Adjusting Journal

Entries
The Accounting Cycle
 Identifying and
Analyzing
Business
Transactions
Reversing Entries Recording in the
Journals

Post-Closing Trial Posting to the

Balance Ledger

The Accounting
Cycle
Unadjusted Trial
Closing Entries
Balance

Financial Adjusting Journal

Statements (FS) Entries

Adjusted Trial
Balance
Adjusting Journal Entries
Adjusting journal entries (AJE) are accounting entries made to a
company's journal of accounts at the end of a financial period.
The process allocates income and expenses to the actual period in which the
income or expense occurred.
It is composed of at least nominal account and real account.
Purpose of AJE
This is prepared to confirm with the accrual concept and matching principle.

Accrual Concept Matching Principle

states that income is

matching principle aims
recognized when earned
to align expenses with
regardless of when it
revenues. Expenses
was collected and
should be recognized in
expenses are recognized
the period when the
when incurred
revenues earned with
regardless of when it
them are recognized.
was paid.
Why is AJE Important?
▪ At the end of the accounting period, some income and expenses may have
not been recorded, taken up or updated; hence, there is a need to update
the accounts.
▪ If adjusting entries are not prepared, some income, expense, asset, and
liability accounts may not reflect their true values when reported in the
financial statements.
Types of Adjusting Journal Entries

Accruals Deferrals

Adjusting
Journal Entries

Allowance for
Depreciation
Bad Debts
Accruals
Accrual adjusting entries are the means for including transactions that
occurred during the current accounting period but have not yet been
recorded in a company's general ledger accounts.
Without accrual adjusting entries, those transactions will likely be reported in
a later accounting period.
Accruals

Accrual

Accrued Accrued
Income Expense
Accrued Income
Accrued income or accrued revenue is an income already earned but not yet
recorded because it is still uncollected. (e.g. interest earned on notes
receivable, unpaid rental of a tenant, etc.)
Without this AJE, asset and income of the company is understated.
Accrued Income
Proforma Adjusting Entry:

Receivable account X,XXX

Income account X,XXX
Accrued Income
Example 1:
The company leases its building space to a tenant. The tenant pays monthly
rental fees of P2,000. On June 30, no entry was made. AJE would be:

June 30 Accrued Rent Income P2,000

Rent Income P2,000
OR
June 30 Rent Receivable P2,000
Rent Income P2,000
Accrued Income
Example 2:
The company lent P9,000 at 10% interest on August 31, 2021. The amount
will be collected after 1 year. No entry was made on the interest earned at
the end of the year. AJE would be:
Dec 31 Interest Receivable P300
Interest Income P300
▪ (P9,000 * 10% * 4/12) 4 mo. from Aug 31 to Dec 31
Accrued Income
Example 3:
The company lent P9,000 at 10% interest on Dec 1, 2021. The amount will be
collected after 1 year. No entry was made on the interest earned at the end
of the year. AJE would be:
Dec 31 Interest Receivable P75
Interest Income P75
▪ (P9,000 * 10% * 1/12) 1 mo. from Dec 1 to Dec 31
Accruals

Accrual

Accrued Accrued
Income Expense
Accrued Expense
Accrued expenses refer to those that are already incurred but have not yet
been paid. (e.g. unpaid salaries, commission, interest, rent, etc.).
Without this AJE, liability and expense of the company is understated. Hence,
income is overstated.
Accrued Expense
Proforma Adjusting Entry:

Expense account X,XXX

Liability account X,XXX
Accrued Expense
Example 4:
The employees worked for the last three days of the year 2021. The total
wage for the employees is P5,000. The transaction was not recorded in the
accounting books. To record the AJE:
Dec 31 Salaries Expense P5,000
Accrued Salaries Expense P5,000
OR
Dec 31 Salaries Expense P5,000
Salaries Payable P5,000
Accrued Expense
Example 5:
The company borrowed P6,000 at 12% interest on August 1, 2021 payable
after 1 year. No entry was made at the end of the year.

Dec 31 Interest Expense P300

Interest Payable P300
(P6,000 * 12% * 5/12) 5 mos from Aug 1 to Dec 31
Types of Adjusting Journal Entries

Accruals Deferrals

Adjusting
Journal Entries

Allowance for
Depreciation
Bad Debts
Deferral
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.”
A journal entry that adjusts an amount already recorded on the books of a
company because part of the amount pertains to a future accounting
period.
Deferral

Deferral

Deferred Deferred
Expense Income

Asset Expense Liability Income

Method Method Method Method
Deferred Expense
This is an expense paid in advance and recorded as such. This is considered
as an asset until the benefit is received hence there is a need to adjust at the
end of the accounting period. (e.g. prepaid advertising, insurance, rent, etc.)

