Basic Accounting Practice - Adjusting Entries

ADJUSTING ENTRIES

Adjusting entries are made at the end of the period, either monthly, at year end, etc. They are made in
order to properly reflect the elements of financial statements ( assets, liabilities, equity, income, and
expenses ). It asks the questions, “ When are expenses and income incurred and earned? “ , “ Should
there have been an asset or liability? “.

Accruals

Accruals are income/revenue already earned but have not yet been collected. A balance sheet
account and an income statement account are always recognized.

There are two ( 2 ) types of accruals:

Accrued Income

These are items that are already earned but are not yet collected. Accruals for income/revenue are
recognized to properly reflect income/revenue in the income statement and assets in the balance
sheet.

Pro-forma Entry:

Receivable Account xx
Income Account xx

The balance sheet account ( receivable ) is recognized for the amount collectible at a future date.
The income statement account is recognized for the amount actually earned during the adjusting
period or current period.

Accrued Expense

These are items that are already incurred or used but are not yet paid. Accrual for expenses are
recognized to properly reflect expenses in the income statement and liabilities in the balance sheet.

Pro-forma Entry:

Expense Account xx
Liability Account xx

The income statement account ( expense ) is recognized for the amount of expense actually incurred
or used up during the adjusting period or current period. The balance sheet account ( liability ) is
recognized for the amount payable or to be paid at a future date.

ILLUSTRATION - Accruals

Accrued Income

On December 31, 2024, the auditor of SHIN Company determined that P10,000 worth of services were
already rendered, but the customer, who had not yet paid, had already been already billed.

Adjusting Entry:

Accounts Receivable 10,000

Service Income 10,000

On April 1, 2024, FITA Company received a note from one of its customers at a face amount of
P100,000, bearing an interest rate of 10%. The interest is payable, annually starting April 1 of next year.

Page 1 of 33
 Basic Accounting Practice - Adjusting Entries

Adjusting Entry:

Interest Receivable
( P100,000 x 10% x 9/12 ) 7,500
Interest Income 7,500

Accrued Expense
On December 31, 2024, HYE Company had already incurred utilities expenses for its office building
during the month of December, which are to be paid in the next month. Total utilities cost for the office
building was P25,000.

Adjusting Entry:

Utilities Expense 25,000

Utilities Payable 25,000

On April 1, 2024, ACER Company issued a note from to FITA Company at a face amount of P100,000,
bearing an interest rate of 10%. The interest is payable annually, starting April 1 of next year.

Adjusting Entry:

Interest Expense
( P100,000 x 10% x 9/12 ) 7,500
Interest Payable 7,500

Reminders:

For Accrued Income, you can use Accrued Interest Income to replace Interest Receivable.
For Accrued Expenses, you can use Accrued Interest Expense to replace Interest Payable.

However, if there is a chart of accounts or a trial balance, it is advisable to use the account used.

Deferrals

Deferrals are items that have already been paid or collected but not yet incurred or earned. Same as
accruals, deferrals recognize at least one income statement account and one balance sheet
account. They specifically asks the question, “ What amount was actually earned or incurred? “.

Examples of Prepayments:
a. Prepaid Insurance
b. Supplies
c. Prepaid Rent

There are two ( 2 ) types of deferrals:

Prepayments

Are items that have already been paid for but are not yet incurred. Deferrals for prepayments are
recognized to determine what amounts are used ( expense ) and not used ( assets ).

There are two ( 2 ) methods in accounting for prepayments, they are:

Asset Method

As the name stands, an asset account is recognized when prepayments are initially recorded.
Therefore, the adjusting entry is to determine what amount of the asset is used up in order to record the

Page 2 of 33
 Basic Accounting Practice - Adjusting Entries
expense portion and to properly reflect expenses in the income statement and assets in the balance
sheet.

Pro-forma Entry:

Initial Recognition Adjusting Entry

Prepayment ( Asset ) xx Expense xx

Cash xx Prepayment ( Asset ) xx

To Visualize:

Assume you paid P10,000 in rent in April 1, 2024 to be used up for one year. We are now in the
reporting date December 31, 2024, how much of the rent was used up?

Initial Entry:

Prepaid Rent 10,000

Cash 10,000

January 1 April 1 December 31

Used Portion ( 9 Months )

Hence, we allocate the amount of P10,000 for 9 months used over 12 months ( 1 year ). So, our used up
portion or expensed amount is equal to P7,500.

Adjusting Entry:

Rent Expense 7,500

Prepaid Rent 7,500

Expense Method

A method opposite to the asset method, the expense method recognizes an expense account when
prepayments are initially recorded. Therefore, the adjusting entry is to determine what amount is not
used up in order to record the asset portion and to properly reflect expenses in the income statement
and assets in the balance sheet.

Pro-forma Entry:

Initial Recognition Adjusting Entry

Expense xx Prepayment xx
Cash xx Expense xx

To Visualize:

Using the same example from the asset method, Assume you paid P10,000 in rent in April 1, 2024 to be
used up for one year. We are now in the reporting date December 31, 2024, how much of the rent was
actually used up?

Initial Entry:

Rent Expense 10,000

Cash 10,000

Page 3 of 33
 Basic Accounting Practice - Adjusting Entries

January 1 April1 December 31

Used Portion ( 9 Months )

We initially recorded the P10,000 as expense which is not correct since the only used up portion is for 9
months out of 12 months. Hence, we first need to determine what amount was actually used up.

P10,000 x 9/12 = P7,500 is the “ Should be “ expense, but you recorded the whole P10,000 as expense.
Then, how much of the P10,000 should be decreased in order to properly have an expense for the
period of P7,500? The answer would be P2,500 ( P10,000 - P7,500 ). The P2,500 would be expense at the
end of the last three months of the rent.

Adjusting Entry:

Prepaid Rent 2,500

Rent Expense 2,500

T-Account Analysis

Asset Method

Prepaid Rent
Beginning Balance 10,000 7,500 Rent Expense
2,500 Ending Balance

Rent Expense
Beginning Balance -
Rent Expense 7,500 7,500 Ending Balance
before closing

Expense Method

Rent Expense
Beginning Balance 10,000 2,500 Rent Expense
7,500 Ending Balance
before closing

Prepaid Rent
Beginning Balance -
PrepaidRent 2,500 2,500 Ending Balance

As you can notice from both methods, the “should be” or after adjustment amount of prepaid rent
( asset ) and rent expense are the same.

Rent expense should be P7,500 which is for the 9 months used from April 1 to December 31, and P2,500
of prepaid rent which is 3 months unused for the remaining months of January to March 31.

Page 4 of 33
 Basic Accounting Practice - Adjusting Entries

Precollections

Are items that have already been collected but which are not yet earned. Deferrals for precollections
are recognized to determine what amounts are earned ( income ) and not earned and are to be
earned ( liability).

