ADJUSTING ENTRIES FOR DEPRECIATION OF PROPERTY, PLANT, AND EQUIPMENT

Understanding accounting periods

• Monthly
• Quarterly
• Semi-annual
• Annually
Remember that accounting periods are determined for the preparation of the financial
statements.
Annual accounting period
• Calendar year - Begins with January 1 and ends with December 31.
• Fiscal year - An accounting year of 12 consecutive months that may or may not be in
accordance with the calendar year.
Interim financial statements:
• Financial Statements that cover one-month activities, three months, and or six
months.
Cash basis and Accrual basis of accounting
• Cash basis recognizes revenue when cash is received; and recognize expense when
cash is paid. This basis of accounting does not need adjusting entries.
• Accrual basis recognizes revenue when sales are made or services are performed
regardless of when cash is received or not; and recognizes expenses as incurred regardless of
when cash is paid out or not. This basis of accounting needs the preparation of adjusting
entries.

Need for adjusting entries

• Are entries prepared at the end of an accounting period to update and adjust the
balances of accounts.
• They are necessary so that revenue and expenses will be reported in the period they
are earned and incurred.
• All adjusting entries affect at least one income statement account and one balance
sheet account.

Adjusting entry for depreciation of property, plant, and equipment

Depreciation
• In accounting, depreciation is referred to as the decrease in value of the assets.
Property, plant, and equipment
• Assets or physical resources that are owned and used by the business which are
relatively fixed or permanent in nature
• They are sometimes referred to as fixed assets or plant assets

Depreciation Expense (name of asset) xxxx

Accumulated Depreciation (name of asset) xxxx
To take up depreciation for the year.
(This is the entry to record the depreciation.)

Straight Line Method of Depreciation:

Asset cost
• Includes purchased price plus other direct costs incurred in acquiring the asset.
Estimated useful life
• Number of years or time the asset can be used.
Estimated residual value
 • This is the estimated amount the fixed asset can be sold at the end of its useful life.
Other terms used are salvaged value, scrap value, or trade in value.

EXAMPLES:
1. On January 2, 2015, ABC Company bought equipment for a total cost of P 750,000. Its
estimated useful life is 5 years and the residual value is P 25,000. Prepare the adjusting entry
on December 31, 2015.

Adjusting Entry:

Depreciation Expense - Equipment 145 000

Accumulated Depreciation – Equipment 145 000
To take up depreciation for the year.

2. On January 2, 2015, DEF Company bought Furniture and Fixtures worth P 450,000. Its
estimated useful life is 8 years and the residual value is P 40,000. Prepare the adjusting entry on
December 31, 2015.

Adjusting Entry:
Depreciation Expense – Furniture & Fixture 51 250
Accumulated Depreciation – Furniture & Fixtures 51 250
To take up depreciation for the year.

3. On January 2, 2015, Company A bought a Delivery Truck worth P 900,000. It’s estimated
useful
life is 10 years and the residual value is P 100,000. Prepare the adjusting entry on December 31,
2015.

Adjusting entry:

Depreciation Expense - Equipment 80 000

Accumulated Depreciation – Equipment 80 000
To take up depreciation for the year
(The first three examples show the steps in computing the annual depreciation. For the
succeeding examples, you will compute monthly depreciation. If you are having a hard time
understanding the concept of adjusting entries for depreciation, please read and analyze
again the examples give.)

4. On October 1, 2015, Company A bought an Office Equipment worth P 120,000. It’s estimated
useful life is 5 years and the residual value is P 4,000. Prepare the adjusting entry on December
31, 2015.

Adjusting entry:
Depreciation Expense - Equipment 5 800
Accumulated Depreciation – Equipment 5 800
To take up depreciation for 3 months.

Notice that we only recorded the depreciation for 3 months. It is because the equipment was
bought on Oct 1, 2015. Now you count from Oct 1 to Dec 31, 2015. It’s only 3 months.

5. On April 1, 2015, Company B bought an Office Equipment worth P 500,000. It’s estimated
useful life is 10 years and the residual value is P 45,000. Prepare the adjusting entry on
December 31, 2015.

