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Lesson 1: ADJUSTING JOURNAL ENTRIES

Adjusting Journal Entries are entries used to update the accounts prior to the preparation of
Financial Statements because they affect more than one accounting period. Transactions are
apportioned properly between the accounting period affected. The accounts affected are adjusted
so that there would be no overstatement or understatement of balance sheet items and income
statement items.
The process of determining an entity’s net income or net loss requires certain income and expense
accounts to be apportioned over several accounting periods. According to the accrual principle,
income is recognized at the time it is actually earned and expense is recognized at the time it is
actually incurred or used. Thus, a receipt of cash does not necessarily mean a recognition of an
income, and payment of cash does not necessarily mean a recognition of an expense.
An example of this is the cash received from a customer for the reservation of a hotel room for
two weeks. The receipt of cash from the customer does not necessarily mean that income should
be recognized. The receipt of cash should be recognized more as a liability in the form of service
to be rendered. It is only after the customer has checked in the hotel for his two-week stay can his
advance payment be considered as income because the service has already been rendered.
Another example is a one-year insurance premium paid for the insurance of a house. The amount
paid representing a one-year premium cannot be charged outright as an expense. This 1s because
the premium paid covers a one-year insurance. Hence, the full amount can only be charged as
expense after one year.
Lesson 2: Prepayments
Prepayments are expenses already paid but not yet incurred or used.
Following are the accounts subjected to adjustments:
Asset Method
Journal Entry upon payment
Prepaid Expense XXX
Cash XXX
Adjusting Journal Entry at the end of the accounting period:
Expense XXX
Prepaid Expense XXX
Note: The amount on the adjusting journal entry represents the expired or used portion of the
prepayment.

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Example 1
On April 30, 2016, X Co. paid Php 36,000 worth of insurance premium for two years. Give the
Adjusting Journal Entry on June 30, 2016.
Journal Entry upon payment on April 30, 2016
Prepaid Insurance 36,000
Cash 36,000
Paid two-year insurance
Insurance Expense 3,000
Prepaid Insurance 3,000
To record the expired insurance
Computation
The 36,000 amount of insurance premium represents insurance premium for two years. Divide Php
36,000 by 24 to get the monthly premium. Then, multiply it by 2 months representing the premium
from May 1 to June 380, 2016.
𝑃 36,000
= 𝑃 3,000
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PHP3,000 is therefore the expired insurance from May 1 to June 30, 2016.
Analysis: When you paid 36,000 for the two-year insurance premium on April 30, you debited the
asset account Prepaid Insurance representing 24 months insurance. On June 30, the 36,000 Prepaid
Insurance is not totally asset since it includes the 2-monthexpired portion (May 1 to June 30).
Hence, an adjusting entry 1s necessary to recognize the insurance expense for 2 months by debiting
it and decreasing the balance of
Prepaid Insurance by crediting it.
Example 2
On September 1, 2016, X Co. paid a one-year advance rent for P 30,000. Give the Adjusting
Journal Entry on Dec. 31, 2016.
Journal Entry upon payment on September 1
Prepaid Rent 30,000
Cash 30,000
Paid rent for one year

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Adjusting Journal Entry at end of the accounting period December 31, 2016
Rent Expense 10,000
Prepaid Rent 10,000
To record expired rent
Computation

The P 30,000 amount of rent represents one-year or 12-month rent. Divide P30,000 by 12 to get
the monthly rent. Then, multiply it by 4 months representing the rent from September 1 to
December 31, 2016.
𝑃ℎ𝑝 30,000
× 4 = 𝑃ℎ𝑝 10,000
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Php 10,000 is therefore the expired/ used rent from September 30 to December 31, 2016.
Analysis: When you paid *30,000 for the one-year rent in advance on September 1, you debited
the asset account Prepaid Rent representing 12 months worth of rent. On December 31, the end of
the accounting period, the 30,000 Prepaid Rent is not totally asset since it includes the 4 months
used portion (Sept. 1 to December 31). Hence, an adjusting entry is necessary to recognize the rent
expense for 4 months by debiting it and decreasing the balance of Prepaid Rent by crediting it.
Example 3

