically
buying or prepaying for the usefulness of
that asset.
Therefore, a portion of the cost of the
asset should be recorded as expense in
each accounting period.
1. ASSET COST is the amount an entity
paid to acquire the depreciable asset.
2. ESTIMATED SALVAGE VALUE is the
amount that the asset can be probably
sold for at the end of its estimated
useful life.
3. ESTIMATED USEFUL LIFE is the
number of periods that an entity can
make use of the asset.
STRAIGHT-LINE METHOD
COMPUTATION FOR DEPRECIATION
DERECIATION EXPENSE FOR EACH
TIME PERIOD=
(ASSET COST LESS ESTIMATED
SALVAGE VALUE DIVIDED BY
ESTIMATED USEFUL LIFE)
Depreciation Expense is the account
title used to record the amount of
devaluation of a property in an
accounting period.
Accumulated Depreciation is a contra-
asset account used in recording the
amount of depreciation of an asset.
ADJUSTING ENTRY FOR BAD DEBTS
EXPENSE OR DOUBTFUL ACCOUNTS
EXPENSE
Businesses may allow some of their customers to
purchase goods and acquire services on credit.
As some business owners’ experiences, some of
their customers did not pay their obligations.
Therefore, to recognize those accounts which are
doubtful, accountants recognized it as expense.
Accountants estimates the percentage of
receivables which may be considered doubtful.
 Using the percentage of the revenue in
provisioning the allowance for doubtful accounts.
JOURNAL ENTRY
Date Account Title & Explanation Debit Credit

xxx Bad Debts Expense Pxxxx

Allowance for Bad Debts Pxxxx
to record provision for
doubtful accounts
Doubtful Accounts Expense or Bad Debts
Expense refers to the amount of accounts
receivable that is estimated as uncollectible
and as recognized as expense in the current
accounting period.
Allowance for Doubtful Accounts or
Allowance for Bad Debts is a contra-asset
account used to record the amount of
doubtful accounts considered as a deduction
to the total accounts receivable.
ADJUSTING ENTRY FOR ACCRUALS
Under accrual accounting, the accountant
recognized income and expenses as they are
earned and incurred. The adjustments is
based on this principle.
ACCRUED REVENUE or Accrued Income
arises when the business renders services or
delivers goods to its clients, but collections
have not yet been received.
 JOURNAL ENTRY

Date Account Title & Explanation Debit Credit

xxx Receivable Account Pxxxx

Revenue Account Pxxxx

To record advance
receipt of revenue
ACCRUED EXPENSES arise when businesses
incur expenses but not yet paid. Examples
are salaries, taxes and interest.
Date Account Title & Explanation Debit Credit

xxx Expense Account Pxxxx

Payable Account Pxxxx

To record depreciation
ADJUSTMENTS FOR DEFFERALS
Deferral is the postponement of the
recognition of “an expense already paid but
not yet incurred” or of “revenue already
collected but not yet earned.
Deferred revenue of Unearned Revenue
refers to revenue already received but not
yet earned.
If the accountant used INCOME METHOD
the adjusting entry will be this way:
Date Account Title & Explanation Debit Credit

xxx Revenue Account Pxxxx

Liability Account Pxxxx

To record adjustments
for deferrals
The initial journal entry for INCOME METHOD
is:

Date Account Title & Explanation Debit Credit

xxx Cash Pxxxx

Revenue Account Pxxxx

To record adjustments
for deferrals
If the accountant used LIABILITY METHOD the
adjusting entry will be this way:

Date Account Title & Explanation Debit Credit

xxx Liability Account Pxxxx

Revenue Account Pxxxx

To record adjustments
for deferrals
The initial journal entry for LIABILITY
METHOD is:

Date Account Title & Explanation Debit Credit

xxx Cash Pxxxx

Liability Account Pxxxx

To record adjustments
for deferrals
ADJUSTMENTS FOR PREPAID EXPENSES
Prepaid Expense is an expense already paid for in advance but
not yet incurred. If the accountant used ASSET METHOD the
adjustments will be this way:
Date Account Title & Explanation Debit Credit

xxx Expense Account Pxxxx

Asset Account Pxxxx

To record adjustments
for prepayments
The initial journal entry is:

Date Account Title & Explanation Debit Credit

xxx Asset Account Pxxxx

Cash Pxxxx

To record supplies
bought
If the accountant used EXPENSE METHOD the
adjustment will be this way:

Date Account Title & Explanation Debit Credit

xxx Asset Account Pxxxx

Expense Account Pxxxx

To record adjustments
for prepayments
The initial journal entry is:

Date Account Title & Explanation Debit Credit

xxx Expense Account Pxxxx

Cash Pxxxx

To record supplies
bought
ADJUSTING ENTRY FOR DEPRECIATION
Case 1: Paid P160,000 cash to purchase a
delivery van (surplus) on Jan. 1. The van
was expected to have a 3 year life and a
P10,000 salvage value. Depreciation is
computed on a straight-line basis. Prepare
the adjusting entry for the year ended
December 31, 2016.
Date Account Title & Explanation Debit Credit

2016 Depreciation Expense-Service 50000

Dec 31
Vehicle
Accumulated Depreciation 50000
– Service Vehicle

To record depreciation
of service vehicle
Using the straight-line method in computing for
depreciation,
Asset Cost P160,000
Less: Estimated Salvage Value 10,000
Depreciable Cost 150,000
Divided by: Estimated Useful Life 3 years
Depreciation Expense for the Year P50,000
Case No. 2: Paid P160,000 cash to
purchase a delivery van (surplus) on Jan.
1. The van was expected to have a 3
year life and a P10,000 salvage value.
Depreciation is computed on a straight-
line basis. Prepare the adjusting entry
for the month ended January 31,
2016.
Date Account Title & Explanation Debit Credit

2016 Depreciation Expense- 4166.67

Dec 31
Service Vehicle
Accumulated 4166.67
Depreciation – Service Vehicle

To record
depreciation of service vehicle
ADJUSTING ENTRY FOR BAD DEBTS
EXPENSE OR DOUBTFUL ACCOUNTS
EXPENSE
Case No. 3: Based on experience 2% of the
outstanding Accounts Receivable amounting
to P2,000,000 of Orani Service Company is
considered doubtful. Record the adjusting
entry for uncollectible accounts for the year
ended December 31, 2019.
Date Account Title & Explanation Debit Credit

2016 Bad Debts Expense 40000

Dec 31
Allowance for Bad Debts 40000

To record allowance
for doubtful accounts
To compute for doubtful accounts:
Outstanding Accounts Receivable P2,000,000
Multiplied by percentage of allowance 2%
Amount of Doubtful Accounts P 40,000
ADJUSTING ENTRY FOR ACCRUALS
ACCRUED REVENUES
Case No. 5: RDS Laundry Services
rendered as a rush laundry services to a
client on June 30, 2019 amounting to
P35,000. The services have been earned
but unbilled.
Date Account Title & Explanation Debit Credit

2019 Accounts Receivable 35000

Jun
30
Laundry Income 35000

To record
accrual of unrecorded
revenues
Case No. 6: Invested P100,000 cash in
certificate of deposit that paid 5%
annual interest. The certificate was
acquired on January 1 and carried a 1-
year term to maturity. Prepare the
adjusting entry for the year ended
December 31, 2017.
Date Account Title & Explanation Debit Credit

2017 Interest Receivable 5000

Dec
31
Interest Income 5000

To record
accrual of unrecorded
revenues
The interest earned for the year is determined by
the following formula:
Interest = Principal x Interest Rate x Time Period
=P100,000 x 5% x 12/12 (12/12 = 1 year)
=P100,000 x .05 x 1
= P5,000
Case No. 7: Invested P100,000 cash in
certificate of deposit that paid 5%
annual interest. The certificate was
acquired on May 1 and carried a 1-
year term to maturity. Prepare the
adjusting entry for the year ended
December 31, 2017.
Date Account Title & Explanation Debit Credit