There are two ( 2 ) methods in accounting for prepayments, they are:

Liability Method

Also known as “ real approach “ , in parallel with the asset method of prepayment, in liability method
of precollections, a liability account is recognized when precollections are initially recorded. Therefore,
the adjusting entry is to determine what amount of the liability is earned in order to record the income
portion and to properly reflect revenues in the income statement and liabilities in the balance sheet.

Pro-forma Entry:

Initial Recognition Adjusting Entry

Cash xx Liability Account xx

Liability Account xx Income Account xx

To Visualize:

Assume a client paid P10,000 in rent in April 1, 2024 to be used up for one year. We are now in the
reporting date December 31, 2024, how much of the rent was earned?

Initial Entry:

Cash 10,000
Unearned Rent Income 10,000

January 1 April 1 December 31

Earned Portion ( 9 Months )

Hence, we allocate the amount of P10,000 for 9 months earned over 12 months ( 1 year ). So, our
eared portion or recognized as income is equal to P7,500.

Adjusting Entry:

Unearned Rent Income 7,500

Rent Income 7,500

Income Method

Also known as the “ nominal approach “, the liability method recognizes an income account when
precollections are initially recorded. Therefore, the adjusting entry is to determine what amount is not
earned in order to record the liability portion and to properly reflect income in the income statement
and liabilities in the balance sheet.

Pro-forma Entry:

Initial Recognition Adjusting Entry

Cash xx Income Account xx

Income Account xx Liability Account xx

Page 5 of 33
 Basic Accounting Practice - Adjusting Entries

To Visualize:

Using the same example from the liability method, Assume a client paid P10,000 in rent in April 1, 2024
to be used up for one year. We are now in the reporting date December 31, 2024, how much of the
rent was actually earned?

Initial Entry:

Cash 10,000
Rent Income 10,000

January 1 April1 December 31

Earned Portion ( 9 Months )

We initially recorded the P10,000 as income which is not correct since the only earned portion is for 9
months out of 12 months. Hence, we first need to determine what amount was actually earned in
those 9 months.

P10,000 x 9/12 = P7,500 is the “ Should be “ income but you recorded the whole P10,000 as income.
Then, how much of the P10,000 should be decreased in order to properly have an income for the
period of P7,500? The answer would be P2,500 ( P10,000 - P7,500 ). The P2,500 would be earned at the
end of the last three months of the rent.

Adjusting Entry:

Rent Income 2,500

Unearned Rent Income 2,500

T-Account Analysis

Liability Method

Unearned Rent Income

Unearned Rent 7,500 10,000 Beginning Balance
Ending Balance 2,500

Rent Income
- Beginning Balance
Ending Balance 7,500 Income Earned
Before closing 7,500

Income Method

Rent Income
Unearned Rent 2,500 10,000 Beginning Balance
Ending Balance
Before closing 7,500

Unearned Rent Income

- Beginning Balance
Ending Balance 2,500 2,500 Unearned Rent

Page 6 of 33
 Basic Accounting Practice - Adjusting Entries

As you can notice from both methods, the “should be” or after adjustment amount of unearned rent
income ( liability ) and rent income are the same.

Rent income should be P7,500 which is for 9 months earned from April 1 to December 31, and P2,500 of
unearned rent income which is 3 months unearned to be earned as income for the remaining months
of January to March 31.

ILLUSTRATION - Deferrals

Prepayments

Illustration 1. In July 1, 2024, Mikoyan Enterprises paid insurance of P20,000 to Gurevich, an insurance
company. The contract states that the insurance will be good for two years. As of the year ended,
December 31, 2024, what is the adjustment if the entity uses (1) Asset Method, (2) Expense Method

Adjusting Entry:

Asset Method

Insurance Expense 5,000

Prepaid Insurance 5,000

Expense Method

Prepaid Insurance
( P20,000 x *18/24) 15,000
Insurance Expense 15,000

* 18 months unused

Illustration 2. Makarov Trading had P10,000 worth of office supplies at the beginning of the year 2024.
During the year, due to shortage, the entity purchased P15,000 worth of office supplies. At the end of
the year, based on physical count, P5,000 of the supplies was left. How much office supplies was used
up?

Adjusting entries:

Asset Method

Office Supplies Expense

( P10,000+15,000-5,000 ) 20,000
Office Supplies 20,000

Expense Method

Office Supplies
( P10,000+15,000-5,000-20,000 ) 5,000*
Office Supplies Expense 15,000

* P10,000 of beginning balance ( assuming the entity uses reversing entries ), plus P15,000 of purchases
debited to office supplies expense, totals P25,000. However, with the P5,000 of supplies remaining at
year-end, the total expense should be reduced by P5,000 to arrive at the correct expense of P20,000
which is the same with the asset method.

Page 7 of 33
 Basic Accounting Practice - Adjusting Entries

Office Supplies Expense

Beginning 10,000 5,000 Adjustment*
Purchases 15,000 20,000 Ending Balance before closing

Office Supplies
Beginning -
Adjustment 5,000* 5,000 Ending

* P5,000 of unused office supplies as at year-end

Precollections

Illustration 1. Deutschland, a printing services company, received an advance payment from Rossiya
Books of P25,000 in March 1, 2024 for services to be rendered for twelve months starting March 4 of the
same year. How much of the payment was earned?

Adjusting Entry:

Liability Method

Unearned Printing Revenue 20,833.33

Printing Revenue 20,833.33

Income Method

Printing Revenue 4,166.67

Unearned Printing Revenue 4,166.67
( P25,000 x *2/12 )
* 2 months still unearned

Concepts

1. If accruals for income are not recorded:

 Net Income is understated and assets are understated, effectively, equity is also
understated
2. If accrual for expenses are not recorded:
 Net Income is overstated and liabilities are understated, effectively, equity is also
overstated
3. If prepayments under asset method are not recorded:
 Net income is overstated and assets are overstated, effectively, equity is also overstated.
4. If prepayments under expense method are not recorded:
 Net income is understated and assets are understated, effectively, equity is also
understated.
5. If precollections under liability method are not recorded:
 Net income is understated and liabilities are overstated, effectively, equity is also
understated.
6. If precollections under income method are not recorded:
 Net income is overstated and liabilities are understated, effectively, equity is also
overstated.
7. In Asset Method you are finding the used portion ( Expense ), and in Liability Method you are
looking for the earned portion ( Income ).
 Base amount x Months Used or Earned / Total Applicable Months
8. In Expense Method you are finding the unused portion ( Asset ), and in Income Method you
are looking for the unearned portion ( Liability ).
Page 8 of 33
 Basic Accounting Practice - Adjusting Entries

 Base amount x Months Unused or Unearned / Total Applicable Month

Note: The base amount is the amount paid for or received.
9. If the problem is silent as to what method was used, determine what account was initially
recorded, if any, if none, assume Asset and Liability Methods since they are the most
convenient.