Supplies account showed a balance of Php 4,000. Supplies used during the year amounted to Php
2,300. Give the Adjusting Journal Entry on Dec. 31, 2016.
Adjusting Journal entry on Dec. 31, 2016
Supplies Expense 2,300
Supplies 2,300
To record supplies used for the year
Computation
There is no computation necessary because the Php 2,300 supplies used during the year was
already given in the problem.
Analysis: The asset account Supplies showed a balance of 74,000 at the beginning of the year.
Supplies used during the year amounted to 2,300. This should be recorded as expense by debiting
Supplies Expense and crediting the asset account Supplies to decrease its balance.
Example 4

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Adjusting Journal Entry on December 31, 2016

Supplies Expense 4,500
Supplies 4,500
To record supplies used for the year
Computation
Supplies at the beginning of the year is P8,000. At the end of the year, the remaining balance is
Php 3,500. The difference represents the supplies used during the year. Subtract Php 3,500 from
8,000 to get the supplies used during the year.

Php 8,000 — 3,500 = Php 4,500

Analysis: On January 1, 2016, the asset account Supplies has a balance of Php 8,000. Since the
end of the year, the balance of the asset account Supplies decreased to Php 3,500. The difference
represents the supplies used during the year. You will have to recognize the used supplies as an
expense by debiting Supplies Expense and decrease the asset account Supplies by crediting it.
Supplies account on January 1, 2016, showed a balance of Php 8,000. On December 31, 2016,
supplies on hand amounted to 3,500.
Lesson 3: Deferrals
Unearned or deferred income is income already received but not yet earned.
Liability method
Journal entry upon receipt of cash
Cash XXX
Unearned Income XXX
Received cash for services to be rendered
Adjusting journal entry at the end of the accounting period
Unearned Income XXX
Income XXX
To record earned portion of the liability
Note: The amount of the Adjusting Journal Entry is the earned portion of the amount initially
received.

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Example 1
On August 1, Dr. Yee received Php 790,000 for dental fees to be rendered in the next 6 months.
Give the adjusting journal entry at the end of Sept.
Journal Entry upon receipt of cash on August 1
Cash 90,000
Unearned Dental Fees 90,000
Received cash for dental services to be rendered
Adjusting Journal Entry on September 30
Unearned Dental Fees 30,000
Dental Fees 30,000
To record dental fees earned
Computation
The Php?90,000 amount of cash received represents 6-month dental services to be rendered.
Divide Php 90,000 by 6 to get the monthly dental fee. Multiply the result by 2.
𝑃ℎ𝑝 90,000
× 2 = 𝑃ℎ𝑝 30,000
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Php 30,000 is therefore the dental fees earned from August 1 to September 30, 2016.
Analysis: When the Php 90,000 was received on August 1 for the 6-month dental services paid in
advance, cash was debited and the liability account Unearned Dental Fees was credited
representing 6 months of unearned fees. On September 30, the Php 90,000 Unearned Dental Fees
is not totally a lability account since it includes the 2-month dental fees earned (August 1 to
September 30). Hence, an adjusting entry is necessary to recognize the earned portion of the
initially recorded Unearned Dental Fees by crediting Dental Fees and debiting Unearned Dental
Fees to decrease the liability.
Example 2
On December 1, 2016, Petit Co. received Php 48,000 amount of advanced rentals for 6 months.
Give the Adjusting Journal Entry on December 31, 2015.
Journal Entry upon receipt of cash on December 1
Cash 48,000
Unearned Rent Income 48,000
Received 6 months rent in advance

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Adjusting Journal Entry on December 31

Unearned Rent Income 8,000
Rent Income 8,000
To record rent earned for the month
Computation
The 48,000 cash you received represents six months of rent. Divide Php 48,000 by 6 to get the
monthly rent. Then, multiply it by 1 month representing the rent from Dec. 1 to Dec. 31, 2016.

