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Adjusting Entries

FAB M

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Rainier Cortes Eyao
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22 views17 pages

Adjusting Entries

FAB M

Uploaded by

Rainier Cortes Eyao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ADJUSTING ENTRIES

In the accounting process of a service firm, there are SIX CLASSIFICATIONS OF ADJUSTING ENTRIES:

Depreciation
Bad debts
Prepaid expenses
Accrued expenses
Deferred revenues
Accrued revenues
ADJUSTING ENTRIES are prepared at the end of an accounting
period to unrecorded revenue that has been earned and unrecorded
expenses that has been incurred during the accounting process.
CHARACTERICTICS:

1. each entry is recorded at the end of an


accounting period;
2. each entry has at least one balnce sheet
account ( eg. Assets or liability) and atleast
one income statement account ( expenses
or revenue)
3. each entry has no cash account in either
the debit and credit side.
DEPRECIATION

- is applied to components of PPE.


-there are assets held by an entity and expected to benefit more than one accounting
period.
- it is done to allocate the cost less residual value of the PPE over its useful life.

- gain is represented by revenue and pain is represented by depreciation expense


The entry to record depreciation is:

Dr. Depreciation Expense xxx


Cr. Accumulated Depreciation xxx

Depreciation Expense is an income statement account while Accumulated


depreciation is a balance sheet account.

The difference between a PPE account and its related Accumulated Depreciation
Account is called BOOK VALUE.
The basic formula in computing depreciation is as follows:

Depreciation expense = Cost of the PPE- Estimated Residual Value


Estimated Useful Life

RESIDUAL VALUE is the amount that is expected to be


recovered from the asset at the end of its useful life through
sale, rather than through continuing use.

This method of depreciation is called the STRAIGHT-LINE –


METHOD.
BAD DEBTS
-isapplied to the accounts receivable of a firm.
-the most common method in estimating bad debts is
by multiplying the amount of the accounts receivable by
a certain percentage, which is determined through
years of experience of the entity in business. The
resulting figure is the required balance of the allowance
for doubtful accounts.
The pro-forma entry for a bad debts
adjusting entry is:
Dr. Bad Debts Expense xxx
Cr. Allowance for Doubtful Accounts
xxx

Bad Debts Expense is an income statement account while Allowance


for Doubtful Accounts is a balance sheet account.

Allowance for Doubtful Account is a deduction from A/R.

The difference between A/R and the Allowance for Doubtful Accounts
is called the Net Realizable Value of the Accounts Receivable.
PREPAID EXPENSES
- These expenses are paid even before they are incurred. The outlay of cash
precedes the actual consumption of the economic benefits.
- Usually periodic expenses which are paid at the beginning of a certain period of
time for convenience of both the payor and the payee.

The pro-forma entry is a s follows:

Dr. Prepaid Expense xxx


Cr. Cash xxx

When the prepaid expense has already expired, the following is the pro-
forma adjusting entry:

Dr. Expense xxxx


Cr. Prepaid Expense xxx
ACCRUAL EXPENSE

- Incurrence comes before the actual disbursement of cash.


- An expense should be recorded, although there is no actual outlay of cash.
The pro-forma entry to record an accrued expense is simply as follows:

Dr. Expense xxx


Cr. Accrued Expenses Payable xxx
UNEARNED REVENUE
- Cash is received first before services are rendered. *
- When cash is received the following entry is made:

Dr. Cash xxx


Cr. Unearned Revenue xxx

- As the period covered by cash received expires, or the required services


have already been rendered, such revenue is deemed earned, rather than
unearned. This is because the company has already provided the economic
benefits that are expected from it by the payor.
- When such revenue is earned an adjustment of this form should be made:

Dr. Unearned Revenue xxx


Cr. Revenue xxx
ACCRUED REVENUE

Just like in the case of expenses, there is also an opposite of


unearned revenue, and that is accrued revenue.

-simply the adjusting entry should be:

Dr. Receivable xxx


Cr. Revenue xxx
Sample problem for Prepaid Expenses:

On August 1, 2018,a P 18,000 premium was paid on a one year


policy. Prepare the adjusting entry for the year ended December 31, 2018.

1. The payment of the 19,000 insurance premium for two years in advance
was originally recorded as Prepaid Insurance. One year of the policy has
now expired. Prepare the adjusting entry for the year ended December
31, 2016.
2. The payment of the 19,000 insurance premium for two years in advance
was originally recorded as Insurance expenses. One year of the policy
has now expired. Prepare the adjusting entry for the year ended
December 31, 2016.
3. Paid 24,000 for a 1-year fire insurance policy to commence on
September 1. The amount of premium was debited to Prepaid Insurance
and credit to cash. Record the necessary adjusting entry for the month .
Sample problem for Prepaid Expenses:

4.On June 1, 2017, Lacerna Company paid for a one-year insurance in the
amount of P 24,000. It was recorded as debit to Insurance Expense and credit
to Cash. Record the necessary adjusting entry for the month.

5.On October 1, 2019, ABM Company acquired a 3 –year insurance policy for
P36,000 paid in advance. Prepare the adjusting entry for the year ended,
December 31, 2019.
Sample problem for Supplies

1. On May 8, 2016, Rain Company purchased supplies P 18,532. The


accountant recorded it as Office Supplies. At the end of the month
the custodian makes a careful physical inventory of supplies. The
inventory count showed that supplies costing P 15,129. Prepare the
adjusting entry for the month ended.

2.For the month of March 2016, Janzen Company’s book of account


shows a debit balance on its Office Supplies account the amount of P
10,000. During the month. A total of P5,000 was purchased and was
recorded to Office Supplies. By the end of the month, the total Office
Supplies on hand amounts to P6,000. record the necessary adjusting
entry for the month.
Sample problem for Supplies

3.For the month of March 2016, Jantzen Company’s book of account


shows a debit balance on its Supplies Expense account the amount of
P10,000 , During the month, a total of P5,000 was purchased and was
recorded to Supplies expense. By the end of the month, the total
office supplies on hand amount to P6,000. Record the necessary
adjusting entry for the month

4. On May 8, 2016, rain Company purchased supplies P18,532. The


accountant recorded it as Supplies Expense. At the end of the month
the custodian makes a careful physical inventory of supplies. The
inventory count showed that supplies costing P15,129.

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