Doubtful Accounts or Bad Debts

Doubtful accounts arise from trade receivables, specifically, Accounts Receivable. Since accounts
receivable are oral agreements, there is no guarantee that a customer will pay on time or will pay at
all. Therefore, a company anticipates the loss ( Principle of Conservatism ) derived from these doubtful
accounts, hence, establishing an allowance.

Accounts receivable are valued at Net Realizable Value or Amortized Cost. It is the amount expected
to be recovered when the amounts are collected.

Accounts Receivable Pxx

Allowance For Doubtful Accounts ( xx)
Net Realizable Value Pxx

There are three ways to estimate doubtful accounts, these are:

1. Percentage of Ending Accounts Receivable.
2. Percentage of Credit Sales
3. Aging of Accounts Receivable

There are two ( 2 ) methods in accounting for doubtful accounts:

1. Allowance Method
2. Direct-Write off Method

In this material, we will only be talking about the Allowance Method.

Allowance Method

This method recognizes an expense for the estimated doubtful accounts in the current period, rather
than when specific accounts actually become uncollectible. It sets up one expense account and one
contra-asset account. A contra-asset is an account that reduces its related asset account. This method
anticipates future uncollectibility of accounts and therefore sets up an allowance.

The allowance method is more preferred since it provides a better matching of revenues and expenses.

Pro-forma Entry:

To set up the allowance

Doubtful Accounts Expense xx
Allowance for Doubtful Accounts xx
To write-off accounts
Allowance for Doubtful Accounts xx
Accounts Receivable xx
To recover accounts
Accounts Receivable xx
Allowance for Doubtful Accounts xx
To recover accounts and subsequently collect them
Accounts Receivable xx
Allowance for Doubtful Accounts xx
Cash xx
Accounts Receivable xx

Page 9 of 33
 Basic Accounting Practice - Adjusting Entries

Applicable T-Accounts

Allowance for Doubtful Accounts

Write-offs xx xx Beginning
xx Doubtful Accounts Expense
xx Recoveries
Ending xx

Accounts Receivable
Beginning xx xx Cash Collections
Recoveries xx xx Write-offs
Sales on Account xx xx Sales Returns and Discounts
xx Ending

Methods in Estimating Doubtful Accounts

Percentage of Ending Accounts Receivable

The resulting amount is automatically the ending balance of the allowance for doubtful accounts
since the basis is a balance sheet account ( Accounts Receivable )

Percentage of Allowance x Ending Accounts Receivable

Percentage of Credit Sales

The resulting amount is automatically the doubtful account expense but not the ending balance of the
allowance since the basis is an income statement item ( Credit Sales ).

Percentage of Allowance x Credit Sales

Aging of Accounts Receivable

The resulting amount is already the ending balance of the allowance of doubtful accounts. However,
the basis is the uncollectible percentage or rate of specific accounts belonging to specified aging
group.

Uncollectible Percentage of Accounts in an Age Group x A/R Balance

To illustrate:

Age in Days Amount % Uncollectible Amount Uncollectible

30-60 P100,000 2% *P2,000
61 - 90 60,000 5% 3,000
91 - 120 20,000 10% 2,000
Allowance for Doubtful Accounts P7,000

* P100,000 x 2%
Note: If it says % Collectible you must first find the % Uncollectible. Assuming the % Collectible is 98%
therefore the % Uncollectible is only 2%.

If the problem says that the allowance is increased by, the resulting amount is an addition to an
existing balance assuming there are no write-offs and recoveries. If there is no existing balance, then
the amount is already the ending balance. If it says increased to, the resulting amount is the ending
balance.

Page 10 of 33
 Basic Accounting Practice - Adjusting Entries

Illustration - Doubtful Accounts

Illustration 1. On December 31, 2024, KOPI Co. had accounts receivable of P100,000. On December 31,
2023, it had P200,000 in accounts receivable and Allowance for doubtful Accounts of P20,000. During
the year the company generated P500,000 of sales of which 50% was on cash basis. The company also
wrote off P15,000 of accounts. ( The percentage of credit sales is 10% )

Required:

Determine the adjustment need assuming the company uses:

a. % of Ending Accounts Receivable

b. % of Credit Sales

Solution:

a. P100,000 x 10% = P10,000 Ending ADA

If not given, to find the percentage of ending accounts receivable, divide the beginning balance of
the allowance for doubtful accounts by the beginning balance of accounts receivable. ( Both
accounts are ending balances last year )

Allowance for Doubtful Accounts

Write-offs 15,000 20,000 Beginning
5,000 Doubtful Accounts Expense

Ending 10,000

P10,000 Ending + P15,000 Write-offs - P20,000 Beginning = P5,000 DAE

Note: Both sides of the t-account must always equal.

Adjusting Entry:
Doubtful Accounts Expense 5,000
Allow. For Doubtful Accounts 5,000

b. P250,000 x 10% = P25,000 DAE

Remember if it is % of credit sales, the resulting amount is already the adjustment.

Adjusting Entry:
Doubtful Accounts Expense 25,000
Allow. For Doubtful Accounts 25,000

Page 11 of 33
 Basic Accounting Practice - Adjusting Entries

Depreciation

As defined in PAS 16, depreciation is the systematic allocation of the depreciable amount of an item
of Property, Plant, and Equipment over its useful life.

The Depreciable Amount is the cost of an asset, or other amounts substituted as cost, less its residual
value or salvage value.

Cost Pxx
Accum. Depcreciation (xx)
Depreciable Amount Pxx

Residual or Salvage Value is the estimated value of an asset at the end of its useful life. That’s why it is
not included in the depreciation since the remaining amount would need to be equal to its residual
value.

For basic accounting purposes, the straight-line method is used. Other methods are discussed further in
higher accounting subjects.

The annual depreciation under straight-line method is computed as follows:

(Cost - Residual Value) or Depreciable Amount

Estimated Useful Life in Years

Note that it says annual depreciation that means if the depreciation started in May 1 and the balance
sheet date is December 31, you must allocate the annual depreciation for 8 months used from May 1
to December 31 out of 12 months in a year ( annual ).

Illustration - Depreciation

Illustration 1. RAYQUAZA Company acquired an office equipment on October 1, 2024 for P310,000. The
asset has an estimated useful life of 5 years and an estimated salvage value of P10,000.

The entries to record the depreciation for the current year and the next year are:

2024

Adjusting Entry:

Depreciation Expense
( P310,000 - P10,000 / 5 Yrs. X 3/12 ) 15,000
Accum. Depreciation 15,000

Depreciation expense is only for October 1, 2024 to December 31, 2024 which is three months.