𝑃ℎ𝑝 48,000
× 1 = 𝑃ℎ𝑝 8,000
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Php 8,000 is therefore the rent income from Dec. 1 to Dec. 31, 2016.
Analysis: When you received Php 48,000 for the six-month rent paid to you in advance on
December 1, you debited cash and credited the lability account Unearned Rent Income for the 6-
month rent. On December 31, which is the end of the accounting period, the Php 48,000-worth of
Unearned Rent Income is not totally a liability account since it now includes the 1-month rent
earned (December 1 to December 31). Hence, an adjusting entry is necessary to recognize the
earned portion of the initially recorded Unearned Rent Income by crediting Rent Income and
debiting Unearned Rent Income to decrease the liability.
Lesson 4: Accrued Expenses
Accrued expenses are expenses already incurred or used, but not yet paid.
Adjusting Journal Entry at the end of the accounting period
Expenses XXX
Expenses Payable XXX
To record unpaid expenses
Example 1
The company received a Maynilad bill in the amount of #9,800 on Dec. 26, 2016. The company
intends to pay on January 8, 2017.
Adjusting Journal Entry on December 31, 2016:
Utilities Expense 9,800
Utilities Payable 9,800
To record unpaid utilities for the month

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Analysis: This is liability on the part of the company because the Maynilad bill is for the month of
December but the company has not yet paid for it. Hence, a liability on the part of the company
should be recognized at the end of the accounting period.
Example 2
Unpaid salaries at the end of December 31, 2016 amounted to Php 18,800.
Adjusting Journal Entry on December 31, 2016
Salaries Expense 18,800
Salaries Payable 18,800
To record unpaid salaries at year end
Analysis: This is a liability on the part of the company because the employees have already worked
for this but the company has not paid their salaries. Hence, a liability on the part of the company
should be recognized at the end of the accounting period.
Accrued income is income already earned but not yet received.
Income Receivable XXX
Income XXX
To record income earned
Example
A one-year, 6% note receivable in the amount of P 200,000 was received on January 1, 2016. The
interest and the principal are payable on maturity date. Give the Adjusting Journal Entry on June
30, 2016.
Adjusting Journal Entry on June 30, 2016
Interest Receivable 6,000
Interest Income 6,000
To record interest income earned
Computation
Interest = Principal x Rate x Time
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= 200,000 x 6% x 2 year
1
= P 200,000 x 0.06 x 2

= P6,000
The interest for 6 months is Php 6,000

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Analysis: The note receivable bears interest at 6% per annum. This interest will be received after
one year on January 1, 2017. However, the note has already earned half-year interest on June 30,
2016 in the amount of Php 6,000 although this interest has not yet been received. Hence, an
Adjusting Journal Entry is necessary to recognize the interest earned on the notes receivable for
6 months, that is, from January 1 to June 30, 2016.
Lesson 5 Bad Debts/Doubtful Accounts/Uncollectible Accounts
Bad debts/ doubtful accounts are losses due to uncollectible accounts.
Adjusting Journal Entry at the end of the accounting period
Bad Debts Expense XXX
Allowance for Bad Debts XXX
To record estimated uncollectible accounts
OR
Doubtful Accounts Expense XXX
Allowance for Doubtful accounts XXX
To record estimated uncollectible accounts
OR
Uncollectible Accounts Expense XXX
Allowance for Uncollectible Accounts XXX
To record estimated uncollectible accounts
Example 1
Accounts Receivable shows a balance of Php100,000. It is estimated that 8% of this is
uncollectible. Give the adjusting journal entry on December 31, 2016 for the provision of the
estimated uncollectible account.
Bad Debts Expense 8,000
Allowance for Bad Debts 8,000
To record estimated uncollectible accounts
Computation
Php 100,000 x 0.08 = Php 8,000

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Example 2
Accounts Receivable shows a balance of 100,000. It is estimated that 8% of this is uncollectible.
Allowance for Bad Debts per general ledger has a balance of P'1,000. Give the adjusting journal
entry on December 31, 2016 for the provision of the estimated uncollectible account.
Bad Debts Expense 7,000
Allowance for Bad Debts 7,000
To record estimated uncollectible accounts
Note: The required allowance for doubtful accounts is Php8,000 (Php 100,000 x 8%). However,
per general ledger, the allowance for doubtful accounts already shows a balance of Php 1,000. An
adjusting journal entry to bring the balance of the allowance for doubtful accounts to the required
balance of Php 8,000 is necessary. This can be best illustrated by the T-account.
Allowance for Doubtful Accounts
1,000 Balance before adjustment
7,000 Adjusting Journal Entry
8,000 Required Balance (end)