Deferred
Expense

Asset Expense
Method Method
Deferred Expense – Asset Method
Under the asset method, a prepaid expense account (an asset account) is
recorded when the amount is paid. AJE will be made to an expense account
to all or portion of the prepayments expired at the end of the period.
Proforma Entries:
Initial Entry Adjusting Entry
Prepaid Expense XXX Expense Account XXX
Cash XXX Prepaid Expense XXX
To record prepayment To record adjustment
Deferred Expense – Asset Method
Example 6:
The company purchased office supplies amounted to P1,500 on December 7,
2021.

Dec 7 Office Supplies P1,500

Cash P1,500
Deferred Expense – Asset Method
Example 6:
On December 31, 2021, 60% of the supplies have been used.

40% 600 Unused Asset

60% 900 Used Expense
100% 1,500 Total amount paid

Dec 31 Supplies Expense P900

Office Supplies P900
Deferred Expense – Asset Method
Example 6:

Office Supplies Office Supplies Expense Cash

1,500 900 900 1,500

600 900 1,500

Unused Used
Deferred Expense
This is an expense paid in advance and recorded as such. This is considered
as an asset until the benefit is received hence there is a need to adjust at the
end of the accounting period. (e.g. prepaid advertising, insurance, rent, etc.)

Deferred
Expense

Asset Expense
Method Method
Deferred Expense – Expense Method
Under the expense method, an expense account is recorded when the
amount is paid. AJE will be made to an asset account to all or portion of the
prepayments unexpired at the end of the period.
Proforma Entries:
Initial Entry Adjusting Entry
Expense Account XXX Prepaid Expense XXX
Cash XXX Expense Account XXX
To record prepayment To record adjustment
Deferred Expense – Expense Method
Example 7:
The company purchased office supplies amounted to P1,500 on December 7,
2021.

Dec 7 Office Supplies Expense P1,500

Cash P1,500
Deferred Expense – Expense Method
Example 7:
On December 31, 2021, 60% of the supplies have been used.

40% 600 Unused Asset

60% 900 Used Expense
100% 1,500 Total amount paid

Dec 31 Office Supplies P600

Office Supplies Expense P600
Deferred Expense – Expense Method
Example 7:

Office Supplies Office Supplies Expense Cash

600 1,500 600 1,500

600 900 1,500

Unused Used
Deferred Expense – Asset Method
Example 8:
On September 1, 2021, the company acquired an insurance for its properties
with a coverage of one year amounting to P24,000.

Sept 1 Prepaid Insurance P24,000

Cash P24,000
 Deferred Expense – Asset Method
Example 8:
On September 1, 2021, the company acquired an insurance for its properties with a
coverage of one year months amounted to P24,000.

Used – P8,000 Unused – P16,000

Sept 1, 2021 Dec 31, 2021 Sept 1, 2022

24,000 X 4/12 24,000 X 8/12

4 mos from Sept 1 – Dec 31 8 mos from Dec 31 – Sept 1
 Deferred Expense – Asset Method
Example 8:
On September 1, 2021, the company acquired an insurance for its properties with a
coverage of one year months amounted to P24,000.

Used – P8,000 Unused – P16,000

Sept 1, 2021 Dec 31, 2021 Sept 1, 2022

Dec 31 Insurance Expense P8,000

Prepaid Insurance P8,000

Deferred Expense – Asset Method
Example 8:

Prepaid Insurance Insurance Expense Cash

24,000 8,000 8,000 24,000

16,000 8,000 24,000

Unused Used
Deferral

Deferral

Deferred Deferred
Expense Income

Asset Expense Liability Income

Method Method Method Method
Deferred Income
Unearned revenue (also known as deferred revenue/income) represents revenue
already collected but not yet earned (e.g. advanced rental paid by the tenant, interest
income collected in advance, etc.). This is considered a liability until it is earned
hence there is a need to adjust at the end of the accounting period. They are also
called "advances from customers“.

Deferred
Income

Liability Revenue
Method Method
Deferred Income – Liability Method
Under the liability method, an unearned income account (a liability account)
is recorded when the amount is received. AJE will be made to an income
account to all or portion of the advances earned at the end of the period.
Proforma Entries:
Initial Entry Adjusting Entry
Cash XXX Unearned Income XXX
Unearned Income XXX Income Account XXX
To record receipt of To record adjustment
payment
Deferred Income – Liability Method
Example 10:
The company made P30,000 advanced collections from its customers on
January 10, 2021.
Initial entry:
Jan 10 Cash P30,000
Unearned Revenues P30,000
Deferred Income – Liability Method
Example 10:
On Jan 31, the company rendered 20% of the services required to the
customers.