6. On May 1, 2015, GHI Company bought Furniture and Fixtures worth P 675,000. It’s estimated
useful life is 5 years and the residual value is P 75,000. Prepare the adjusting entry on
December
31, 2015.
Adjusting entry:
Depreciation Expense - Equipment 80 000
Accumulated Depreciation – Equipment 80 000
To take up depreciation for 8 months

Instructions: Answer the following questions below.

1.Why do you need to prepare adjusting entries?

2. Differentiate calendar year and fiscal year accounting period.

Instructions: Provide the adjusting entry and the book value of the items being asked for. You
may use a separate sheet for your computation.

1. On January 2, 2015, ABC Company bought equipment for a total cost of P 800,000. Its
estimated useful life is 8 years and the residual value is P 125,000. Prepare the adjusting entry
on December 31, 2015.

2. On May 1, 2015, GHI Company bought Furniture and Fixtures worth P 440,000. Its estimated
useful life is 5 years and the residual value is P 35,000. Prepare the adjusting entry on
December 31, 2015.

3. On April 1, 2015, Company ABC bought a Delivery Truck worth P 600,000. Its estimated
useful life is 4 years and the residual value is P 50,000. Prepare the adjusting entry on
December 31, 2015.

4. On January 2, 2015, Company B bought an Office Equipment worth P 175,000. Its estimated
useful life is 5 years and the residual value is P 15,000. Prepare the adjusting entry on
December 31, 2015.

5. On October 1, 2015, Company A bought an Office Equipment worth P 120,000. Its estimated
useful life is 5 years and the residual value is P 4,000. Prepare the adjusting entry on December
31, 2015.
 ADJUSTING ENTRY FOR UNCOLLECTIBLE ACCOUNTS

Adjusting entry for uncollectible accounts

• These are the company’s receivables which might not be collected.
• Prepared to recognize the anticipated loss that the business might incur arising from
these uncollectible.
Uncollectible Accounts Expense xxxx
Allowance for Uncollectible Accounts xxxx

To take up provision for uncollectible accounts

(This is the entry to record the adjusting for uncollectible accounts.)

• Note: Allowance for Uncollectible Accounts has a normal balance of credit. It is a

contra asset account.
• A contra asset account is an account that is being deducted from its related account.

EXAMPLES:
1.On December 31, 2015, the company has an outstanding Accounts Receivable balance of
350,000. 5% of these receivables might not be collected. The allowance for uncollectible
accounts has no balance.
350 000 x .05 = 17 500

2.On December 31, 2015, the company A has an outstanding Accounts Receivable balance of
215,000. Of these, 7% is estimated to be uncollectible. The allowance for uncollectible account
has no balance.
215 000 x .07 = 15 050
3. On December 31, 2015, the company has an outstanding Accounts Receivable balance of
112,000. 2% of these receivables might not be collected. The allowance for uncollectible
accounts has no balance.
112 000 x .02 = 2 240

4. On December 31, 2015, the company B has an outstanding Accounts Receivable balance of
210,000. Of these, 3% is estimated to be uncollectible. The allowance for uncollectible account
has no balance.
210 000 x .03 = 6300

5. On December 31, 2015, the company B has an outstanding Accounts Receivable balance of
600,000. 3% of these in uncollectible. The allowance for uncollectible account has a credit
balance of 10,000.

6. On December 31, 2015, the company B has an outstanding Accounts Receivable balance of
875,000. 6% of these in uncollectible. The allowance for uncollectible account has a credit
balance of 7,600.
Instructions: Provide the adjusting entry and the net realizable value of the items being asked
for. You may use a separate sheet for your computation.

1. On December 31, 2015, the company has an outstanding Accounts Receivable balance of
950,000. 8% of these receivables might not be collected. The allowance for uncollectible
accounts has

a credit balance of 5,000.

2. On December 31, 2015, the company A has an outstanding Accounts Receivable balance of
760,000. Of these, 7% is estimated to be uncollectible. The allowance for uncollectible account
has a credit balance of 8,000.

