CASH BASIS without adjusting entries

ACCRUAL BASIS with adjusting entries

One income statement Account
ACCOUNTING PERIOD One balance sheet account
period of time that will be used for financial statement purposes
DR
ADJUSTING PROCESS CR
to gather and put together data necessary to update the balances of some accounts

TYPES OF ADJUSTING ENTRIES

1 Accrued Expenses
2 Accrued Revenue
3 Prepaid Expenses or Deferred Expenses
4 Unearned Revenues or Deferred Revenues
5 Depreciation of Property, Plant and Equipment
6 Uncollectible Accounts or Bad Debts
7 Merchandise Inventory (will be discussed in the succeeding chapters)
e income statement Account Revenue Or expense
e balance sheet account Asset or liability account
 TYPES OF ADJUSTING ENTRIES
1 Accrued Expenses
2 Accrued Revenue
3 Prepaid Expenses or Deferred Expenses
4 Unearned Revenues or Deferred Revenues
5 Depreciation of Property, Plant and Equipment
6 Uncollectible Accounts or Bad Debts
7 Merchandise Inventory (will be discussed in the succeeding chapters)

1 Accrued Expenses/Accrued Liabilities

expenses incurred but not yet paid
Ex: Taxes Payable, Interest Payable, Utilities Payable, Salaries Payable etc

Pro-forma Entry:
Expense xxxx Inc.
Payable xxxx BS

November 30, unpaid taxes amounting 10,000

Taxes Expense 10,000.00

Taxes payable 10,000.00

2 Accrued Revenue/Accrued Assets

revenue earned but not yet received or collected at the end of the accounting period

Pro-forma Entry:
Receivable xxxx BS
Revenue xxxx Inc.

El Nino is an apartment renting business. As of Nov 30, a tenant has not paid his
November Rent Php 8,000.

Rent Receivable 8,000.00

Rent Revenue 8,000.00

3 Prepaid Expenses or Deferred Expenses ASSET

expenses paid in advance

unused 1. Asset Method -account debited upon payment is an asset account. In adjustment, an expense account
used 2. Expense method -account debited upon payment is an expense account. In adjustment, an asset account

Jan 3, purchased office supplies Php 8,000

Unused 1. Asset Method

Office Supplies 8,000.00
Cash 8,000.00

Used 2. Expense Method

Office Supplies Expense 8,000.00
 Cash 8,000.00

Jan 31, remaining unused supplies Php 2,000 ASSET

Used - Php 6,000 EXPENSE
ADJUSTING
1. Asset Method (adj - Expired or used portion)
Office Supplies Expense 6,000.00
Office Supplies 6,000.00

2. Expense Method (adj - remaining or unused portion)

Office Supplies 2,000.00
Office Supplies Expense 2,000.00

4 Unearned Revenues or Deferred Revenues LIABILITY

revenues collected or received in advance by the business

1. Liability Method -account credited upon receipt of cash is a liability account. In adjustment, a liability acc
2. Revenue method -account credited upon receipt of cash is a revenue account. In adjustment, a revenue a

On October 1, 2024 Love Yourself Apartelle received P 120,000 from Magic Shop company,
a tenant occupying an office space in the building. Amount is for 1 year rental beginning
month of October paid in advance by Magic Shop.

Oct-01 1. Liability Method

unearned Cash 120,000.00 A
Unearned Rent Revenue 120,000.00 L

2. Revenue Method
earned Cash 120,000.00 A
Rent Revenue 120,000.00

Dec 31, unearned rent Php 90,000 LIABILITY

Php 120,000 / 12 mos. = Php 10,000 rent income per month
Earned - Php 30,000 REVENUE
ADJUSTING
1. Liability Method (adj - Earned portion)
Dec 31 Unearned Rent Revenue 30,000.00 BS
Rent Revenue 30,000.00 Inc.