80% 24,000 Unearned Liability

20% 6,000 Earned Income
100% 30,000 Total amount received

Jan 31 Unearned Revenue P6,000

Service Revenue P6,000
Deferred Income – Liability Method
Example 10:

Unearned Revenue Service Revenue Cash

6,000 30,000 6,000 30,000

24,000 6,000 30,000

Unearned Earned
Deferred Income

Deferred
Income

Liability Revenue
Method Method
Deferred Income – Income Method
Under the income method, an income account is recorded initially when the
amount is collected. AJE will be made to a liability account to all or portion
of the services not yet rendered at the end of the period.
Proforma Entries:
Initial Entry Adjusting Entry
Cash XXX Income Account XXX
Income Account XXX Unearned Income XXX
To record receipt of cash To record adjustment
payment
Deferred Income – Income Method
Example 11:
The company made P30,000 advanced collections from its customers on
January 10, 2021.
Initial entry:
Jan 10 Cash P30,000
Service Revenue P30,000
Deferred Income – Income Method
Example 11:
On Jan 31, the company rendered 20% of the services required to the
customers.

80% 24,000 Unearned Liability

20% 6,000 Earned Income
100% 30,000 Total amount received

Jan 31 Service Revenue P24,000

Unearned Revenue P24,000
Deferred Income – Income Method
Example 11:

Unearned Revenue Service Revenue Cash

24,000 24,000 30,000 30,000

24,000 6,000 30,000

Unearned Earned
Deferred Income – Liability Method
Example 12:
Lala Enterprise leases its available space to third parties. On March 31, 2021,
it received an advance payment for two years from a tenant amounting to
P84,000.
Initial Entry:
Marc 31 Cash P84,000
Unearned Rent Income P84,000
 Deferred Income – Liability Method
Example 12:

Lala Enterprise leases its available space to third parties. On March 31, 2021, it
received an advance payment for two years from a tenant amounting to P84,000.

Earned – P31,500 Unearned – P52,500

Mar 31, 2021 Dec 31, 2021 Mar 31, 2023

84,000 X 9/24 84,000 X 15/24

9 mos from Mar 1, 2021– 15 mos from Jan 1, 2022 – Mar
Dec 31, 2021 31, 2020
 Deferred Income – Liability Method
Example 12:

Lala Enterprise leases its available space to third parties. On March 31, 2020, it
received an advance payment for two years from a tenant amounting to P84,000.

Earned – P31,500 Unearned – P52,500

Mar 31, 2021 Dec 31, 2021 Mar 31, 2023

Dec 31 Unearned Rent Income P31,500

Rent Income P31,500

Deferred Income – Liability Method
Example 12:

Unearned Rent Income Rent Income Cash

31,500 84,000 31,500 84,000

52,500 31,500 84,000

Unearned Earned
Types of Adjusting Journal Entries

Accruals Deferrals

Adjusting
Journal Entries

Allowance for
Depreciation
Bad Debts
Depreciation
Depreciation is an accounting method of allocating the cost of a tangible or
physical asset over its useful life or life expectancy. Depreciation represents
how much of an asset's value has been used up.
Types of Depreciation
1. Physical Depreciation
2. Functional or economic depreciation
Computation of Depreciation
Straight-line Method:
Under the straight line method, the cost of the fixed asset is distributed
evenly over the life of the asset.
Three factors are involved in computing of depreciation expense:
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 probably be
sold for at the end of its estimated useful life.
3. Estimated useful life is the estimated number of periods that an entity
can make use of the asset.
Computation of Depreciation
Straight-line Method:
Asset cost xx
Less: Estimated salvage value xx
Depreciable cost xx
Divided by: Estimated useful life xx
Depreciation expense xx
Depreciation
Proforma Adjusting Entry:
Depreciation Expense XXX
Accumulated Depreciation XXX
Depreciation
Example 14:
A company acquired a delivery van of P40,000 at the beginning of 2021. The
van has an estimated useful life of 5 years and a salvage value of P6,000.