3. On December 31, 2015, the company B has an outstanding Accounts Receivable balance of
120,000. 2/5 of these are estimated to be uncollectible. The allowance of uncollectible account
has a credit balance of 8,000. Provide the adjusting entry.

4. On December 31, 2015, the company C has an outstanding Accounts Receivable balance of
500,000. 5% of this is estimated as uncollectible. The Allowance for uncollectible account has
a credit balance of 8,500. Provide the adjusting entry.

5. On December 31, 2015, the company has an outstanding Accounts Receivable balance of
110,000. 2% of these receivables might not be collected. The allowance of uncollectible
accounts has a credit balance of 1,000. How much is the net realizable value of Accounts
Receivable?

Instructions: Answer the following questions below.

1. What is a contra-asset account?
2. Why do you think it is important to determine the uncollectible account

Adjusting Entry for Accrued Expense

Accrued expense
• (a liability account)
• An expense incurred but not yet paid.

Examples of accrued expenses are:

• Taxes payable
• Interest payable
• Utilities payable
• Salaries payable
• Rent payable
• Advertising payable

EXAMPLES:
1. On December 31, 2016, the company has unpaid taxes amounting to P20,000.

Adjusting entry:
Taxes Expense 20 000
Taxes Payable 20 000
To take up accrued taxes expense.

Failure to prepare the adjusting entry above will result to taxes expense for the month of December to
be understated, resulting to an overstatement in the net income for the month of December.

2. On January 31, 2016, the company has unpaid electricity bills amounting to P15,000.

Adjusting entry:
Utilities Expense 15 000
Utilities Payable 15 000
To take up accrued utilities expense.
Failure to prepare the adjusting entry above will result to utilities expense for the month of December to
be understated, resulting to an overstatement in the net income for the month of December.

3. DEF company pays salaries every Friday, the end of a five-day workweek. The total salaries for
the week ending September 2, 2016 is P270,000. What is the adjusting entry on August 31, 2016?

Adjusting entry:

Salaries Expense 162 000

Salaries Payable 162 000
To take up accrued salaries expense.

The workweek is from August 29, Monday – September 2, Friday. The business needs to prepare
financial statements on August 31. Meaning, from August 29-31, they will consider the salaries as
accrued because it is incurred but not yet paid. It will be paid on September 2, 2016.
270 000 / 5 = 54 000 (one-day salary) 54 000 x 3(days accrued) = 162 000 (three-day salary)

4. ABC store helper is earning P1,200 per day. Pay day is every Saturday for a six-day work week that
begins on Monday. Assuming December 31, is Thursday. What is the adjusting entry on December 31?

Adjusting entry:
Salaries Expense 4 800
Salaries Payable 4 800
To take up accrued salaries expense.
The workweek is from December 28, Monday – January 3, Saturday. The business needs to prepare
financial statements on December 31. Meaning, from December 28, Monday-31, they will consider the
salaries as accrued because it is incurred but not yet paid. It will be paid on January 2, Saturday. 1 200 x
4 = 4 800 (four-day salary)

5. The company pays all employees every Friday. The total salaries for the five-day workweek ending
January 1, 2016 is P225,000. Assume that December 28, Monday. What is the adjusting entry at the end
of the year?

Adjusting entry:
Salaries Expense 180 000
Salaries Payable 180 000
To take up accrued salaries expense.

The workweek is from December 28, Monday – January 1, Friday. The business needs to prepare
financial statements on December 31. Meaning, from December 28-31, they will consider the salaries as
accrued because it is incurred but not yet paid. 225 000 / 5 = 45 000(one-day salary) 45 000 x 4 = 180000
(four-day salary)

6. On December 1, 2016 the company issued a 90-day, 10% notes payable worth P75,000. Assume the
company’s accounting period ends on December 31. Provide the adjusting entry.

Adjusting entry:

Interest Expense 625

Interest Payable 625
To take up accrued interest expense.

75 000 x .10 = 7 500(annual interest) 7 500 / 12 = 625(monthly interest)

The interest was accrued for 1 month only from December 1-31, 2016.