2025

Adjusting Entry:

Depreciation Expense
( P310,000 - P10,000 / 5 Yrs. X 12/12 ) 60,000
Accum. Depreciation 60,000

Depreciation expense is from January 1, 2025 to December 3, 2025 which is 12 months.

Page 12 of 33
 Basic Accounting Practice - Adjusting Entries

Merchandise Inventory

For a merchandising company its primary purpose is to buy and sell, but what are they buying and
then selling? These are what you call Inventory or Merchandise Inventory. In the first year of operations,
a merchandising company typically does not have a beginning inventory, it first purchases these
goods at cost.

Normally, not all of the inventories available for sale will be sold, hence when the physical count of
inventories come, there would be remaining goods available for sale and these are your Ending
Inventory. Your ending inventory for in this period or year is then the beginning balance for the next
period or year.

The adjustment for Inventories involve a temporary account called the Income and Expense Summary.

There are two ( 2 ) methods in Adjusting for Merchandise Inventory:

a. Adjusting Entry Method
b. Closing Entry Method

The Closing Entry Method is more convenient.

Adjusting Entry Method

Pro-forma Entry:

Income and Expense Summary xx

Inventory, beginning xx

Inventory, ending xx
Income and Expense Summary xx

Closing Entry Method

Pro-forma Entry:

Inventory, ending xx
Income Statement Accounts with normal credit balances xx
Inventory, ending xx
Income Statement Accounts with normal debit balances xx
Income and Expense Summary ( Balancing Figure ) xx

All Income Statement accounts having a normal credit balance are debited and all Income
Statement accounts having debit balances are credited. This is made in order to offset or cancel out
their respective balance so that their amount would be zero ( 0 ).

If the Income and Expense Summary have a credit balance it is considered as a Net Income or Profit, it
it has a debit balance it is then a Net Loss. The balance of the Income and Expense Summary is closed
to the Owner’s Equity account for a sole proprietorship.

As we know, Income statement accounts or nominal accounts are not carried over to the next period.

Debit Balance ( Net Loss )

Owner’s Equity xx
Income and Expense Summary xx

The Debit balance in the income summary account is credited and the owner’s equity account is
debited to represent a decrease.

Page 13 of 33
 Basic Accounting Practice - Adjusting Entries

Credit Balance ( Net Income )

Income and Expense Summary xx

Owner’s Equity xx

The credit balance in the income and expense summary is debited and the owner’s equity account is
credited to represent an increase.

After the closing entries at year-end the income and expense summary account will be zero ( 0 ) for
both scenarios.

Illustration - Adjustment for Inventories

At December 31, 2024, the trial balance of Minuteman Co. showed the following:

Debits Credits
Cash P10,000
Accounts Receivable 5,000
Merchandise Inventory, Beginning 15,000
Accounts Payable P8,000
Minuteman, Capital 35,000
Minuteman, Drawings 5,000
Sales P33,000
Sales Discounts 10,000
Sales Returns and Allowance 5,000
Purchases 10,000
Purchase Discounts 2,000
Purchase Returns and Allowance 2,000
Freight-in 5,000
Freight-out 5,000
Officer’s Salaries 5,000
Office Supplies Used 5,000
Totals P80,000 P80,000

Additional Information:
i. Physical count at year end revealed that there were P10,000 of inventories remaining.

Requirement:
1. Prepare the adjustment for inventory using adjusting entry method and closing entry method.

Solution:

Adjusting Entry Method:

Income and Expense Summary 15,000

Merchandise Inventory, Beginning 15,000

Merchandise Inventory, Ending 10,000

Income and Expense Summary 10,000

Page 14 of 33
 Basic Accounting Practice - Adjusting Entries

Closing Entry Method:

Merchandise Inventory, ending 10,000

Sales 33,000
Purchase Returns and Allowances 2,000
Purchase Discounts 2,000
Income and Expense Summary 13,000
Purchases 10,000
Sales Returns and Allowances 5,000
Sales Discounts 10,000
Freight -in 5,000
Freight-out 5,000
Officer’s Salaries 5,000
Office Supplies Used 5,000
Merchandise Inventory, beginning 15,000

Page 15 of 33
 Basic Accounting Practice - Adjusting Entries

THEORIES

1. An accounting period that is one year in length, but does not begin on January 1, is
referred to as
a. Fiscal Year
b. Interim Period
c. Time Period Assumption
d. Reporting Period
2. The revenue recognition principle dictates that revenue should be recognized in the
accounting records:
a. When cash is received
b. When it is earned
c. At the end of each month
d. At the same time taxes are paid.
3. The matching principle matches:
a. Customers with business
b. Expenses with revenues
c. Assets with liabilities
d. Creditors and the business
4. CPA services a car on July 31. The customer picks up the vehicle on August 1 and mails the
payment to CPA on August 5. CPA received the check in the mail on August 6. When should
CPA show that the revenue was earned, according to the revenue recognition principle?
a. July 31
b. August 1
c. August 5
d. August 6
5. Under accrual-basis of accounting:
a. Cash must be received before revenue is recognized
b. Net income is calculated by matching cash outflows against cash inflows.
c. Events that change a company’s financial statements are recognized in the period they
occur rather than in the period in which cash is paid or received.
d. The ledger accounts must be adjusted to reflect a cash basis of accounting before
financial statements are prepared under GAAP.
6. Adjusting entries are required:
a. Yearly
b. Quarterly
c. Monthly
d. Every time financial statements are prepared.
7. An adjusting entry:
a. Affects two balance sheet accounts.
b. Affects two income statement accounts.
c. Affects a balance sheet account and an income statement account.
d. Is always a compound entry.
8. Accounts often need to be adjusted because:
a. There are never enough accounts to record all the transactions.
b. Many transactions affect more than one period.
c. There are always errors made in recording transactions.
d. Management can’t decide what they want to report.
9. Expenses incurred but not yet paid or recorded are called:
a. Prepaid Expenses
b. Accrued Expenses
c. Interim Expenses
d. Unearned Expenses
10. Accumulated depreciation is a :
a. Expense account
b. Owner’s Equity account
c. Liability account
d. Contra-Asset account