Lesson 6: Depreciation Expense

Depreciation expense is the allocation of plant asset cost over its estimated useful life. This is the
expense allotted for the wear and tear of property, plant, and equipment due to passage of time.
The following are the three factors considered in computing the depreciation expense:
1. Cost is the purchase price of the depreciable asset.
2. Salvage value is the estimated value of the asset at the end of its useful life.
3. Estimated useful life, as the name connotes, is not an exact measurement but merely an
estimation of the number of years an asset can be useful to the entity.
The formula for computing for annual depreciation is as follows:

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The process of recording depreciation expenses does not directly charge depreciation to the asset
account. The charge is recorded in a contra-asset account called accumulated depreciation. The
use of this account allows the original cost of the asset and the related accumulated depreciation
account to be shown in the balance sheet. The balance of the accumulated depreciation is deducted
from the cost of the asset to get the carrying value of the asset.
Example
A building with an estimated useful life of 30 years finished construction on June 1, 2016. The
cost of the building is 4.8 million pesos with an estimated salvage value of Php 300,000. Give the
Adjusting Journal Entry on December 31, 2016 to record the depreciation of the building.
Adjusting Journal Entry on Dec. 31, 2016
Depreciation Expense 87,500
Accumulated Depreciation 87,500
To record depreciation expense for the building
Computation

Note: What you have gotten is the annual depreciation. Since the building was completed on June
1, you will have to apportion the annual depreciation of 7 150,000 by dividing it by 12 to get the
monthly depreciation. Multiplying it by 7 months, you get the depreciation of the building from
June 1 to Dec. 31, 2016.
𝑃ℎ𝑝 150,000
× 7 𝑚𝑜𝑛𝑡ℎ𝑠 = 𝑃ℎ𝑝 87,500
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Lesson 7: An alternative method in recording prepayments
An alternative method in recording prepayments is to initially record them as an expense instead
of an asset.

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Expense Method
Journal Entry upon payment
Expense XXX
Cash XXX
Paid expense
Adjusting Journal Entry at the end of the accounting period
Prepaid Expense XXX
Expense XXX
To record unexpired expense
Note: The amount on the adjusting journal entry represents the unexpired or unused portion of the
prepayment.
Example
On April 30, 2016, X Co. paid 36,000 insurance premium for two years. Give the Adjusting Journal
Entry on June 30, 2016.
Journal Entry upon payment on April 30
Insurance Expense 36,000
Cash 36,000
Paid insurance for two years
Adjusting Journal Entry at end of the accounting period June 30, 2016
Prepaid Insurance 33,000
Insurance Expense 33,000
To record the unexpired insurance
Computation
The Php 36,000 insurance represents two-year or 24-month premium. Divide P 36,000 by 24 to
get the monthly insurance then multiply it by 22 months representing the unexpired insurance from
July 1, 2016 to April 30, 2018.
𝑃ℎ𝑝 36,000
× 22 = 𝑃ℎ𝑝 33,000
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Php 33,000 is therefore the prepaid insurance from July 1 to April 30, 2018.

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Analysis: When you paid Php 36,000 for the two-year insurance on April 30, you debited the
expense account Insurance Expense representing 24 months insurance. On June 30 the end of the
accounting period, the ? 36,000 Insurance Expense is not really your insurance expense for the
year. It includes the 22 months unexpired or unused portion (July 1, 2016 to April 30, 2018).
Hence, an adjusting entry is necessary to recognize the asset portion by debiting Prepaid Insurance
and decreasing the balance of Insurance Expense by crediting it.
Summary for Prepayments
Asset Method Expense Method
Upon Payment on April 30, 2016
Prepaid Insurance 36,000 Insurance Expense 36,000
Cash 36,000 Cash 36,000
Paid two-year insurance premium Paid two-year insurance premium
Adjusting Journal entry on June 30, 2016
Rent Expense 3,000 Prepaid Rent 33,000
Prepaid Rent 3,000 Rent Expense 33,000
To record expired insurance for the year To record the unexpired insurance
The effect of the adjusting entries on the ledger accounts after posting is the same regardless of
the method used.

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