7. On December 31, 2016 a 60-day, 9% notes payable has a balance of P240,000 in the ledger. The note
was issued on December 1, 2016. No interest has been taken on this note.
Adjusting entry:

Interest Expense 1 800

Interest Payable 1 800
To take up accrued interest expense.
240 000 x .09 = 21 600(annual interest) 21 600 / 12 = 1 800(monthly interest)
The interest was accrued for 1 month only from December 1-31, 2016.

8. Notes payable has a balance of P100,000 issued by the company on August 16, 2016. The term is 6
months with interest rate of 9%. Provide the adjusting entry on December 31, 2016.

Adjusting entry
Interest Expense 3 375
Interest Payable 3 375
To take up accrued interest expense

100 000 x .09 = 9 000(annual interest) 9 000 / 12 = 750(monthly interest)

750 x 4.5 = 3 375(August 16-December 31)
The interest was accrued for 4.5 months from August 16-December 31.

9. On June 1, 2016, the company has a P840,000 notes payable balance in the ledger with 8% interest,
and a term of 1 year. The company follows a fiscal year starting March 1, 2016. Provide the adjusting
entry at the end of the accounting period.

Adjusting entry:
Interest Expense 50 400
Interest Payable 50 400
To take up accrued interest expense.

840 000 x .08 = 67 200(annual interest) 67 200 / 12 = 5 600(monthly interest)

5 600 x 9 = 50 400 (June 1, 2016 – February 28, 2017)

The interest was accrued for 9 months. The company follows a fiscal year starting March 1,
2016. Meaning, their accounting period will end on February 28, 2017. If you can recall a fiscal year may
start any month aside from January and ends exactly after 12 months.

10. On February 1, 2016, Company C has a notes payable of P200,000 with 6% Interest, and a term of
9months. The company’s accounting period is quarterly, starting January 1, 2016. Provide the adjusting
entry.

Adjusting entry:
Interest Expense 2 000
Interest Payable 2 000
To take up accrued interest expense.

200 000 x .06 = 12 000(annual interest) 12 000 / 12 = 1 000(monthly interest)

1 000 x 2 = 2 000 (February 1, 2016 – March 31, 2016)

The interest was accrued for 2 months. The company follows a quarterly accounting period that starts
on January 1, 2016. Meaning, their accounting period will end on March 31, 2016. The company will
create financial statements every 3 months under quarterly accounting period.

11.Company B has an outstanding 3-month, 12% notes payable dated October 1, 2016 amounting
to P300,000 with a term of 1 year. The company’s accounting period is the calendar year. Provide the
adjusting entry.

Adjusting entry:
Interest Expense 9 000
Interest Payable 9 000
 To take up accrued interest expense.

300 000 x .12 = 36 000(annual interest) 36 000 / 12 = 3 000(monthly interest)

3 000 x 3 = 9 000 (October 1, 2016 – December 31, 2016)
The interest was accrued for 3 months. The company follows a calendar year accounting period.
Meaning, their accounting period will start on January 1, 2016 and will end on December 31, 2016. The
term of 1 year means that the company has to pay the complete amount within 1 year. Do not include
the term on your computation. It has nothing to do with it.

Instructions: Provide the adjusting entry.

1. Notes payable has a balance of P50, 000, issued by the company on November 1, 2016. The term is 90
days with an interest rate of 9%. The Company follows the calendar year. Prepare the adjusting entry.

2. The company pays P25, 500 worth of salaries every Friday from a five-day workweek starting Monday.
Assume that December 31 is Tuesday. Provide the adjusting entry.

3. The company has three employees earning P450 per day, P500 per day, and P550 per day
respectively. Payday is every Saturday for a six-day workweek that begins on Monday. Assume
December 31 is Thursday. Provide the adjusting entry.

4. On August 16, 2016, Company A issued a notes payable worth P360, 000 with 8% interest, and a term
of 1 year. The company follows a fiscal year starting June 1, 2016. Provide the adjusting entry.

5. Notes payable has a balance of P100, 000 issued by the company on September 1, 2016. The term is
180 days with interest rate of 9%. The company’s accounting period is semi-annual beginning July 1,
2016. Provide the adjusting entry.