Page 16 of 33
 Basic Accounting Practice - Adjusting Entries

11. If a company fails to adjust prepayments using asset method, what effect will this have on the
financial statements?
a. No effect on Financial Statements
b. Expenses are overstated and net income and owner’s equity will be understated
c. Assets will be overstated and net income and owner’s equity will be understated
d. Assets will be overstated and net income and owner’s equity will be overstated.
12. Which of the following would not result in an unearned revenue?
a. Rent collected in advance
b. Services performed on account
c. Sale of season tickets to football games
d. Sale of two-year magazine subscriptions
13. An adjusted trial balance
a. Is prepared after financial statements are completed
b. Proves the equality of the total debit balances and credit balances of the ledger
accounts after all adjustments have been made.
c. Is a required financial statement under GAAP.
d. Cannot be used to prepare financial statements.
14. An item that represents services received by the firm for which it will pay for in the future is
called?
a. Accrued Expense
b. Accrued Revenue
c. Unearned Revenue
d. Prepaid Expense
15. Which of the following is an adjusting entry?
a. Recording purchase of supplies
b. Recording payment of salaries
c. Recording the billing of customers for services rendered
d. Recording depreciation
16. An item that represents services provided by the firm for which it will receive payment in the
future is called?
a. Accrued Expense
b. Accrued Revenue
c. Unearned Revenue
d. Prepaid Expense
17. The broad classification of adjusting entries are:
a. Accruals and closing
b. Accruals and deferrals
c. Closing and trials
d. Trials and deferrals
18. A year-end adjusting entry will take the format of which of the following entries?
a. Debit to a liability account and credit to an asset account.
b. Debit to an expense account and a credit to a revenue account.
c. Debit to an revenue account and credit to an asset account.
d. Debit to an asset account and credit to a revenue account.
19. Income statement accounts and Balance sheet accounts are also called?
a. Permanents accounts and Temporary Accounts
b. Adjustment accounts
c. Nominal Accounts and Real Accounts
d. Elements
20. What is the effect when prepayments under asset method, accrual of expenses, and
precollections under income method, have on the net income when they are not adjusted for?

Prepayment ( Asset Method) Accrued Expenses Precollections ( Income Method )

a. Overstated Understated Overstated
b. Overstated Overstated Understated
c. Understated Overstated Overstated
d. Overstated Overstated Overstated

Page 17 of 33
 Basic Accounting Practice - Adjusting Entries

21. The difference between the Accounts Receivable balance and the related Allowance for
Doubtful Accounts is called:
a. Net Book Value
b. Net of Allowance
c. Net Realizable Value
d. Net Cost of Accounts Receivable
22. To which account is the adjustment for Merchandise Inventory closed to?
a. Operations Summary
b. Owner’s Equity
c. Income and Expense Summary
d. Operating Expenses
23. Adjustment for merchandise inventory can be accomplished through what method/s?\
a. Cost of Sales and Ending Inventory Methods
b. Adjusting Entry and Post Closing Methods
c. Closing Entry and Year-end Methods
d. Adjusting Entry and Closing Entry Methods
24. When the beginning inventory is closed to a suspense account, the entry includes:
a. Credit to Income Summary
b. Debit to Ending Inventory
c. Credit to Beginning Inventory
d. Debit to Ending Inventory
25. What adjustment is typically different between a Service and Merchandising entities?
a. Prepayments
b. Depreciation
c. Bad Debts
d. Inventory
26. When wages are incurred in one period and paid in the next period, this often leads to which
account appearing on the balance sheet at the end of the time period?
a. Due from Employees
b. Due to Employer
c. Wages Payable
d. Wages Expense
27. An equipment factory's employees work overtime to finish an order that is sold on February
28. The office sends a statement to the customer in early March and payment is received
by mid-March. The overtime wages should be expensed in:
a. February.
b. March.
c. The period when the workers receive their checks.
d. Either in February or March depending on when the pay period ends.
28. If an adjustment is needed for prepaid expenses, the:
a. Asset and related expense are overstated before adjustment.
b. Asset and related expense are understated before adjustment.
c. Asset is understated and the related expense is overstated before adjustment.
d. Asset is overstated and the related expense is understated before adjustment.
29. A company usually determines the amount of supplies used during a period by:
a. Adding the supplies on hand to the balance of the Supplies account.
b. Totaling the amount of supplies purchased during the period.
c. Taking the difference between the supplies purchased and the supplies paid for during
the period.
d. Taking the difference between the balance of the Supplies account and the cost of
supplies on hand.
30. At December 31, 2024, before any year-end adjustments, PASARA Company's Insurance
Expense account had a balance of P1,450 and its Prepaid Insurance account had a balance
of P3,800. It was determined that P3,000 of the Prepaid Insurance had expired. The adjusted
balance for Insurance Expense for the year would be
a. P3,000.
b. P1,450.
c. P4,450.
d. P2,250.
Page 18 of 33
 Basic Accounting Practice - Adjusting Entries

31. KAYA KOTO Company purchased a computer for P3,600 on January 1, 2024. The company
expects to use the computer for 3 years. It has no salvage value. Monthly depreciation
expense on the asset is:
a. P0.
b. P100.
c. P1,200.
d. P3,600.
32. SP University sold basketball tickets for the 2024 PRISAA for P160,000. A total of 8 games will be
played during September, October and November. In September, two games were played. In
October, three games were played. The balance in Unearned Revenue at October 31 is:
a. P0.
b. P40,000.
c. P60,000.
d. P100,000.
33. Volzanbell Company collected P8,400 in May of 2024 for 4 months of service which would take
place from October of 2024 through January of 2025. The revenue reported from this
transaction during 2024 would be:
a. 0.
b. P6,300.
c. P8,400.
d. P2,010.
34. Judraijm has performed P500 of audit services for a client but has not billed the client as of the
end of the accounting period. What adjusting entry must Judraijm make?
a. Debit Cash and credit Unearned Revenue
b. Debit Accounts Receivable and credit Unearned Revenue
c. Debit Accounts Receivable and credit Service Revenue
d. Debit Unearned Revenue and credit Service Revenue
35. Zoltrak signed a four-month note payable in the amount of P8,000 on September 1. The note
requires interest at an annual rate of 9%. The amount of interest to be accrued at the end of
September is :
a. P240.
b. P60.
c. P720.
d. P80.
36. JAPAN paid employee wages on and through Friday, January 26, and the next payroll will be
paid in February. There are three more working days in January (29–31). Employees work 5 days
a week and the company pays P900 a day in wages. What will be the adjusting entry to
accrue wages expense at the end of January?
a. Wages Expense ................................................................... 900
Wages Payable ........................................................... 900
b. Wages Expense ................................................................... 4,500
Wages Payable ........................................................... 4,500
c. Wages Expense ................................................................... 2,700
Wages Payable ........................................................... 2,700
d. No adjusting entry is required.
37. Can financial statements be prepared directly from the adjusted trial balance?
a. They cannot. The general ledger must be used.
b. Yes, adjusting entries have been recorded in the general journal and posted to the
ledger accounts.
c. No, the adjusted trial balance merely proves the equality of the total debit and total
credit balances in the ledger after adjustments are posted. It has no other purpose.
d. They can because that is the only reason that an adjusted trial balance is prepared.
38. Which of the statements below is not true?
a. An adjusted trial balance should show ledger account balances.
b. An adjusted trial balance can be used to prepare financial statements.
c. An adjusted trial balance proves the mathematical equality of debits and credits in the
ledger.
d. An adjusted trial balance is prepared before all transactions have been journalized.