2017 Interest Receivable 3333.33

Dec
31
Interest Income 3333.33

To record
accrual of unrecorded
revenues
The interest earned for the year is
determined by the following formula:
Interest = Principal x Interest Rate x Time
Period
=P100,000 x 5% x 8/12
(8/12 =certificate was acquired May 1)
=P100,000 x .05 x 8/12
= P3,333.33
ACCRUED EXPENSES
Case No. 8: Borrowed P500,000 by
issuing a 1-year note with 10% annual
interest to Rural Bank of Limay on
October 1, 2016. Prepare the adjusting
entry for the year ended December 31,
2016.
Date Account Title & Explanation Debit Credit

2016 Interest Expense 3333.33

Dec
31
Interest Payable 3333.33

To record
accrual of unrecorded
expense
Case No. 9: Three days salaries
are unpaid as at December 31,
2016. Salaries are P75,000 for
a five-day work week.
Date Account Title & Explanation Debit Credit

2016 Salaries Expense 45000

Dec
31
Salaries Payable 45000

To record
accrual of unrecorded
expense
ADJUSTMENTS FOR DEFFERALS
Case No. 10: July 1, 2019, Matapat
Company received a check for 2 years’ rent
paid in advance. The accountant may record
a credit unearned rent revenue (liability) or
rent revenue (income), depending on the
accounting policy of the company.

The initial journal entry could be between

the two:
 LIABILITY METHOD
Date Account Title & Explanation Debit Credit

2019 Cash 48000

July 1

Unearned Rent Income 48000

To record
payment for 2 year rental
 INCOME METHOD
Date Account Title & Explanation Debit Credit

2019 Cash 48000

July 1

Rent Income 48000

To record
payment for 2 year rental
The necessary adjusting entries are as follows depending
on the method used in recording
LIABILITY METHOD
Date Account Title & Explanation Debit Credit

2019 Unearned Rent Income 12000

Dec
31
Rent Income 12000

To record
adjusting entry for rent
The necessary adjusting entries are as follows depending
on the method used in recording
INCOME METHOD
Date Account Title & Explanation Debit Credit

2019 Rent Income 36000

Dec
31
Unearned Rent Income 36000

To record
adjusting entry for rent
ADJUSTMENTS FOR PREPAID EXPENSES
Case No. 11: On October 1, 2019, Malinis
Company acquired a 3-year insurance policy
for P36,000 paid in advance. The
accountant may record a debit of Prepaid
Insurance (asset) or Insurance Expense
(expense), depending on the accounting
policy of the company.
To record acquisition of 3-year
insurance
The necessary adjusting entries are as follows depending on the method
used in recording.
• Adjusting entries are made at the end of each
accounting period.
• Adjusting entries make it possible to report
correct amounts on the statement of financial
position and on the income statement.
• All adjusting entries affect at least one income
statement account and one statement of
financial position account.
• Adjusting entries are journal entries that are
prepared in order to generate correct data at the
end of the accounting period.
• These are then recorded in the general journal and
posted to the ledger accounts so that information in the
ledger accounts will then be brought to correct
balances.
• Are done to be able to depict sensible financial
statements.
• Accountants and bookkeepers make adjustments
because accounts could have been understated and
overstated.
• There are some portions of an asset which may be
expire and there may be some portions of a liability
which could have been paid.
Activity 4.1 Complete the table by filling in the accounts to
be debited and to be credited in preparing the adjusting
entries. Account Account
Debited Credited
Accrued Expenses
Accrued Revenues
Depreciation
Prepayments- Asset Method
Prepayments- Income Method
Unearned Revenue- Liability Method

Unearned Revenue- Income Method

Thank you for listening
MARIA CLARISSA AGUSTIN-MARCELO