6. A company pays salaries every Friday, the end of a five-day workweek. The total salaries for the week
ending January 3, 2017 is P120, 000. Prepare the adjusting entry on December 31, 2016.

7. Notes payable has a balance of P600, 000 issued by the company on November 01, 2016. The term is
120 days with interest rate of 9%. The company’s accounting period is quarterly starting October 1,
2016. Provide the adjusting entry.

8. Unpaid taxes as of December 31, 2016, amounted to P90,000.

Instructions: Answer the question below.

1. What will happen in the income statement if you fail to record the accrued expense?
 ADJUSTING ENTRY FOR ACCRUED REVENUE

Accrued Revenue
• An asset account.
• Refers to income already earned but has not yet been collected.

EXAMPLES
1. Company ABC leases its building space to a tenant on December 1, 2016. The tenant agreed to pay
monthly rental fees of P10,000. On December 31, 2016, ABC Company did not receive the rental fee yet
and no record was made in the journal.
Adjusting entry:
Rent Receivable 10 000
Rent Revenue 10 000
To take up accrued rent revenue

Even though the tenant hasn’t paid his monthly fee, the company has to record its supposed revenue in
the form of accrued revenue. You will debit a receivable because you are assuming that the tenant will
pay his rent. Failure to record the accrued revenue will make the revenue understated in the Income
Statement.

2. The company’s accounting period ends every month. As of March 31, commissions already
earned but not yet collected amounts to P38,000.
Adjusting entry:
Commissions Receivable 38 000
Commissions Revenue 38 000
To take up accrued commissions revenue.

3.The tenant who occupies the right side of the shop space hasn’t paid his rental fee beginning
September 1, 2016. The monthly rental is P8,200. The company follows a fiscal year starting
June 1, 2016.
Adjusting entry:
Rent Receivable 73 800
Rent Revenue 73 800
 To take up accrued rent revenue.

The company follows a fiscal year starting June 1, 2016 which will end on May 31, 2017. The company
has to make the adjusting entry on May 31, 2017 8 200 x 9 = 73 800(September 1, 2016 – May 31, 2017).

4. ABC Company lent 90,000 with annual interest of 10% interest on December 16, 2016. The term is 1
year. The company’s accounting period is semi-annual starting July 1, 2016.
Adjusting entry:
Interest Receivable 375
Interest Revenue 375
To take up accrued rent revenue.

The company follows a semi-annual accounting period starting July 1, 2016 – December 31, 2016.
90 000 x .10 = 9 000(annual interest) 9 000 / 12 = 750(monthly interest)
750 x .5 = 375(December 16 – December 31, 2016)

5. On August 16, 2016, Entity A lent 300,000 to another entity with an interest rate of 9% and a
term of 1 year. The company follows a fiscal year starting March 1, 2016.
Adjusting entry:
Interest Receivable 14, 625
Interest Revenue 14, 625
To take up accrued rent revenue.
The company follows a fiscal year accounting period starting March 1, 2016 – February 28, 2017.
300 000 x .09 = 27 000(annual interest) 27 000 / 12 = 2 250(monthly interest) 2 250 x 6.5 = 14,
624(August 16, 2016 – February 28, 2017)

Comparison between Accrued Expense and Accrued Revenue

1. On October 16, 2016, ABC Company received a 5-month, 6% promissory note from a XYZ Company in
the amount of P28, 000. Both companies follow a calendar year accounting period.

(28 000 x .06 = 1680) 1680 x 2.5 = 4 200

Remember, you have to be careful on identifying who is the debtor and the creditor.
Instructions: Write the correct answer on the space provided.
1. Company ABC leased its building space to Company B on May 01, 2016. Company B agreed to pay
monthly rental fees of P8, 000. The company uses the calendar year. Provide the adjusting entry of
Company B.

2. Notes receivable has a balance of P800, 000 received from a customer on May 16, 2016. It is a 150-
day, 12% note. The company’s accounting period is quarterly starting April 1, 2016. Provide the adjusting
entry of the creditor.

