UNIT 8 ::

ADJUSTING
ENTRIES
5TH STEP OF THE ACCOUNTING PROCESS
LEARNING OBJECTIVES
• Define what adjusting entries are.
• Enumerates the different types of
adjusting entries.
• Prepare adjusting entries for
accruals, deferrals, depreciation,
doubtful account, and supplies.

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ADJUSTING ENTRIES
•Adjusting entries made at the
end of the accounting period
before closing procedures to
update the balances of assets,
liability, revenue, and expense
accounts to make their balances
ready for the preparation of
financial statements.

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Adjusting Entries

1. Deferrals
2. Accruals
3. Depreciation
4. Doubtful accounts
5. Supplies
Adjusting entries adhere to:

• Completeness
• Free from error
• Timeliness
• Accrual basis
• Revenue recognition
• Matching principle
1. DEFERRALS
Deferrals involve expenses already paid in
ADVANCE but not yet incurred and income
already received/ collected in ADVANCE but
not yet earned.

Prepayments

A. Asset Method- When “Asset Method” is used, it means that a

“prepaid” account is debited as an asset in originally recording the
transaction in the journal.
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EXAMPLE:
“A 1-year rent for the commercial space was paid in advance on August
1 for ₱120,000. The company’s accounting period ends on December
31.”

AA Asset Method (original entry):

Prepaid Rent 120,000.00
Cash 120,000.00

AA Asset Method (Adjusting entry):

Rent Expense 50,000.00
Prepaid Rent 50,000.00

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1. DEFERRALS

Prepayments

B. Expense Method- When “Expense Method”

is used, it means that an expense account is
debited in originally recording the transaction in
the journal

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EXAMPLE:
“A 1-year rent for the commercial space was paid in advance on August
1 for ₱120,000. The company’s accounting period ends on December
31.”

AA Expense Method (original entry):

Rent Expense 120,000.00
Cash 120,000.00

AA Expense Method (Adjusting entry):

Prepaid Rent 70,000.00
Rent Expense 70,000.00

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1. DEFERRALS

Pre-collections

A. Income Method- When income method is

used, it means that the money collected in
advance is recorded as an income in full even if
it is not yet earned and NO liability is recorded
yet in this case in the original journal entry.

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EXAMPLE:
On November 15, a sum of ₱25,000 was received in advance for services to be
rendered at some future dates. At year-end, only ₱15,000 worth of service has
been rendered to the client.

AA Income Method (original entry):

Cash 25,000.00
Service Income 25,000.00

AA Income Method (Adjusting entry):

Service Income 10,000.00
Unearned Service Income 10,000.00

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1. DEFERRALS

Pre-collections

B. Liability Method- When liability method is

used, it means that the money collected in
advance is recorded as a liability in full and NO
income is recorded yet in this case
in the original journal entry.

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EXAMPLE:
On November 15, a sum of ₱25,000 was received in advance for services to be
rendered at some future dates. At year-end, only ₱15,000 worth of service has
been rendered to the client.

AA Liability Method (original entry):

Cash 25,000.00
Unearned Service Income 25,000.00

AA Liability Method (Adjusting entry):

Unearned Service Income 15,000.00
Service Income 15,000.00

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2. ACCRUALS

Accruals are items for adjustments that have

already been incurred (expenses) or have
already been earned (income) but have not
been paid or received.

Salaries and utilities expense

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EXAMPLE:
a. At the end of the accounting period it was ascertained that salaries
amounting to ₱18,000 was not reflected in the records and was still unpaid.
Adjusting entry:
AA
Salaries expense 18,000.00
Salaries payable 18,000.00

b. Water, electricity and internet bills that have already been paid were not
recorded on the books by the bookkeeper. Total amount paid was ₱12,000
Adjusting entry:
AA
Utilities expense 12,000.00
Cash 12,000.00
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2. ACCRUALS
Interest Expense/ Interest Income

An interest can either be an income or an

expense depending on whose perspective
we deal with—the debtor or the creditor.

• The DEBTOR or BORROWER incurs the

interest expense and has to pay for it.

• The CREDITOR or LENDER earns the

interest income and can collect it. The
DEBTOR or BORROWER incurs the
interest expense and has to pay for it.
Interest is computed as:

I= Principal x rate x time or I=P x R x T

Example (Borrowers point of view):

A 2-year loan of ₱500,000 was obtained from the bank on January 2, 2019.
The bank charges an interest of 10% of the principal. At year-end (December
31, 2019), no interest payment was made
Adjusting entry:
AA
Interest expense 50,000.00
Interest payable 50,000.00
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Example (Creditor’s/ Lender’s point of view):

Using the same problem but assuming that you are the lender/ creditor, the
computation of interest income will still be the same as that of interest
expense. Only the account title in the adjusting entries will be different.

Adjusting entry:
AA
Interest receivable 50,000.00
Interest income 50,000.00

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3. DEPRECIATION
Depreciation refers to the decrease in the
value of a physical asset over its useful life
because of wear and tear. Through
depreciation, the cost of the depreciable
physical asset is allocated over its useful life..