2. Revenue Method (adj - remaining or unearned portion)

Rent Revenue 90,000.00
Unearned Rent Revenue 90,000.00
 One income statement Account Revenue Or expense
One balance sheet account Asset or liability account

DEFERRALS VS. ACCRUALS

postponement of the recognition of expense
recognition of revenue already incurred
the company has though not yet paid
collected in advance and and revenue already
expense the company earned though not yet
received
has paid in advance

Prepaid Exp Accrued Expense

Unearned Revenue Accrued Revenue

CASH - advance NO CASH

. In adjustment, an expense account is debited and asset account will be credited

unt. In adjustment, an asset account is debited and expense account will be credited

ASSET METHOD
Office Supplies Office Supplies Expense
8,000.00 6,000.00 6,000.00

2,000.00 6,000.00
 EXPENSE METHOD
Office Supplies Office Supplies Expense
2,000.00 8,000.00 2,000.00

2,000.00 6,000.00

account. In adjustment, a liability account is debited and revenue account will be credited
account. In adjustment, a revenue account is debited and liability account will be credited

hop company,
al beginning

LIABILITY METHOD
Unearned Rent Revenue Rent Revenue
30,000.00 120,000.00 30,000.00

90,000.00 30,000.00

REVENUE METHOD
Unearned Rent Revenue Rent Revenue
90,000.00 90,000.00 120,000.00

90,000.00 30,000.00
 5 Depreciation of Property, Plant and Equipment
Property, Plant & Equipment - physical resources that are owned
and used by a business which are relatively fixed or permanent
in nature that have a long useful life. (also called fixed/plant assets)
**these are used to generate income for the business and so
a portion should be expensed in each accounting period of its life

Depreciation Accounting - process of allocating the depreciable cost

of a fixed asset over its estimated useful life.
Accumulated Depreciation - accumulated amount of depreciation
expense from the year of recognition to the latest balance sheet date

Pro-forma Entry:
Depreciation Expense-(Name of Asset) xxxx
Accumulated Depreciation-(Name of Asset) xxxx

Several most common Methods of Computing Depreciation:

1 Straight-line method
2 Sum-of-the-years digit method
3 Declining balance method
4 Units of production method

FACTORS TO BE CONSIDERED IN COMPUTING DEPRECIATION

1 Asset Cost - purchase price plus other direct costs incurred

in acquiring and bringing the asset to its intended use.
(Other costs: freight or installation cost)
2 Estimated Residual Value - estimated amount the fixed asset
can be sold at the end of its useful life. Other terms for this are
salvage value, scrap value or trade in value
3 Estimated Useful life- expressed in years or number of units or
hours the asset can be used

ILLUSTRATION:
A. On January 2, 2024, Dreamers Company bought equipment for a
total cost of P 500,000. Its useful life is 10 yrs and its estimated
residual value is P 50,000. The company uses the straight line method
of computing depreciation.

Jan-02 Equipment ₱ 500,000.00

Cash ₱ 500,000.00

Dec-31 Depreciation Expense-Eqt. ₱ 45,000.00

Accumulated Depreciation-Eqt. ₱ 45,000.00

Computation:

Cost of Equipment ₱ 500,000.00

Less: Estimated Residual Value 50,000.00
Depreciable Cost ₱ 450,000.00
 Divided by estimated useful life 10 years
Annual Depreciation ₱ 45,000.00
2024 2025
Asset Cost ₱ 500,000.00 ₱ 500,000.00
Less: Accumulated Dep at Dec 31, 2024 45,000.00 90,000.00
Book Value, Dec 31, 2024 ₱ 455,000.00 ₱ 410,000.00

PARTIAL-YEAR DEPRECIATION

B. On September 1, 2022, Dreamers Company purchased a delivery

truck for a total cost of P 960,000. The estimated useful life is 8 years
and at the end of which it is estimated to be sold for P 80,000.