3. Notes receivable has a P405, 000 balance received from a customer on July 1,2016. The term is 12-
months with 8% interest. The company follows a fiscal year starting May 1, 2016. Provide the adjusting
entry of the debtor.

4. Company A borrowed 100,000 at 12% interest on March 1, 2016 from Company B. The accounting
period is semi-annual. Provide the adjusting entry of the borrower.

5. Notes payable has a balance of P400, 000 issued by the company on October 16, 2016. The term is
360 days with interest rate of 9%. The fiscal year starts on August 1, 2016. Provide the adjusting entry of
the creditor.

6. Notes receivable has a balance of P710, 000 received from a customer on August 16, 2016. It is a 1-
year, 12% note. The company’s accounting period is quarterly starting July 1. Provide the entry of the
debtor on August 16, 2016.

7. The company pays 450,000 worth of salaries every Saturday for a six-day workweek. Assume
December 29 is Monday. Provide the adjusting entry.

8. Company C leased its building space to Company D on March 16, 2016. The annual fee is 72, 000. The
fiscal year starts on March 1, 2016. Provide the adjusting entry of Company C.

9. Company AB borrowed 200,000 at 9% interest from Company CD on July 1, 2016. The accounting
period is semi-annual starting July 1, 2016. Provide the adjusting entry of CD.
10.Refer to item number 9. Provide the entry of Company AB on July 1, 2016.

B. Instructions: Write the correct answer on the space provided.

1. On December 31, 2015, the company has an outstanding Accounts Receivable balance of 700,000. 6%
of these receivables might not be collected. The allowance for uncollectible accounts has a credit
balance of 6,000. How much is net realizable value of Accounts Receivable?

2. On December 31, 2015, the company A has an outstanding Accounts Receivable balance of 850,000.
Of these, 5% is estimated to be uncollectible. The allowance for uncollectible account has a credit
balance of 8,000. Provide the adjusting entry.

3. On January 1, 2015, ABC Company bought equipment for a total cost of P 800,000. Its estimated
useful life is 8 years and the residual value is P 75,000. How much is the depreciation from the time it
was bought to March 31, 2015.

4. On July 1, 2015, Company ABC bought a Delivery Truck worth P 2,600,000. Its estimated useful life is
10 years and the residual value is P 160,000. Fiscal year, April 1, 2015. Prepare the adjusting entry.

5. On December 31, 2015, the company B has an outstanding Accounts Receivable balance of 420,000.
2/5 of these are estimated to be uncollectible. The allowance of uncollectible account has a credit
balance of 8,000. Provide the adjusting entry.

REFERENCES:
Baguino et. Al. Principles of Accounting.
Dumrique et Al. Accounting Made Easy

Adjusting Entry for Prepaid Expenses

What is a prepaid expense?

 Expenses paid in advance.
 Expenses paid by the business now, but will be utilized in the future.
 Prepaid expenses are treated as asset and become an expense through the passage of time.
 Prepaid rent, prepaid insurance, prepaid advertising, and office supplies.

Asset method
 Under this method, the account debited is an asset account. Upon adjustment, an expense
account is debited with a corresponding credit to an asset account.

Expense method
 Under this method, the account debited is an expense account. Upon adjustment, an asset
account is debited with a corresponding credit to an expense account.

EXAMPLES:
1. On April 1, 2016, the company purchased office supplies amounting to P20, 000. At the end of
the accounting period, unused office supplies amounted to P4, 500
 2. On September 1, 2016, DEF Repair Shop paid the rental fee for one year amounting to P72, 000.
The business follows the calendar year.

Adjusting Entry for Unearned Revenue

Unearned revenue (liability account)
 Revenue already collected but not yet earned.
 Revenues collected or received in advance.

Liability method
 The account credited upon receipt of cash is a liability account. Upon, adjustment, such liability
account will be debited and a revenue account is credited.

Revenue method
 The account credited upon receipt of cash is a revenue account. Upon, adjustment, such
revenue account will be debited and a liability account is credited.

EXAMPLE
1. On October 1, 2015, MNO Company received a 2-year advance payment for a shop space worth
288,000. The company follows a calendar year accounting period.