Jan 1, 2021 Service Vehicle P40,000

Cash P40,000
Depreciation
Example 14:

December 31, 2021

Depreciation = Cost – Salvage Value
Useful Life Depreciation Expense P6,800
Accumulated Depreciation P6,800
Depreciation = P40,000 – P6,000
5 years

Depreciation = P6,800
Depreciation
Example 14:
Dec 31, 2021 Depreciation Expense P6,800

Accumulated Depreciation P6,800

Dec 31, 2022 Depreciation Expense P6,800

Accumulated Depreciation P6,800

Dec 31, 2023 Depreciation Expense P6,800

Accumulated Depreciation P6,800

Dec 31, 2024 Depreciation Expense P6,800

Accumulated Depreciation P6,800

Dec 31, 2025 Depreciation Expense P6,800

Accumulated Depreciation P6,800

Depreciation
Example 15:

2021 2022 2023 2024 2025

Cost P40,000 P40,000 P40,000 P40,000 P40,000
Accumulated P6,800 P13,600 P20,400 P27,200 P34,000
Depreciation
Book Value P33,200 P26,400 P19,600 P12,800 P6,000
Depreciation
Example 15:
A company acquired a delivery van of P40,000 on April 1, 2021. The van has
an estimated useful life of 5 years and no salvage value

Apr 1, 2021 Service Vehicle P40,000

Cash P40,000
Depreciation
Example 14:

December 31, 2021

Depreciation = 40,000
5 years Depreciation Expense P6,000
Accumulated Depreciation P6,000
Depreciation = P8,000 x 9/12

Depreciation = P6,000
Depreciation
Example 15:
Dec 31, 2021 Depreciation Expense P6,000

Accumulated Depreciation P6,000

Dec 31, 2022- Depreciation Expense P8,000

2025 Accumulated Depreciation P8,000

Mar 31, 2026 Depreciation Expense P2,000

Accumulated Depreciation P2,000

(P8,000* 3/12) 3 mos from Jan 1 to Mar 31, 2026

Depreciation
Example 16:

2021 2022 2023 2024 2025 2026

Cost P40,000 P40,000 P40,000 P40,000 P40,000 P40,000
Accumulated P6,000 P14,000 P22,000 P30,000 P38,000 P40,000
Depreciation

Book Value P34,000 P26,000 P18,000 P10,000 P2,000 -

Depreciation
Example 17:
A company acquired an office equipment of P75,000 at the beginning of the
year. The equipment has an estimated useful life of 8 years and a salvage
value of P3,000.

Dec 31, 2021

Depreciation Expense 9,000
Accumulated Dep 9,000
Depreciation
Example 18:
A company acquired an office equipment of P75,000 on July 31, 2021. The
equipment has an estimated useful life of 8 years and a salvage value of
P3,000.

Dec 31, 2021

Depreciation Expense 3,750
Accumulated Dep 3,750
Depreciation
Example 19:
A company acquired an office equipment of P120,000 on March 1, 2021. The
van has an estimated useful life of 6 years and a salvage value of P15,000.
The company uses fiscal year and the end of their accounting period is
November 30, 2021.

Nov 30, 2021

Depreciation Expense P13,125
Accumulated Depreciation P13,125
Types of Adjusting Journal Entries

Accruals Deferrals

Adjusting
Journal Entries

Allowance for
Depreciation
Bad Debts
Allowance for Bad Debts
Accounts receivable should be presented in the balance sheet at net
realizable value, the most probable amount that the company will be able to
collect.
Net Realizable Value (NRV) – the amount reported in the balance sheet which is the
difference between Accounts Receivable and Allowance for Doubtful Accounts.

Accounts Receivable (Gross) PXXX

Less: Allowance for Doubtful Accounts (XXX)

Net Realizable Value PXXX

Allowance for Bad Debts
Proforma Adjusting Entry:
1. Doubtful Accounts Expense XXX
Allowance for Doubtful Accounts XXX

2. Bad Debts Expense XXX

Allowance for Bad Debts XXX

3. Uncollectible Accounts Expense XXX

Allowance for Uncollectible Accounts XXX
Illustration
Assume that Company ABC uses past experience to estimate that 2% of all
accounts receivable are uncollectible. (i.e., bad debt expense). During 2021
the company had P300,000 accounts receivable balance.

Adjusting Journal Entry

Dec 31 Bad Debts Expense P6,000
Allowance for Bad Debts P6,000
Percentage of Receivables
Assume that Company ABC has the following balances at the end of the
period before adjustments. What is the net realizable value of the receivable
for 2021?

Accounts Receivable P300,000

Less: Allow for Bad Debts 6,000
NRV P294,000
Illustration
Chinky Enterprise’s financial report shows a debit balance of account
receivable amounting to P96,000. Allowance for doubtful accounts is set up
at 5% of accounts receivable.

Adjusting Journal Entry

Dec 31 Doubtful Accounts Expense P4,800
Allowance for Doubtful Accounts P4,800