Page 19 of 33
 Basic Accounting Practice - Adjusting Entries

39. On January 2, 2024, SHARK Loans and Savings purchased a general liability insurance policy for
P2,400 for coverage for the calendar year. The entire P2,400 was charged to Insurance Expense
January 2, 2024. If the firm prepares monthly financial statements, the proper adjusting entry on
January 31, 2024, will be:
a. Insurance Expense.............................................................. 2,200
Prepaid Insurance....................................................... 2,200
b. Prepaid Insurance................................................................ 2,200
Insurance Expense ..................................................... 2,200
c. Insurance Expense.............................................................. 200
Prepaid Insurance....................................................... 200
d. Prepaid Insurance................................................................ 200
Insurance Expense ..................................................... 200
40. Jus is a lawyer who requires that his clients pay him in advance of legal services rendered. Jus
routinely credits Legal Service Revenue when his clients pay him in advance. In June Jus
collected P12,000 in advance fees and completed 75% of the work related to these fees. What
adjusting entry is required by Jus' firm at the end of June?
a. Unearned Revenue ............................................................. 9,000
Legal Service Revenue .............................................. 9,000
b. Unearned Revenue ............................................................. 3,000
Legal Service Revenue .............................................. 3,000
c. Cash .................................................................................... 12,000
Legal Service Revenue .............................................. 12,000
d. Legal Service Revenue ....................................................... 3,000
Unearned Revenue .................................................... 3,000

Page 20 of 33
 Basic Accounting Practice - Adjusting Entries

PROBLEMS

1. The Prepaid Insurance account showed the following entries on June 30:

Beginning Balance P15,300

January 1 29,000
May 1 33,660

The beginning balance represents the unexpired portion of a one-year policy purchased in April of the
previous year. The January 1 entry represented a new one-year policy, while the May 1 entry
represented additional coverage under a three-year policy.

How much is the expired portion of the insurance as of the fiscal end of year June 30, 2024?

2. The following table contains the cost and annual depreciation for buildings and equipment, all of
which were purchased during the year and all have useful life of 10 years:

Accounts Cost Salvage Value

Buldings P1,850,000 P350,000
Equipment 2,180,000 450,000

The Building was purchased on April 1 , 2024 and the Equipment on July 31,2024.

How much is the depreciation expense for the current year as of December 31, 2024?

3. Profits Co. pays its five workers on Fridays on five-day basis: P10,000 to two employees, P15,000 to the
other two employees, and P20,000 for the last employee who is the manager. As of December 31, 2024,
a Wednesday, how much salaries were incurred but not yet paid?

Page 21 of 33
 Basic Accounting Practice - Adjusting Entries

4. On December 31, 2023, Kamisato Commission has an outstanding interest receivable of P20,000
from a loan made to a customer in September 3, 2023 in the amount of P120,000 maturing three years
from that date. Assuming no receipt of interest were made, How much is the interest income as of the
calendar year ended December 31, 2024?

5. NIBELUNG Co. accepted advanced payment for services to be rendered, company policy states to
initially recognize services to be rendered as income and to provide reversing entries, the income
account showed the following entries during 2024:

Beginning Balance P145,000

March 24 100,000
October 5 88,000

The beginning balance represents advanced payment on October 1, 2023 for services to be rendered
until April 30, 2024. The March 24 entry is for services to be rendered until February 1, 2025. Lastly, the
October 5 entry is until March 1, 2025.

How much is actually earned during 2024?

6. Your CPA Merchandising’s credit terms were 2/10, n/30. Furthermore, the company has problems
with some of its customers who doesn’t pay regularly on time, so as of December 31, 2023 the
company established doubtful accounts of P20,000 based on the outstanding receivables as of year-
end of P 200,000. During the current year, credit sales amounted to P50,000, cash collections on
account of P63,700 ( hint: the collections are the cash actually receive hence does not include the
discount ), and write-offs of P10,000.

What is the adjustment to allowance for doubtful accounts for the year ended December 31, 2024?

Page 22 of 33
 Basic Accounting Practice - Adjusting Entries

7. Grumman Company paid P100,000 for office supplies during the current year and recorded the
transaction as a debit to Office Supplies. At the beginning of the year, the Office Supplies account
had a debit balance of P36,000. The physical count of unused offices supplies at year end revealed
P60,000 remained unused. How much is the office supplies expense for the year?

How much supplies were used during the year?

8. On September 1, 2024, Sycat Co. Borrowed on a P1,350,000 notes payable from Tacys Bank. The
note earns an interest at 18% and is payable after three years. At December 31, 2024, what amount
should be reported as accrued interest expense?

9. Before any adjustments were made, the October 31, 2024 trial balance of MITSU Trading contains
revenues of P580,000 and expenses of P178,000. Adjustments are necessary for the following items: (a)
depreciation for October, P20,000; (b) fees earned in October not yet billed to customers, P65,000; (c)
portion of the prepaid rent applicable/used in October, P90,000. After recording the adjustments, how
much is the net income for MITSU Trading?

10. At the beginning of the current year, the Prepaid Rent account showed a debit balance of P60,000.
At the end of the year, the Prepaid Rent account showed a balance of P50,000 after an adjusting
entry that debited a Rent Expense for P90,000. Advances for rents are consistently debited to an asset
account. How much were the prepaid rent paid during the year?

Page 23 of 33
 Basic Accounting Practice - Adjusting Entries

11. JRC Merchandise purchased equipment on December 1, 2024 and issued a 120-Day, 9% note
having a face value of P200,000 ( Use 360 days ). What is the adjustment for December 31, 2024?

12. Page One Co. received cash of P135,000 on September 1, 2024 for a two-year rent advance
starting on October 1, 2024. The entity recorded the transaction with a credit to Rent Revenue. Prepare
the adjusting entry as of year end.

13.-14. Apep Company estimates that 20% of its receivables would be uncertain as to collectibility. The
company already had an existing balance of P20,000 from last year’s allowance. During the year,
there were write-offs of 10,000, and after updating the Accounts Receivable account its balance
showed P100,000. (A) At what amount is the allowance for doubtful accounts adjusted for? (B) What is
the net realizable value of the Account Receivable?

15.-16. Caring 4U Co. Acquired an equipment in May 31, 2024 with a total cost of P1,500,000, estimated
residual value of P200,000, with management estimated its useful life to be 4 years. Caring 4U Co.
made a down payment of P500,000 and the balance is supported by a promissory note signed by the
entity. The note is payable after 2 years bearing a simple interest of 8%. Prepare the adjustments for (1)
depreciation, and (2) accrued interest expense.

Page 24 of 33
 Basic Accounting Practice - Adjusting Entries

17. Salaries and Wages Payable were P5,000 at the end of November, and P3,000 at the end of
December. Salaries and Wages paid for December was P20,000. How much was accrued for salaries
and wages during December?