The adjusting entry to take up depreciation of the truck for the year
ended December 31, 2022 is:

Dec-31 Dep. Exp.-Delivery Truck ₱ 36,667.00

Accum.d Dep.-Delivery Truck ₱ 36,667.00

Computation:

Cost of Delivery truck ₱ 960,000.00

Less: Estimated Residual Value 80,000.00
Depreciable Cost ₱ 880,000.00
Divided by estimated useful life 8 years
Annual Depreciation ₱ 110,000.00 12 mos.
Divided by mos. in a year 12
Monthly Depreciation ₱ 9,166.67
Multiplied by no. of mos. From Sep 1 to Dec 31 4
Depreciation Exp for 4 mos. ₱ 36,667.00
Book Value, Dec 31 , 2022 ₱ 923,333.00

6 Provision for Uncollectible Accounts

anticipated loss from uncollectible receivables

Pro-forma Entry:
Uncollectible Accounts Expense/Bad debts Exp. xxxx
Allowance for Uncollectible Accounts/Bad Debts xxxx

ILLUSTRATION:
A. Assume that on Dec 31, 2022, the end of ABC company's accounting period,
the company has outstanding Accounts Receivable of P 400,000. The company
estimates that 4% of these receivables might not be collected. The allowance
for Uncollectible Accounts has no balance.

Dec 31, Uncollectible Accounts Expense ₱ 16,000.00

2022 Allowance for Uncollectible Accounts ₱ 16,000.00
(P 400,000 x 4% = P 16,000)

Accounts Receivable will be presented as follows:

 Accounts Receivable ₱ 400,000.00
Less: Allowance for Uncollectible Accounts 16,000.00
Expected or Net Realizable Value ₱ 384,000.00

Note: Contra Account is an account deductible from its related account.

B. ABC Company has the ff. account balances on Dec. 31 2022 before adjusting
entries are prepared.

Accounts Receivable ₱ 400,000.00

Allowance for Uncollectible Accounts ₱ 10,000.00 Credit

Uncollectible Accounts Expense ₱ 6,000.00

Allowance for Uncollectible Accounts ₱ 6,000.00

Computation:

Outstanding Accounts Receivable ₱ 400,000.00

Multiply by percent uncollectible 4%
Required Balance of the Allow. Acct. after Adj. ₱ 16,000.00 Credit
Less: Allowance balance before adj. (credit) 10,000.00
Amount of Adjustment ₱ 6,000.00

C. ABC Company has the ff. account balances on Dec. 31 2022 before adjusting
entries are prepared.

Accounts Receivable ₱ 400,000.00

Allowance for Uncollectible Accounts (debit) ₱ 10,000.00 Debit

Uncollectible Accounts Expense ₱ 26,000.00

Allowance for Uncollectible Accounts ₱ 26,000.00

Computation:

Outstanding Accounts Receivable ₱ 400,000.00

Multiply by percent uncollectible 4%
Required Balance of the Allow. Acct. after Adj. ₱ 16,000.00 Credit
Add: Allowance balance before adj. (debit) 10,000.00 Debit
Amount of Adjustment ₱ 26,000.00

T-ACCOUNT after Adjusting Entries

Allowance for Uncollectible Accounts Allowance

Bal before adj P 10,000 P 26,000 amount of adjustment 10,000.00

P 16,000 balance after adj.

 Equipment
Jan-24 500,000.00
Accumulated Depreciation
5 yrs 2024 100,000.00 1 100,000.00
2025 100,000.00 2 200,000.00
2026 100,000.00 3 300,000.00
2027 100,000.00 4 400,000.00
2028 100,000.00 5 500,000.00
0.00

Expense (Income Statement)

Contra-Asset Account

Cost RV
500,000.00 50,000.00 450,000.00
Asset Cost less Residual Value =Dep. Exp/ yr.
Useful Life

500,000 - 50,000 Depreciable Cost

10 yrs
 2034
₱ 500,000.00
450,000.00
₱ 50,000.00

Dec 31, 2022 36,667.00 4mos

2023 110,000.00 12mos
2024 110,000.00 12mos
2025 110,000.00 12mos
accum dep'25 ₱ 366,667.00

Asset Cost 960,000.00

Less: Accum Dep, 12/31/2025 366,667.00
Book Value, Dec 31 , 2025 593,333.00
36,667.00
1 110,000.00
2 110,000.00
3 110,000.00
4 110,000.00
5 110,000.00
6 110,000.00
7 110,000.00
31-Aug 73,333.36
880,000.36
Expense - Income Statement
Contra-Asset Account

Asset Receivable
(accum Dep) (allow. For unc.)
Book Value Net Realizable Value

Expense - Income Statement

Contra-Asset Account
Allowance
26,000.00

16,000.00
16,000.00