Straight Line Method

Depreciation = (cost – salvage value) /
estimated useful life
3. DEPRECIATION
Cost includes the asset’s purchase price,
shipping cost or freight, installation costs,
testing cost, etc.

Salvage value or residual value is the

expected value to be received when an asset
is sold at the end of its useful life.
Amount

The pro-forma entry to record depreciation

expense is shown below:

Depreciation expense xx
Accumulated depreciation xx
EXAMPLE:
A machine costing ₱50,000 with a salvage value of ₱5,000 was purchased at
the beginning of the year. Useful life is 9 years. The company’s accounting
period ends on December 31.
Depreciation = (50,000 – 5,000) / 9
= 45,000 / 9
= 5,000 per year

Entry:
Depreciation expense 5,000.00
Accumulated depreciation 5,000.00

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4. DOUBTFUL ACCOUNTS
Doubtful Accounts represent the portion of
accounts receivable that may not
be collected in the future.

Entry:
Doubtful Accounts Expense xx
Allowance for Doubtful Accounts xx
EXAMPLE:
At the end of the accounting period, an estimated ₱8,000 worth of account is
doubtful of collection. The balance of the Allowance for Doubtful Accounts in
the records is already at ₱4,500.00.

Adjusting Entry:
Doubtful Accounts Expense 3,500
Allowance for Doubtful Accounts 3,500

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5. Supplies
Preparing the adjusting entries for supplies
are the same as that of prepayments.

A. Asset method
Adjusting Entry:
Supplies expense xx
Supplies xx

B. Expense method
Adjusting Entry:
Supplies xx
Supplies expense xx
EXAMPLE:
“A ₱16,000 worth of supplies were bought on a cash basis on November.
On December 31, on the company’s year-end, remaining supplies
amounted to
₱3,000.” Asset Method (original entry):
AA
Supplies 16,000.00
Cash 16,000.00
Asset Method (Adjusting entry):
Supplies Expense 13,000.00
Supplies 13,000.00

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EXAMPLE:
“A ₱16,000 worth of supplies were bought on a cash basis on November. On
December 31, the company’s year-end, the remaining supplies amounted to
₱3,000.”

AA Expense Method (original entry):

Supplies Expense 16,000.00
Cash 16,000.00

AA Expense Method (Adjusting entry):

Supplies 3,000.00
Supplies Expense 3,000.00

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10 COLUMN WORKSHEET

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10. COLUMN WORKSHEET

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EXCEL FORMAT (SUMMARIZE AND ARRANGE THE ACCOUNTS
ACCORDINGLY WITH THEIR AMOUNTS IN THEIR RESPECTIVE POSITIONS. OBSERVE
PROPER FORMAT)

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ILLUSTRATIVE PROBLEM:
consider the additional information below and the Unadjusted Trial Balance
to guide you in preparing adjusting entries at the end of January.
GMM MOTOR SERVICING
Unadjusted Trial Balance
January 31, 2023

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ILLUSTRATIVE PROBLEM:
Additional information:

a. Salaries of employees for the month of January worth ₱12,000 were

unrecorded and unpaid.

b. Taxes and licenses amounting to ₱13,000 were not recorded but were
already paid.

c. Supplies remaining on hand at month-end amount to only ₱1,000. The

business uses asset method in accounting for supplies

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ILLUSTRATIVE PROBLEM:
d. As a company policy, depreciable assets acquired within the 1st fifteen (15)
days are depreciated as if they were acquired on the 1st day of the month.
Acquisitions falling within the 2nd fifteen (15) days of the month shall be
depreciated as if they were bought on the last day of the month. Accordingly,
the Straight-Line Method is used for depreciation purposes.
❖ The machine has a useful life of 10 years with a ₱5,000 salvage value.
❖ The equipment has a useful life of 8 years with a ₱3,000 salvage
value.
e. A 3-year loan of ₱800,000 was obtained from the bank on March 31, 2023.
The bank charges an interest of 10% of the principal. At year-end (December
31, 2023), no interest payment was made..
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ANSWER:
AA
.a. Salaries Expense 12,000.00
Salaries payable 12,000.00
AA
b. Taxes and licenses 13,000.00
Cash 13,000.00

AA
c. Supplies expense 4,000.00
Supplies 4,000.00

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ANSWER:

d. Depreciation Expense 250.00

Accumulated depreciation-Machinery 250.00

Depreciation Expense 125.00

Accumulated depreciation-Equipment 125.00
AA
e. Interest expense 60,000.00
Interest payable 60,000.00

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SUMMARY:

Accrual income already earned but not yet received and expenses
already incurred but not yet paid

Adjustments for accruals include salaries, interest,

utilities, etc.

Deferral income already received but not yet earned and expenses
already paid but not yet incurred

Adjustments for deferrals include prepayments (asset

and expense method) and pre-collections (income and
liability method)
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SUMMARY:

Depreciation decrease in the value of a physical asset over its useful

life due to wear and tear.

Doubtful Accounts the portion of the accounts receivable that may not be
collected
Supplies this account includes stationeries, paper clips, pens,
ink, and the like

Adjustments for supplies also involve the use of asset

and expense method.

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THANK YOU!