18. -20. At the start of the year 2024, Frost Westbrook, James Ramirez, and Roach Sanderson Service
Firms , each had P100,000 of office supplies on hand. These three firms use different accounting
procedures for recording supplies.

Frost Westbrook and Roach Sanderson show the beginning balance in the Office supplies account, but
James Ramirez reflects beginning balance in the Supplies Expense account. Frost Westbrook debits the
account Office supplies when supplies are acquired, while James Ramirez, and Roach Sanderson
follow the policy o debiting Office Supplies expense upon acquisition. Each of the three companies
acquired P450,000 of supplies at different dates throughout the year, and each has P94,000 of office
supplies at year-end. Prepare the adjusting entry for each of the firms.

21. On December 31, 2024, Feeport McMoRan Company prepared an income statement and
balance sheet and failed to take into account three adjusting entries. The incorrect income statement
showed net income of P40,000. The balance sheet showed total assets, P120,000; total liabilities,P45,000;
and owner's equity, P75,000.

The data for the three adjusting entries were:

1. Depreciation of P9,000 was not recorded on equipment.
2. Wages amounting to P8,000 for the last two days in December were not paid and not
recorded. The next payroll will be in January.
3. Rent of P14,000 was paid for two months in advance on December 1. The entire amount was
debited to Rent Expense when paid.

What is the correct balance of the financial statement amounts? Also provide adjusting entries if
necessary.

Page 25 of 33
 Basic Accounting Practice - Adjusting Entries

22.-24.The items below are adjusting events from three different companies:

Case 1
Newmont Company began the year with a P3,000 balance in the Office Supplies account. During the
year, P8,500 worth of additional office supplies were purchased. A physical count of office supplies on
hand at the end of the year revealed that P6,400 worth of office supplies had been used during the
year. No adjusting entry has been made until year end.

Case 2
Paragon Company has a calendar year-end accounting period. On July 1, the company purchased
office equipment for P30,000. It is estimated that the office equipment will depreciate P500 each
month. No adjusting entry has been made until year end.

Case 3
Tenka Izumo is in the business of renting several apartment buildings and prepares monthly financial
statements. It has been determined that 3 tenants in P700 per month apartments and one tenant in
the P1,000 per month apartment had not paid their August rent as of August 31st.

Prepare the necessary Adjusting entries as of year-end.

25. Die Landebahn started its first year of operations as a logistics company serving as the medium of
Duda Co.’s supply chain. As of December 31, 2024, the entity has three trucks used to ship Duda’s
supplies.

The trucks are recorded at cost and were acquired at different points in time
Truck Cost Residual Value Useful Life
Dongfeng 4250 P1,000,000 P200,000 4 Years
Mitsubishi TVYZSJR2R 1,200,000 200,000 8 Years
Hino SV 1,500,000 300,000 5 Years

Additional Information:
a. The Dongfeng 4250 was acquired on July 1 of the same year.
b. The Mitsubishi TVYZSJR2R was acquired on March 20, 2024 but was ready for use on April 10,
2024.
c. The Hino SV was acquired on August 20, 2024.

What is the adjusting entry on December 31, 2024?

Page 26 of 33
 Basic Accounting Practice - Adjusting Entries

26.-28. The following data was taken from the unadjusted trial balance of QUALI Co. in relation to its
accounts receivable:

Accounts Receivable P500,000

Allowance for Doubtful Accounts ( 20,000)
Net Realizable Value P480,000

Requirements:
1. Assuming allowance for doubtful accounts is to be provided at 10% of outstanding accounts
receivables, what is the necessary adjusting entry as of year-end?
2. Assuming allowance for doubtful accounts is to increased by 8% of outstanding accounts
receivables, what is the necessary adjusting entry as of year-end?
3. Assuming allowance for doubtful accounts is to be increased to 8% of outstanding accounts
receivables, what is the necessary adjusting entry as of year-end?

29. -30. QPASSER Company insured three of its property with Consistency Insurances Co.. The following
data below pertains to the insurance payments and its coverage as of December 31, 2024:

Prpoerty Insured Amount Paid Coverage Period

BAACCEN Hotels P100,000 May 1, 2024 - May 1, 2025
PARTERNSHIPS Apartment 125,000 July 1, 2024 - Feb. 28, 2025
FAR Office 115,000 Feb. 28, 2024 - March 1, 2026

What are the necessary adjusting entries assuming the company uses Asset Method?

What are the necessary adjusting entries assuming the company uses Expense Method?

Page 27 of 33
 Basic Accounting Practice - Adjusting Entries

Answer Keys

Theories

1. A 6. D 11.D 16.B 21.C 26.C 31.B 36.C

2. B 7. C 12.B 17.B 22.C 27.A 32.C 37.B
3. B 8. B 13.B 18.D 23.D 28.D 33.B 38.D
4. A 9. B 14.A 19.C 24.C 29.D 34.C 39.B
5. C 10.D 15.D 20.D 25.D 30.C 35.B 40.D

Problems

1.
Beginning balance ( all expired ) P15,300
January 1 entry
( 29,000 x 6/12 ) 14,500
May 1 entry
( 33,660 x 2/36 months ) 1.870
Total insurance expenses P31,670

Insurance Expense 31,670

Prepaid Insurance 31,670

2.
Depreciation Expense
Building ( 1.850M - 350k / 10 ) x 9/12 P112,500
Equipment ( 2.180M - 450k /10 ) x 5/12 72,083
Total Depreciation Expense P 184,583

Depreciation Expense 184,583

Accum. Depreciation - Building 112,500
Accum. Depreciation - Equipment 72,083

3.
10,000 x 2 = 20,000 / 5 Days = P4,000 per day
15,000 x 2 = 30,000 / 5 Days = P6,000 per day
20,000 / 5 Days = P4,000 per day
Total Salaries per Day P14,000

P14,000 x *3 Days = P42,000 Salaries accrued

* Monday to Wednesday

Salaries Expense 42,000

Accrued Salaries Expense 42,000

4.
Interest payable P20,000
Divide by: 4
Accrued interest ( monthly ) P5,000
Multiply: 12 months
Annual Interest P60,000
Divide by: Principal 120,000
Interest rate 50%

Page 28 of 33
 Basic Accounting Practice - Adjusting Entries

Principal P120,000
Multiply: Interest rate 50%
Interest Income ( 1 year ) P60,000

Interest Receivable 60,000

Interest Income 60,000

5.
Beginning balance ( all earned ) P145,000
March 24 entry
( 100k x 9/10 months ) 90,000
October 5 entry
( 88k x 3/5 months ) 52,800
Total income earned P287,800

Service Income 45,200

Unearned Service Income 45,200

6.

Accounts Receivable
Beg. 200,000 63,700 Cash collection
CS 50,000 1,300 Sales Disocunt
10,000 write-offs
175,000 End.
Allowance for Doubtful Accounts
Write-offs 10,000 20,000 Beg.
7,500 Bad Debts Exp.
End. 17,500

Doubtful Accounts Expense 5,000

Allow. For Doubtful Accounts 5,000

Ending ADA last year P20,000

Ending A/R last year 200,000

ADA Percentage of A/R 10%

Note: the beginning balances are ending balances last year. If there are
recoveries that says not included in the collections, these are not included in the
A/R computation since the effect is offsetting. However, if it only says recoveries ,
the amount is a debit to A/R and a credit to ADA.

7.
Supplies
Beginning balance 36,000 76,000 Used / Expended
Purchases 100,000 60,000 Ending balance

Supplies Expense 20,000

Supplies 20,000

Page 29 of 33
 Basic Accounting Practice - Adjusting Entries

8.
Principal P1,350,000
Multiply by:
Interest Rate 18%
Annual Interest P 243,000
Multiply by: *4/12
Interest Incurred P 81,000

Interest Expense 81,000

Accrued Interest Expense 80,000

* September 1 to December 31

9.
Revenues P580,000
Expenses ( 178,000)
Net Income, Unadjusted P402,000
Depreciation ( 20,000)
Fees Earned 65,000
Rent Expense ( 90,000)
Net Income, Adjusted P357,000

Depreciation 20,000
Accumulated Depreciation 20,000

Cash or Accounts Receivable 65,000

Fees Revenue 65,000

Rent Expense 90,000

Prepaid Rent 90,000

Remember that expenses reduces net income and revenues increases net income.

10.
Prepaid Rent
Beginning balance 60,000 90,000 Used / Expended
Paid 80,000 50,000 Ending balance

11.
Principal P 200,000
Multiply by:
Interest Rate 9%
Annual Interest P 18,000
Multiply by: *30/360
Interest Incurred P 1,500

Interest Expense 1,500

Accrued Interest Expense 1,500

* Always excluding the first day of the month so its 30 days in December. It can also be
computed by multiplying the annual interest by 1/12.

Page 30 of 33
 Basic Accounting Practice - Adjusting Entries

12.
Initial Entry:

Cash 135,000
Rent Revenue 135,000

Adjusting Entry: ( Expense Method )

Rent Revenue 118,125

Unearned Rent Revenue 118,125
( P135,000 x *21/24 )

* Out of 24 months ( 2 years ), 3 months have been earned therefore there are 21
months left that should be earned ( liability ).

13.-14.
Allowance for Doubtful Accounts
Write-offs 10,000 20,000 Beginning Balance
Ending Balance *20,000 10,000 DAE

* P100,000 Ending A/R x 20%

Accounts Receivable, end P100,000

Allowance for Doubtful Accounts ( 20,000)
Net Realizable Value P 80,000

Doubtful Accounts Expense 10,000

Allowance for Doubtful Accounts 10,000

15.-16.

Depreciation Expense 189,583

Accumulated Depreciation 189,583
( P1.5M - P300k / 4 Yrs. X 7/12 )

Interest Expense 46,667

Accrued Interest Expense 46,667
( P1.5M - 500k x 8% x 7/12 )

17.

Salaries and Wages Payable

5,000 Beginning
Paid 20,000 18,000 Salaries and Wages Expense
Ending 3,000

Salaries and Wages Expense 18,000

Salaries and Wages Payable 18,000

18. -20.

Frost Westbrook - Asset Method

Office Supplies Expense 456,000

Office Supplies 456,000
( P100k + P450k - P94k )

Page 31 of 33
 Basic Accounting Practice - Adjusting Entries

James Ramirez - Expense Method with Reversing Entry

Office Supplies 94,000

Office Supplies Expense 94,000

Roach Sanderson - Expense Method without Reversing Entry

Office Supplies Expense should only be P456,000, since total debits were P550,000 less an
Ending balance of P94,000.

The P456,000 Office Supplies Expense is adjusted by:

Office Supplies Expense 100,000

Office Supplies 100,000

Office Supplies 94,000

Office Supplies Expense 94,000

Or Simply:

Office Supplies Expense 6,000

Office Supplies 6,000

Office Supplies
Assset ( Beg. ) 100,000 456,000 Actual Expense
Expense ( Acquired ) 450,000
94,000 Ending

Here we treat the the P450,000 expense recognized on acquisition as if it were recorded
in an asset account. Since the actual expense or the portion of the supplies used up
Was P456,000, we then look at the expense whether to increase or decrease it. Actual
Expenses was P456,000 less Expense recorded of P450,000, therefore there is an increase
of P6,000. Effectively, the asset is reduced from P100,000 to P94,000.

21.

Net Income Total Assets Total Liabilites Owner’s Equity

P40,000 P120,000 P45,000 P75,000
(9,000) (9,000) (9,000)
(8,000) 8,000 (8,000)
7,000 7,000 7,000
P30,000 P118,000 P53,000 P65,000

22. -24.
Case 1

Office Supplies Expense

( P3,000 + P8,500 - P6,400 ) 6,400
Office Supplies 6,400

Case 2

Depreciation Expense
( P500 each month x 6 months ) 3,000
Accumulated Depreciation - Office Equipment 3,000

Page 32 of 33
 Basic Accounting Practice - Adjusting Entries

Case 3

Rent Receivable or Accrued Rent Revenue

( (P700 x 3 tenants) + (P1,000 x 1) 3,100
Rent Revenue 3,100

25.
Depreciation Expense 273,750
( P1M - P200k / 4 Yrs. x 6/12 )
( P1.2M - P200k / 8 Yrs. x 9/12 )
( P1.5M - P300k / 5 Yrs. x 4/12 )
Accumulated Depreciation - Dongfeng 4250 100,000
Accumulated Depreciation - Mitsubishi TVYZSJR2R 93,750
Accumulated Depreciation - Hino SV 80,000

26. -28.
A.
Doubtful Accounts Expense 30,000
Allowance for Doubtful Account 30,000
( P500,000 x 10% - P20,000 )
B.
Doubtful Accounts Expense 40,000
Allowance for Doubtful Account 40,000
( P500,000 x 8% )
C.
Doubtful Accounts Expense 20,000
Allowance for Doubtful Account 20,000
( P500,000 x 8% - P20,000 )

29.-30.

Asset Method

Insurance Expense
( P100,000 x 8/12 ) + ( P125,000 x 6/8 ) +
( P115,000 x 10/24 ) 208,333
Prepaid Insurance 208,333

Expense Method

Prepaid Insurance
( P100,000 x 4/12 ) + ( P125,000 x 2/8 ) +
( P115,000 x 14/24 ) 131,667
Insurance Expense 131,667

Under Expense Method, the numerators are the months not used or incurred since we
are looking for the asset portion which is the portion not yet used up.

Page 33 of 33